Legislature(2003 - 2004)

05/18/2003 11:20 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 168(FIN) am                                                                                            
     "An Act relating to issuance  and revocation of licenses                                                                   
     for the importation, sale,  distribution, or manufacture                                                                   
     of cigarettes  and tobacco  products; relating to  a tax                                                                   
     refund or credit for unsaleable,  returned, or destroyed                                                                   
     tobacco  products;  relating   to  restrictions  on  and                                                                   
     penalties  for  shipping   or  transporting  cigarettes;                                                                   
     relating to  records concerning the sale  of cigarettes;                                                                   
     amending  and adding definitions  relating to  cigarette                                                                   
     taxes;  relating  to  the payment  of  cigarette  taxes;                                                                   
     relating  to penalties  applicable  to cigarette  taxes;                                                                   
     relating  to the  definition of the  wholesale  price of                                                                   
     tobacco  products;  relating  to  payment  of  cigarette                                                                   
     taxes through the use of  cigarette tax stamps; relating                                                                   
     to provisions  making certain cigarettes  contraband and                                                                   
     subject to  seizure and forfeiture; relating  to certain                                                                   
     crimes,  penalties,  and   interest  concerning  tobacco                                                                   
     taxes  and  stamps;  relating to  cigarette  sales;  and                                                                   
     providing for an effective date."                                                                                          
SENATOR CON  BUNDE, SPONSOR,  provided information  about the                                                                   
bill.  He  noted   that  the  bill  is  not   "anti  tobacco"                                                                   
legislation, nor  was it the intent to address  taxation. The                                                                   
genesis  was  a  radio  spot by  an  Eastern  company,  which                                                                   
advertised the sale of tax-free  cigarettes that would not be                                                                   
reported to the state [for tax  purposes].  The Department of                                                                   
Revenue has been  trying to address the leakage  in the state                                                                   
of  Alaska's  tax  law  on  cigarettes.  The  Department  has                                                                   
indicated that  they cannot enforce  the tax law  effectively                                                                   
without  a tobacco  tax  stamp.  The Department  of  Revenue,                                                                   
during litigation  proceedings, was able to obtain  a list of                                                                   
companies that do pay their tax.  The federal government will                                                                   
not  join  the  state  in  the  enforcement  of  federal  law                                                                   
[Jenkins Act] without a tobacco  tax stamp. He referenced the                                                                   
state of  Michigan, which also  has a tobacco tax,  and noted                                                                   
that tax revenues  in Michigan increased 9 percent  when they                                                                   
added a  tax stamp. Hawaii saw  a 25 percent increase  with a                                                                   
tax stamp.  He stated  that for  every one  percent that  tax                                                                   
revenues  increase,  Alaska  would  gain  $400  thousand.  He                                                                   
stated that  distributors acknowledged  that the  increase in                                                                   
tobacco  price  decreases  use  by  youth.  Distributors  are                                                                   
concerned with fair  business practices and have  asked for a                                                                   
minimum  price,  which  would  prevent  sales  to  youth  and                                                                   
undercutting prices. He concluded  that selling tobacco below                                                                   
price was poor public policy.                                                                                                   
Senator  Bunde  noted  that the  Heart  Association  and  the                                                                   
Alaska Tobacco Distributors both supported the bill.                                                                            
Vice-Chair Meyer  expressed support  for the legislation  but                                                                   
questioned  if it  were possible  to  put the  burden on  the                                                                   
distributor.  Representative Bunde  noted  that other  states                                                                   
have forced  the industry to bear  the full tax burden.   The                                                                   
legislation  allows  the  industry  to deduct  the  costs  of                                                                   
collecting  the  tax,  for example  investment  in  equipment                                                                   
needed to stamp the cigarettes.                                                                                                 
Vice-Chair  Meyer observed  that  even though  the bill  will                                                                   
cost the  state some money,  it would increase  tax revenues.                                                                   
Representative  Bunde  predicted a  $3  million  net gain  or                                                                   
Representative  Hawker asked if  the bill changed  the timing                                                                   
of the tax collection.  Representative  Bunde speculated that                                                                   
it did not.                                                                                                                     
