Legislature(2003 - 2004)

04/19/2004 03:25 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SB 82-ALCOHOLIC BEVERAGE TAX FOR WINE & OTHERS                                                                                
[Contains discussion of HB 225]                                                                                                 
CHAIR ANDERSON announced  that the first order  of business would                                                               
be CS FOR SENATE BILL NO.  82(L&C)(title am), "An Act relating to                                                               
the  state alcoholic  beverage  tax for  certain  wine and  other                                                               
beverages on amounts  sold in or consigned for  shipment into the                                                               
state that  exceed 100 gallons a  month, and to the  treatment of                                                               
two or  more taxpayers  who have a  relationship for  purposes of                                                               
applying the tax for certain wine and other beverages."                                                                         
Number 0094                                                                                                                     
DOUG LETCH, Staff to Senator Gary Stevens, Alaska State                                                                         
Legislature, presented SB 82 on behalf of Senator Gary Stevens,                                                                 
sponsor of the bill.  He stated:                                                                                                
     When the 22nd Alaska  Legislature passed into law House                                                                    
     Bill  225, breweries  were allowed  to keep  the former                                                                    
     tax rate of  35 cents per gallon on sales  of the first                                                                    
     60,000  barrels  of  beer  sold  in  the  state,  while                                                                    
     wineries  were not  given similar  consideration; as  a                                                                    
     result, the tax  on wine rose from 85  cents per gallon                                                                    
     to  $2.50  per  gallon.     This  statute  which  helps                                                                    
     breweries,  has,  unfortunately,  put  Alaska's  small,                                                                    
     emerging wineries at a  competitive disadvantage in the                                                                    
     SB 82 is legislation intended  to reduce the tax burden                                                                    
     for  small  Alaska wine  producers,  at  which wine  is                                                                    
     currently taxed  at the  rate of  $2.50 per  gallon, at                                                                    
     the time  it is sold in  the state or consigned  to the                                                                    
     state.   Recognizing that a  revision to  current state                                                                    
     statute  to  allow  wineries an  exemption  similar  to                                                                    
     breweries would lead to a  substantial revenue loss, SB                                                                    
     82 attempts  to level the  playing field for  our small                                                                    
     wineries  by offering  a tax  exemption of  100 gallons                                                                    
     per  month,  and this  figure  was  derived after  much                                                                    
     consideration  and consultation  with winery  operators                                                                    
     and  the Department  of Revenue.    The 100-gallon  per                                                                    
     month figure  is also an attempt  to [minimize] revenue                                                                    
     lost  from  unintended   beneficiaries,  while  keeping                                                                    
     within the constrictions of interstate commerce law.                                                                       
     The bill  would decrease  the impact on  state revenues                                                                    
     by  around  $18,000,  but  while  there  is  a  revenue                                                                    
     decrease,  it will  help support  continued development                                                                    
     of small  Alaskan wineries,  which currently  there are                                                                    
     two  on Kodiak  Island, a  third  is in  Haines, and  a                                                                    
     fourth  is  in  Anchorage.     This  burgeoning  Alaska                                                                    
     industry  does   need  our   support  to   prosper  and                                                                    
     contribute to  the state's changing economy,  and SB 82                                                                    
     is one means of assisting them.                                                                                            
     While  the state  would loose  some  income under  this                                                                    
     bill,  we may  also see  a loss  of all  incomes should                                                                    
     these  small businesses  cease  to  exist because  they                                                                    
     can't remain  profitable and  competitive in  a dynamic                                                                    
CHAIR ANDERSON noted the arrival of Representative Guttenberg.                                                                  
Number 0275                                                                                                                     
REPRESENTATIVE  ROKEBERG  asked  Mr.  Letch  to  talk  about  the                                                               
wineries in Alaska.                                                                                                             
MR.  LETCH reported  that on  Kodiak Island  there are  two small                                                               
wineries that  use salmonberries  to make wine  and a  variety of                                                               
products.  He  said there is a  You Brew Pub in  Anchorage, and a                                                               
winery in Haines.                                                                                                               
REPRESENTATIVE ROKEBERG asked  if the bill is for  all wines sold                                                               
less than 100 gallons and those produced in the state.                                                                          
MR.  LETCH  replied  that  because   of  the  federal  interstate                                                               
commerce  laws, wineries  from  outside of  the  state cannot  be                                                               
