Legislature(2003 - 2004)

05/17/2003 09:15 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SB 168 - CIGARETTE SALE/DISTRIBUTION                                                                                          
Number 1356                                                                                                                     
CHAIR McGUIRE announced that the  next order of business would be                                                               
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."                                                                          
Number 1407                                                                                                                     
SENATOR CON BUNDE, Alaska State  Legislature, presented SB 168 on                                                               
behalf of  the sponsor,  the Senate  Labor and  Commerce Standing                                                               
Committee,  which he  chairs.   He  indicated that  SB 168  would                                                               
bring added revenue  to the state.  The genesis  for the bill, he                                                               
explained, was  his hearing  a radio  commercial that  offered to                                                               
send people  untaxed cigarettes.  After  hearing that commercial,                                                               
he said  he asked the  Department of  Revenue (DOR) to  look into                                                               
the issue;  according to  the DOR, there  is a  significant "gray                                                               
market" of  untaxed cigarettes coming  into the state.   During a                                                               
recent attempted  court action against a  Washington company that                                                               
was  sending untaxed  cigarettes into  Alaska, it  came to  light                                                               
that  this  company  had  "hundreds   and  hundreds"  of  Alaskan                                                               
customers.   Subsequently, the DOR notified  those customers that                                                               
they  were "busted"  and  owe cigarette  tax to  the  state.   He                                                               
noted, however,  that it  appears that if  Alaska doesn't  have a                                                               
tax stamp on its cigarettes,  the federal government will not aid                                                               
the  state  in  prosecuting  illegal interstate  trade  to  avoid                                                               
SENATOR  BUNDE, after  saying that  SB 168  is a  "tax stamp  and                                                               
minimum pricing"  bill, held  up an  example of  a tax  stamp for                                                               
members  to view.   When  the DOR  goes into  a store  that sells                                                               
cigarettes, unless  there is a  tax stamp, there is  virtually no                                                               
way  to tell  which products  have had  taxes paid  on them.   He                                                               
opined that SB 168 is  a distributor-friendly bill.  And although                                                               
Internet sales are significant,  Internet companies are unable to                                                               
verify the  age of those  purchasing tobacco products.   The bill                                                               
will require that all cigarettes in  Alaska have a tax stamp, and                                                               
this will  allow the  federal government to  assist the  state in                                                               
prosecuting those  that seek to  avoid paying  Alaska's cigarette                                                               
tax.   He mentioned that  the DOR anticipates, with  the adoption                                                               
of SB 168,  an additional $3 million to $3.5  million in revenue,                                                               
that Hawaii  saw a 25-percent increase  in cigarette-tax revenues                                                               
after enacting a tax stamp, and  that Michigan saw an increase of                                                               
9  percent.   According  to  the DOR,  he  relayed,  for every  1                                                               
percent that collections go up, the state will gain $400,000.                                                                   
Number 1649                                                                                                                     
SENATOR BUNDE noted that SB  168 includes a provision for minimum                                                               
pricing,  and  that  this provision  was  requested  by  Alaska's                                                               
tobacco  distributors.   He mentioned  that  although these  same                                                               
companies testified during hearings  of the legislation initially                                                               
raising the  tobacco tax that  doing so  would have no  impact on                                                               
tobacco use  among youth, they  now claim that raising  the price                                                               
will have a  substantial impact.  Inclusion of  the minimum price                                                               
provision is  one of  the reasons  Alaskan distributors  favor SB
168;  this  provision  will  prevent   large  stores  from  using                                                               
cigarettes  as  a loss  leader,  and  discourage cigarette  "fire                                                               
sales."  In conclusion, Senator Bunde  described SB 168 as a win-                                                               
win  bill, adding  that it  is  supported by  the American  Heart                                                               
Association  as well  as Alaska-based  tobacco distributors.   He                                                               
asked the committee to give SB 168 favorable consideration.                                                                     
REPRESENTATIVE  GARA asked  whether SB  168 would  raise as  much                                                               
money  as   would  a  bill  sponsored   by  Representative  Harry                                                               
SENATOR  BUNDE  said  he  is  not  familiar  with  Representative                                                               
Crawford's legislation.                                                                                                         
REPRESENTATIVE SAMUELS asked who collects the tax.                                                                              
SENATOR BUNDE  said that wholesalers pay  for the tax stamp.   He                                                               
added that a provision  in SB 168 defers a portion  of the tax in                                                               
order to help wholesalers pay for stamping and recordkeeping.                                                                   
REPRESENTATIVE  GRUENBERG  asked  Senator  Bunde  whether  he  is                                                               
familiar with something called "tobacco sampling."                                                                              
SENATOR  BUNDE  indicated  that   he  does  not  support  tobacco                                                               
[Chair McGuire turned the gavel over to Vice Chair Anderson.]                                                                   
Number 1899                                                                                                                     
JOHANNA  BALES, Revenue  Auditor,  Audit Group  I, Tax  Division,                                                               
Department  of  Revenue  (DOR),  explained  that  since  the  tax                                                               
increase  went  into  effect  in  1997, the  state  has  seen  an                                                               
approximate  20-percent  decrease  in  taxable  cigarette  sales;                                                               
there are now  between 40 million and 42 million  packs sold each                                                               
year.   She mentioned  that Internet  companies are  now actively                                                               
advertising  that  they  can send  Alaskans  untaxed  cigarettes;                                                               
these  companies do  not follow  federal laws  pertaining to  the                                                               
sale  of  cigarettes, one  of  which  is called  the  "contraband                                                               
cigarette trafficking Act"  and which does not  apply to anything                                                               