JOHANNA  D.   BALES,  TAX  AUDITOR,  DEPARTMENT   OF  REVENUE                                                                   
testified  via teleconference.   She noted  that she  was the                                                                   
auditor  for the state  cigarette excise  tax. She  confirmed                                                                   
that  the tax  would  continue to  be  collected monthly.  In                                                                   
response to  a question by  Representative Hawker,  Ms. Bales                                                                   
noted   that  the  stamp   would  be   purchased  up   front.                                                                   
Distributors  could   post  a   bond,  which  is   what  most                                                                   
distributors  do, to put  the actual payment  of the  tax off                                                                   
for a month and  a half. This is the current  practice of the                                                                   
reporting system. The tax payment  is due about a month and a                                                                   
half after cigarettes are imported.                                                                                             
In  response   to  a  question  by  Representative   Stoltze,                                                                   
Representative  Bunde noted  that his  motivation is  to make                                                                   
tobacco  less  assessable  to teenagers.  The  motivation  of                                                                   
tobacco distributor is to ensure a fair playing field.                                                                          
Representative Stoltze asked if  using tools for unfair trade                                                                   
practices might  be a more  appropriate vehicle,  rather than                                                                   
focusing  on  a  particular  industry.  Representative  Bunde                                                                   
maintained  that a  great number  of under-priced  cigarettes                                                                   
would be sold before another tool would be effective.                                                                           
Representative  Berkowitz  noted  that  Hawaii  and  Michigan                                                                   
achieved  different  revenue  results,  and  asked  if  their                                                                   
statutes were  different.   Representative Bunde  stated that                                                                   
Hawaii had an aggressive enforcement program.                                                                                   
Ms.  Bales confirmed  that  Hawaii hired  eleven  enforcement                                                                   
individuals. She  stated that  the proposed bill  was modeled                                                                   
after the  state of Hawaii's.   She added that the  amount of                                                                   
tax collected  in Hawaii resulted  in an initial  increase of                                                                   
25 percent, the  final numbers showed a 50  percent increase,                                                                   
from $40 million to $61 million in tax.                                                                                         
Co-Chair Harris noted his support  of the bill, but reference                                                                   
complaints by wholesalers.  Representative  Bunde stated that                                                                   
smaller companies  complained  that larger wholesalers,  like                                                                   
Costco, could  sell tobacco under cost. He  acknowledged that                                                                   
every  business  wants  to  preserve   their  advantage,  but                                                                   
emphasized  that  every  carton   sold  below  cost  promotes                                                                   
smoking,  since  it  has  been   proven  that  price  affects                                                                   
consumption, especially by young  people.  He also noted that                                                                   
imposing a minimum might affect fairness across the market.                                                                     
Co-Chair  Harris stated  that wholesalers  had threatened  to                                                                   
close   their  stores   in  Alaska   if   the  bill   passes.                                                                   
Representative Bunde  speculated that a company  whose profit                                                                   
margins were so narrow might not be doing viable business.                                                                      
Representative  Kerttula  asked  if  the  tax  was  the  same                                                                   
regardless of price. Representative  Bunde noted that the tax                                                                   
was  $1 per  pack,  regardless of  price.  He clarified  that                                                                   
companies would now have to meet the minimum price.                                                                             
Ms.  Bales  explained  that the  minimum  price  stated  that                                                                   
cigarettes  could not  be sold  for less  than the  wholesale                                                                   
purchase  price,  plus  tax, plus  cost  of  doing  business.                                                                   
Companies could use a 4.5 percent  for wholesale or 6 percent                                                                   
at retail above  wholesale to determine price.   The price is                                                                   
not a dollar figure.                                                                                                            
BOBBY  SCOTT, JAN'S  DISTRIBUTING,  ANCHORAGE, testified  via                                                                   
teleconference  in support of  the bill.   He noted  that his                                                                   
company had worked on the bill  with Representative Bunde and                                                                   
Ms. Johanna D. Bales, Tax Auditor, Department of Revenue.                                                                       
MIKE ELERDING,  NORTHERN SALES, testified  via teleconference                                                                   
in support of the bill.  He summarized  his written testimony                                                                   
(copy on  file.) He  discussed the history  of the  bill, and                                                                   
