Legislature(2003 - 2004)
05/18/2003 11:20 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 more. 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 requirement. 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 discount. 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 ordered. 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.