excluded  from taking  advantage  of this  exemption.   The  100-                                                               
gallon  figure was  derived to  minimize the  impact from  out of                                                               
state wineries, he added.                                                                                                       
REPRESENTATIVE  ROKEBERG asked  if that  is approximately  400 to                                                               
500 bottles  a year.   He wondered  if a company  from California                                                               
could import that amount and be excluded from paying the tax.                                                                   
MR. LETCH replied that that is his understanding.                                                                               
REPRESENTATIVE ROKEBERG said he finds that troublesome.                                                                         
CHAIR  ANDERSON noted  the arrival  of  Representatives Lynn  and                                                               
Number 0414                                                                                                                     
CHUCK   HARLAMERT,  Juneau   Section  Chief,   Tax  Division   of                                                               
Administrative Services,  Department of Revenue, spoke  about the                                                               
problem  regarding  out of  state  importation,  noting that  the                                                               
brewery  exemption  lowers the  rate  of  tax for  small  brewers                                                               
depending on  the size  of the brewer.   It does  allow a  lot of                                                               
leakage  of the  credit out  of  state.   He pointed  out that  a                                                               
bigger  problem  is  that  the taxpayers  are  the  importers  or                                                               
distributors, "so  we have to  look through the taxpayers  to the                                                               
underlying  brewer  ....   "This  bill  does  not have  the  same                                                               
problem as  the brewery  reduced rate because  it applies  to the                                                               
taxpayer irrespective of the size of  the winery.  It helps small                                                               
Alaska wineries  because they are  direct taxpayers and  they get                                                               
an  exclusion  of  100  gallons  per  month,  he  explained.    A                                                               
distributor who distributes  a larger volume still  gets only the                                                               
100-gallon exemption, he said.                                                                                                  
REPRESENTATIVE  ROKEBERG asked  if  Mr.  Harlamert is  suggesting                                                               
that  a  vintner  from  California cannot  ship  wine  to  Alaska                                                               
without going to a distributor.                                                                                                 
MR. HARLAMERT said  he believes that they have to  be licensed in                                                               
the  state   so  they  could,   in  theory,  become   a  licensed                                                               
distributor in the state and import  wine, but can't just ship it                                                               
in.  They can't sell direct into Alaska, he added.                                                                              
REPRESENTATIVE ROKEBERG said  he is confused how  that works with                                                               
the "three-tier system."                                                                                                        
Number 0683                                                                                                                     
MR.  HARLAMERT  related  that  the incidences  of  taxes  on  the                                                               
brewing, shipping,  or consignment  in the  state amounts  to ten                                                               
wine taxpayers now,  and there are no wineries  outside of Alaska                                                               
that pay the  tax.  The tax is imposed  at the distributor level,                                                               
he said.                                                                                                                        
CHAIR ANDERSON  asked Representative  Rokeberg to explain  how it                                                               
REPRESENTATIVE ROKEBERG implied  that he is not  sure he entirely                                                               
understands  how  it works.    This  bill  puts  the tax  on  the                                                               
manufacturer of the  wine, if they're in  state, where currently,                                                               
the other wines are taxed at the distribution point.                                                                            
MR. HARLAMERT replied exactly.                                                                                                  
REPRESENTATIVE  ROKEBERG asked  if vintners  from outside  Alaska                                                               
would have to apply to the  Department of Revenue for a licensure                                                               
under the Alcoholic Beverage Control Board (ABC Board).                                                                         
MR. HARLAMERT  said his understanding of  the rule is that  if it                                                               
is  shipped into  the  state for  resale  it must  be  done by  a                                                               
licensed distributor.                                                                                                           
CHAIR ANDERSON stated  that the bill is about  getting parity for                                                               
taxation so that people from other states can't find a loophole.                                                                
REPRESENTATIVE  ROKEBERG clarified  that the  real issue  is that                                                               
when the  legislature raised  alcohol taxes  three or  four years                                                               
ago,  Representative  Rokeberg  offered  an  amendment  that  was                                                               
consistent  with federal  law, which  allowed the  exemption from                                                               
the  increase of  tax  of  locally produced  beer.    But it  was                                                               
consistent with  the "gallonage requirement"  under the  U.S. tax                                                               
code, he noted.  That's why the  there is a reference in the bill                                                               
to 26 U.S.C.  267(b), he pointed out.  He  asked Mr. Harlamert to                                                               