noted  favorable   testimony  received  along   the  way.  He                                                                   
concluded that  the legislation:  provides  increased revenue                                                                   
with  no new  taxes,  provides  a reasonable  profit  margin,                                                                   
creates a level  playing field for Alaskan  distributors, and                                                                   
ends predatory  pricing that  attracts youth consumption.  He                                                                   
pointed out that 25 other states have similar laws.                                                                             
JOHN  AYERS,   KEYSTONE  DISTRIBUTION  SERVICES,   ANCHORAGE,                                                                   
testified  via  teleconference   in  support  of  an  amended                                                                   
version  of the  bill.  He noted  that  his company  provides                                                                   
storage  and distribution  for tobacco  companies.  He  asked                                                                   
that the  bill be  amended to  remove the  requirement  for a                                                                   
customs bonded  warehouse. He stated  that it would  cost his                                                                   
company $100 thousand  to become a customs  bonded warehouse.                                                                   
He maintained  that the requirement would result  in products                                                                   
being distributed from Seattle.   He also questioned the need                                                                   
for a  minimum price.  He asked  what would  happen if  other                                                                   
products were sold  at a loss, whether legislation  would fix                                                                   
those  prices.  He  also  noted  that  tribal  entities  were                                                                   
exempted  and questioned  what  would happen  to the  revenue                                                                   
stream if tribal status were enlarged.                                                                                          
TOM MCKAY,  SR., VICE  PRESIDENT, COSTCO WHOLESALE  expressed                                                                   
concerns regarding  minimum pricing and discounts  for fixing                                                                   
stamps. He noted  that he was responsible for  the operations                                                                   
and purchasing  for the three  Alaskan stores. He  noted that                                                                   
Costco had been unaware of the  attachments regarding minimum                                                                   
pricing. He referred to page 9,  line 22, which would allow a                                                                   
discount to some for fixing stamps.  He noted that Costco did                                                                   
not oppose tax stamps, but questioned  the need for discounts                                                                   
for  certain   distributors.  He   stated  that   under  this                                                                   
provision,  those   distributing  through  Costco   would  be                                                                   
penalized, and asked that this be addressed.                                                                                    
Mr. McKay  referred to the  wholesale level of  distribution,                                                                   
and stated that Costco was a wholesaler  as well as retailer.                                                                   
He  stated that  they supplied  small  operations, and  noted                                                                   
that the price affected where  these businesses chose to buy.                                                                   
He noted that if this provision  were enacted, there would be                                                                   
a loss of 68 jobs in Anchorage,  and a great loss of business                                                                   
in Juneau.  He observed  that Costco has  a strict  policy of                                                                   
never selling  goods below cost.  He maintained  that tobacco                                                                   
is not  generally sold  below cost by  anyone. He  noted that                                                                   
markups  range   around  14  percent.  The   marketplace  and                                                                   
efficiency  in sales  determine  price. The  cost of  selling                                                                   
tobacco is below other products.                                                                                                
Mr. McKay explained that the cost  for a carton of cigarettes                                                                   
was $2  thousand; on this they  are discounted 2  percent for                                                                   
paying in a prompt fashion, which  is built into their price,                                                                   
as they do with  all products. Under the bill,  these savings                                                                   
cannot  be  passed on.  He  referred  to  page 20,  line  21,                                                                   
Section 3,  and quoted: "exempts  the customary  discount for                                                                   
cash".  He  explained that he  must now take a markup  of $90                                                                   
for this exemption.  He contrasted this to lower  markups for                                                                   
other products, and stressed that  the State was now going to                                                                   
monitor these markups.                                                                                                          
Mr. McKay noted  a provision that might also  force Costco to                                                                   
prove a  higher cost  of doing business.  He stated  that his                                                                   
labor costs were 4 percent, rent  was 1 percent, depreciation                                                                   
and  selling  costs  (which he  stated  was  ambivalent)  and                                                                   
licenses,  and taxes,  were all  included in  costs of  doing                                                                   
business.  He noted  that  their costs  were  80 percent.  He                                                                   
concluded  that the  bill was  onerous and  difficult from  a                                                                   