that doesn't  have a state  tax stamp.   She, too,  remarked that                                                               
adoption of a state tax  stamp would allow the federal government                                                               
to assist the  state in prosecuting those that  commit tax fraud.                                                               
Without a tax stamp, that assistance will not be forthcoming.                                                                   
MS.  BALES  relayed that  there  are  approximately 150  Internet                                                               
sellers  of  cigarettes,  and  that  46  other  states  currently                                                               
require a  tax stamp.   Kentucky's tax is  3 cents per  pack, and                                                               
Virginia's tax is 2.5 cents per  pack, but even with such low tax                                                               
rates, those states have found the  tax stamp to be an invaluable                                                               
enforcement tool.  Currently, only four  states do not have a tax                                                               
stamp,  and Alaska  is one  of them.   It  is very  important for                                                               
Alaska  to  adopt a  tax  stamp,  she  opined.   With  regard  to                                                               
Representative  Crawford's  bill,  she  said that  that  bill  is                                                               
essentially  the  same bill  that  was  introduced last  year  by                                                               
Governor Knowles,  and that the  same language is included  in SB
[Vice Chair Anderson returned the gavel to Chair McGuire.]                                                                      
REPRESENTATIVE HOLM  asked for  information regarding  the fiscal                                                               
MS. BALES said that the  current fiscal note contains an estimate                                                               
of possible revenue collections.   When the tax rate increased in                                                               
1997, it was  estimated that there would be a  17-percent drop in                                                               
consumption; however, the actual drop  in sales has turned out to                                                               
be approximately 20 percent, and so  the DOR has based its latest                                                               
estimate on  that actual  data.  She  mentioned that  the current                                                               
fiscal note reflects the addition  of five positions, and this is                                                               
expected  to  increase the  amount  of  revenue collected.    She                                                               
offered that when  Hawaii put its tax-stamp program  in place, it                                                               
resulted in  an increase in  revenue of approximately  50 percent                                                               
in  the  first year;  however,  Hawaii  also filled  11  fulltime                                                               
positions that did nothing but  tax-stamp enforcement.  If Alaska                                                               
is to  see similar  increases in  revenue, it  will also  have to                                                               
have an active enforcement program, she predicted.                                                                              
Number 2159                                                                                                                     
MICHAEL  J.  ELERDING,  President,   Northern  Sales  Company  of                                                               
Alaska,  Inc., said  simply that  he  supports SB  168 and  would                                                               
provide  the committee  with additional  written  testimony.   He                                                               
added that his  company has never done  "cigarette sampling," and                                                               
asked that the committee vote in favor of the bill.                                                                             
Number 2224                                                                                                                     
JENNIFER   APP,   Alaska   Advocacy  Director,   American   Heart                                                               
Association, said that she is testifying  in support of SB 168 on                                                               
behalf of Alaskans for Tobacco-Free  Kids, a youth tobacco policy                                                               
coalition  that  includes  the American  Heart  Association,  the                                                               
American  Lung   Association  of  Alaska,  the   American  Cancer                                                               
Society, and the  Alaska Native Health Board.  She  said that all                                                               
of  these organizations  support SB  168 because  it will  do two                                                               
important things.  She elaborated:                                                                                              
     First, it will decrease  the ability of individuals and                                                                    
     businesses to illegally avoid  the current tobacco tax.                                                                    
     And second,  it will  help keep  cigarettes out  of the                                                                    
     hands of youth.   The ongoing increase  in Internet and                                                                    
     mail order sales of cigarettes  is a major challenge to                                                                    
     public health  efforts to reduce  smoking.   Non "state                                                                    
     to  state" sales  will account  for 14  percent of  all                                                                    
     tobacco sales by  2005; that's just ...  two years from                                                                    
     now.  By failing  to require adequate age verification,                                                                    
     the sharply growing number of  mail order and web sites                                                                    
     selling  cigarettes makes  it  easier  and cheaper  for                                                                    
     kids to buy cigarettes.                                                                                                    
     The  mail  order  offers, and  web  sites  also  offer,                                                                    
     smokers a way to avoid  paying the state tobacco taxes,                                                                    
     thereby  keeping  cigarette  prices  down  and  smoking                                                                    
     levels  up,   and  depriving  the   state  of   a  very                                                                    
     legitimate source of revenue.   In conclusion, the bill                                                                    
     allows  legitimate  commerce   to  continue  unimpeded,                                                                    
     while closing existing loopholes.   The bill allows the                                                                    
     state  to  more   easily  collect  existing  legitimate                                                                    
     taxes, and at  the same time, the bill  helps make sure                                                                    
     that  individual  consumers   can't  access  cigarettes                                                                    
     without an  adequate age  verification process.   Thank                                                                    
     you very much for this opportunity to testify ....                                                                         
CHAIR  McGUIRE, after  determining  that no  one  else wished  to                                                               
testify, closed public testimony on SB 168.                                                                                     
The committee took an at-ease from 10:00 a.m. to 10:02 a.m.                                                                     
Number 2302                                                                                                                     
REPRESENTATIVE ANDERSON  moved to  report CSSB 168(FIN)am  out of                                                               
committee  with individual  recommendations and  the accompanying                                                               
fiscal  notes.   There being  no objection,  CSSB 168(FIN)am  was                                                               
reported from the House Judiciary Standing Committee.                                                                           

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