say more about the problem he spoke about.                                                                                      
Number 0922                                                                                                                     
MR. HARLAMERT related that the problem he was referring to is:                                                                  
     When you  base an  exemption off  of the  activities or                                                                    
     status of the  producer, but the exemption  needs to be                                                                    
     effectuated  at  the  taxpayer   level,  you  create  a                                                                    
     difficult   administrative   process.     The   brewery                                                                    
     exemption does  that.  It's  rather cumbersome  to deal                                                                    
     with when a qualified brewer  ... may sell through more                                                                    
     than one  taxpayer and we  need to keep track  of that.                                                                    
     There's a cap on the amount  of beer that they can sell                                                                    
     at the lower  rate, and if you were to  extend the same                                                                    
     reference  to federal  law for  wineries, I  think that                                                                    
     the   administrative  complications   of  taking   that                                                                    
     approach would be that much worse.                                                                                         
MR.  HARLAMERT continued  to  say  that the  feds  have a  credit                                                               
mechanism that  gives an  advantage to small  wineries.   It's 90                                                               
cents a  gallon, and  it is  phased out  for between  150,000 and                                                               
250,000  gallons  produced a  year.    He  explained that  it  is                                                               
relatively simple  to administer  when dealing directly  with the                                                               
producer and the taxpayer.                                                                                                      
REPRESENTATIVE CRAWFORD asked if it  is 500 bottles per month and                                                               
6,000 bottles per year.                                                                                                         
MR.  HARLAMERT  replied that  he  thinks  it is  between  400-500                                                               
bottles of wine.                                                                                                                
REPRESENTATIVE  CRAWFORD  asked  if   specialty  wines  would  be                                                               
MR.  HARLAMERT answered  that it  doesn't exclude  them directly.                                                               
He said,  "It does via the  taxpayer because they come  through a                                                               
distributor.  The exemption is not  a function of the size of the                                                               
winery or its source.  It's  simply, each taxpayer gets the first                                                               
100 gallons of wine tax free."                                                                                                  
REPRESENTATIVE  CRAWFORD  said,  "What   you're  saying  is,  the                                                               
Fiddlehead can't buy from Columbia Crest Winery directly."                                                                      
MR. HARLAMERT said that is his understanding.                                                                                   
REPRESENTATIVE ROKEBERG said,  "But they may be able  to buy from                                                               
another smaller vintner, is what  I'm concerned about."  He asked                                                               
if Mr. Harlamert  is suggesting that they would have  to buy from                                                               
a wholesale distributor and then resell it.                                                                                     
MR. HARLAMERT said that this is  not his area of expertise and he                                                               
is hesitant to answer.                                                                                                          
CHAIR ANDERSON  asked if this issue  could be worked out  and the                                                               
committee could meet again on the bill.                                                                                         
Number 1178                                                                                                                     
REPRESENTATIVE ROKEBERG suggested that  the fiscal note be looked                                                               
at.   He noted a  loss of $18,000 and  asked the reason  why that                                                               
MR. HARLAMERT said, "We estimate  that the total revenue decrease                                                               
will be $18.4 thousand; approximately  20 percent of that will be                                                               
realized by in-state wineries."                                                                                                 
REPRESENTATIVE ROKEBERG asked  what the volume of  the two Kodiak                                                               
wineries is.                                                                                                                    
MR.  LETCH replied  that  one of  the  wineries produces  roughly                                                               
1,200 gallons per year with the  bulk of that coming in the fall.                                                               
They  would be  producing about  300-400 gallons  per month,  for                                                               
four  months, he  said.   He assumed  that the  other winery  was                                                               
similar in production.                                                                                                          
REPRESENTATIVE ROKEBERG asked how much tax they would be paying.                                                                
MR. HARLAMERT  estimated that local  wineries would be  paying 20                                                               
percent of $18,000.                                                                                                             
REPRESENTATIVE  ROKEBERG asked,  "Someone's  got to  tell me  why                                                               
we're going  to give up four  times the tax that  we'd be abating                                                               
to do this deal."                                                                                                               
CHAIR  ANDERSON suggested  that  someone from  the Department  of                                                               
Revenue  might  be able  to  answer  that  question at  the  next                                                               