business  standpoint.   He  maintained  that   to  discourage                                                                   
smoking, the tax  should simply be raised. He  stated that he                                                                   
was aware  of only  one other  state has  minimum pricing  on                                                                   
tobaccos:  Montana.  He  suggested that  the  legislation  be                                                                   
changed to state that the product  cannot be sold below cost,                                                                   
and allow cost to be set in a fair fashion.                                                                                     
Representative  Berkowitz observed  that a rational  business                                                                   
response  might   be  to  set  up  a  subsidiary   to  handle                                                                   
exclusively tobacco products.  Mr. McKay acknowledged that it                                                                   
would be  a possibility, but  questioned the implications  of                                                                   
such a practice.                                                                                                                
Vice-Chair Meyer  asked if the competitors were  retailers or                                                                   
wholesalers.  Mr. McKay  noted  that wholesalers  were  their                                                                   
competitors, and  noted that they  handled 15 percent  of the                                                                   
cigarettes  distribution market.  Vice-Chair Meyer  asked how                                                                   
Alaska would  differ from Hawaii  and Washington.   Mr. McKay                                                                   
noted  that  these  states  did  not  have  a  minimum  price                                                                   
TAPE HFC 03 - 101, Side B                                                                                                     
In response  to a  question by  Representative Whitaker,  Mr.                                                                   
McKay  clarified  that  they  purchase  from  RJR  and  Brown                                                                   
Williamson through a bonded warehouse  in Alaskan, which is a                                                                   
different class than a distributor.                                                                                             
Representative  Whitaker  observed  that  there  would  be  a                                                                   
sliding scale paid for stamps  based on volume, and asked the                                                                   
effect on  Costco.  Mr. McKay  noted that they would  not get                                                                   
the  discount  due to  their  volume  and observed  that  the                                                                   
sliding scale was inverse of the normal economy of scale.                                                                       
Representative  Hawker clarified  that in  large volumes  for                                                                   
significant   distributors;  there   would  be  no   discount                                                                   
available for those purchasers  at lesser levels. He referred                                                                   
to Page 9, Line 27:                                                                                                             
     The discount  under this subsection is equal  to the sum                                                                   
     of   the   amounts  calculated   using   the   following                                                                   
     percentages of denominated  value of stamps purchased by                                                                   
     a licensee under this section in a calendar year:                                                                          
          (1)  $1,000,000 or less, three percent;                                                                               
          (2) The amount that is more than $1,000,000 but                                                                       
          not more than  $2,000,000, two percent;                                                                               
          (3)  The  amount  that  is  over  $2,000,000,  zero                                                                   
          percent.,  regarding the  discount, and  speculated                                                                   
          that  all distributors  were  availed  of the  same                                                                   
Representative Hawker summarized  that everyone is availed of                                                                   
an   equal   discount.   Mr.   Kay   acknowledged   that   he                                                                   
misunderstood    the   provisions.   Representative    Hawker                                                                   
concluded that there is no objection.                                                                                           
Representative  Hawker refuted  the statement  that only  one                                                                   
other  state   has  minimum  pricing  on   tobacco  products.                                                                   
According to  the Minnesota House of Representative  Research                                                                   
Department  there are  25 states  that prohibit  the sell  of                                                                   
cigarettes  below  cost.  An  additional  seven  states  have                                                                   
general fair trade law that prohibits  the sell of cigarettes                                                                   
below cost.  Mr. McKay reiterated  that he was only  aware of                                                                   
the state of Montana.                                                                                                           
Representative Hawker  MOVED to report CSSB 168  (FIN) am out                                                                   
of  Committee   with  individual   recommendations   and  the                                                                   
accompanying fiscal note. There  being NO OBJECTION it was so                                                                   
CSSB 168  (FIN) (am) was REPORTED  out of Committee  with "no                                                                   
recommendation" and two fiscal  notes:  one new fiscal impact                                                                   
note from the  Department of Revenue and zero  fiscal note #2                                                                   
from the Department of Law.                                                                                                     

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