hearing of the bill.                                                                                                            
REPRESENTATIVE ROKEBERG said he has  concerns about where the tax                                                               
fits.  Mr.  Harlamert's analysis seems to indicate a  ratio of 4-                                                               
to-1 cost-to-benefit analysis, he pointed out.                                                                                  
Number 1359                                                                                                                     
REPRESENTATIVE  GUTTENBERG  suggested  that  a  synopsis  of  the                                                               
developing wine  industry should  be made  available at  the next                                                               
hearing of the bill.   He said he is interested  in hearing if it                                                               
is a sustainable industry.                                                                                                      
REPRESENTATIVE DAHLSTROM,  directing her  comments to  Mr. Letch,                                                               
asked  if  this  bill  is  at   the  request  of  one  winery  in                                                               
MR. LETCH  said when the  bill was  introduced in the  House, the                                                               
makers of the bill worked  primarily with Mr. Steve Thompson from                                                               
Alaska  Wild Wine.    "We have  also heard  from  the other  wine                                                               
owners, John and  Judy Lucas, and also from the  Menakers who own                                                               
the winery  in Haines."  There  has been no contact  with the You                                                               
Brew Pub in Anchorage, he noted.                                                                                                
REPRESENTATIVE DAHLSTROM asked if Steve Thompson is the mayor.                                                                  
MR. LETCH said no, he is a local resident of Kodiak.                                                                            
Number 1485                                                                                                                     
REPRESENTATIVE  CRAWFORD  suggested  that there  should  be  more                                                               
information obtained  on whether  this bill  opens up  a loophole                                                               
for other wines to be imported.                                                                                                 
MR. HARLAMERT  offered to ask  Joanna Bales  who is in  charge of                                                               
the  alcohol [tax]  program to  attend  the next  hearing of  the                                                               
bill.   He said that  he contacted  her prior to  today's meeting                                                               
and  it is  their  understanding  of the  law  that  there is  no                                                               
problem with a loophole.  The  incidence of tax is to "bring into                                                               
the state  for sale, to  distribute, or  to brew," so  an outside                                                               
seller needs to be licensed to do that, he explained.                                                                           
REPRESENTATIVE  ROKEBERG  pointed  out  that the  basis  for  the                                                               
brewery  exemption was  to keep  the brewery  tax at  its current                                                               
level, and  it only applied  to the  incident of a  tax increase.                                                               
He asked Mr. Harlamert if that is his recollection.                                                                             
MR. HARLAMERT said yes.                                                                                                         
REPRESENTATIVE  ROKEBERG added,  "Those  people  who are  locally                                                               
brewing and are  not paying no tax."   He asked if  that would be                                                               
similar in this bill.                                                                                                           
MR. HARLAMERT replied yes and no.  He said:                                                                                     
     It depends on their volume and  I think the best way to                                                                    
     summarize it  is, we looked  at the model used  for the                                                                    
     brewery exemption  and because of two  issues, one, the                                                                    
     administrative burden  involved with  it and,  two, the                                                                    
     fact that  if you do exempt  it based upon the  size of                                                                    
     the venture,  then you do  open up a very  large number                                                                    
     of  potential beneficiaries,  all  of them  out of  the                                                                    
     state,  so in  our dealing  with the  Senator's office,                                                                    
     we've  tried to  come  up with  the  best exemption  we                                                                    
     could come up with the least leakage.                                                                                      
CHAIR  ANDERSON  announced  that  SB   82  would  be  held  until                                                               
Number 1637                                                                                                                     
REPRESENTATIVE GATTO  asked if the  Kodiak winery sold  "all they                                                               
can make."                                                                                                                      
MR. LETCH said he didn't know.                                                                                                  
REPRESENTATIVE  GATTO suggested  that  increasing  the tax  could                                                               
increase sales  by pushing other  importers out.  He  wondered if                                                               
the focus  should be on  increased production, which is  going to                                                               
be better for  the local economy, the workers, and  the state, as                                                               
opposed to just increasing market share.                                                                                        
REPRESENTATIVE ROKEBERG  said it might  be hard to  get empirical                                                               
evidence of market elasticity.                                                                                                  
[SB 82 was held over.]                                                                                                          

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