Legislature(2003 - 2004)
05/05/2003 09:02 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(L&C) "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." This was the first hearing for this bill in the Senate Finance Committee. Co-chair Wilken explained that this legislation addresses cigarette sales and distribution by mandating that a tax stamp be applied to each pack of cigarettes sold in the State thereby signifying that the tobacco tax has been paid. Senator Bunde, the bill's sponsor, expressed that "this is a tobacco distributor-friendly bill" as it would impede "the gray or black" marketing of cigarettes in the State that is negatively impacting legitimate businesses that pay the one dollar a pack State tax. He noted that requiring the State stamp to be affixed to each pack of cigarettes would assure that the State tax would be paid. He informed that this legislation was prompted by a radio advertisement he heard for an out-of-state tobacco distributor who claimed that, by purchasing cigarettes from him, the purchaser would avoid paying the State tax. Upon hearing that advertisement, Senator Bunde checked with the Department of Revenue and learned that numerous out-of-state purchases are being made and are circumventing the current dollar-a-pack tax. Senator Bunde informed that the State must establish a State stamp program in order to qualify for a federal law that specifies that it would be illegal for an entity to sell cigarettes without the affixed stamp were a State stamp required. He stated that this would address the out-of-State distributor issue. He communicated that Alaskan distributors support this legislation as it is intended to address those entities that receive an unfair tax advantage by not paying the State tax. Furthermore, Senator Bunde explained that this legislation provides a minimum price provision for wholesalers and retailers based on the wholesale list price provided by the tobacco manufacturers. This minimum price, he attested, would create a level playing field for competition in the State. He noted that higher cigarette prices might also deter young people from smoking. SFC 03 # 75, Side B 09:50 AM Senator Bunde stated that while the Department of Revenue estimates that the stamp tax could increase State revenue by approximately $500,000, the exact amount of money that this legislation might raise is speculative. He pointed out that Hawaii vigorously enforces its tax stamp program and has increased its cigarette tax revenue by fifty percent. In contract, he noted that Michigan has not vigorously enforced its program and has increased its revenue approximately ten percent. Senator Olson asked whether the industry has indicated that compliance with this legislation would present a hardship. Senator Bunde stated that industry representatives would be presenting testimony. Co-Chair Wilken stated that the tobacco tax currently generates approximately $40 million annually. He calculated that were the State to collect an additional ten percent of that amount, it would generate four million dollars for the general fund and the tobacco tax school fund. Senator Bunde explained that the tobacco tax revenue could be dedicated toward the school fund because these appropriations were "grandfathered in" as existing policy. Co-chair Wilken expressed that 70 percent of the revenue would be dedicated to the school fund with 24 percent dedicated to the general fund. He stated that this would be significant money. JENNIFER APP, Alaska Advocacy Director, American Heart Association, testified via teleconference from Anchorage in support of the bill on behalf of Alaska's tobacco-free kids. She stated that this legislation would decrease "the ability of people and businesses to illegally avoid the tax," and it would assist in keeping tobacco "out of the hands of youth." She attested that non-face-to-face sales such as websites and mail orders account for approximately 14-percent of all sales to youth. Furthermore, she asserted that these sales are detrimental to efforts to reduce youth smoking as no proof of age is required in these transactions and the ability to avoid paying the State tobacco tax allows purchase to be less expensive. She attested that this legislation would prohibit Internet and mail order distributors from avoiding the State tax. She stated that the proof of age issue is also addressed in this bill, as it requires that all shipments must be delivered to a person licensed under Sec. 43.50.105 or to other identified entities specified in Section 9 of the bill. Co-chair Wilken asked whether the American Heart Association supports this legislation. Ms. App responded in the affirmative. Senator Bunde acknowledged the work conducted by the Department of Revenue in this endeavor. JOHANNA BALES, Revenue Auditor and Program Manager, Cigarette & Tobacco Products Excise Tax, Department of Revenue informed the Committee that the Department is in favor of this tax stamp as she expressed that tax enforcement efforts are currently hampered by the absence of a stamp. Moreover, she attested that "it is virtually impossible" to determine whether the tax has been paid on any given pack of cigarettes as tracking via retailer invoice is impossible as no pack is distinguishable from another. She explained to the Committee that prior to the one-dollar-a-pack tax legislation, approximately 53 million packs of cigarettes were sold annually; however, she noted that the annual amount has decreased to approximately 42 million packs. She stated that the Department, in its attempts to enforce the tax, uncovered approximately 1,000 individuals who are purchasing cigarettes via the Internet. She stated that these individuals attest that were a stamp program in place, they would have known whether the tax was or was not paid by the vendor. She stated that the Department calculates that approximately $600,000 was not collected due to Internet, distributor, or mail order activities over a 13-month period. Ms. Bales stated that once the State enacts a State stamp tax program, the federal Contraband Cigarette Trafficking Act would assist in the enforcement of tax. She affirmed that 46 states have tax stamp programs, including the program recently enacted in Hawaii, which has a "very aggressive" eleven-member enforcement team. Co-Chair Green asked whether language in the bill addresses a situation wherein a person, while traveling out of state, purchases tobacco for his or her own personal consumption and transports it back to the State. Ms. Bales clarified that this legislation proposes to change existing tobacco law by implementing a stamp tax. Furthermore, she stated that because no exemption for the transport of tobacco for personal consumption currently exists, the individual should currently be paying the State tax. However, she stated that while this scenario "is impossible to enforce," the Department does not consider it to be a "huge problem." Co-Chair Wilken stated therefore that "the trip wire" would be when an individual distributes the cigarettes for profit or for some manner other than personal use. Ms. Bales responded that current statute specifies that persons transporting cigarettes into the State should be licensed to transport the cigarette, should pay the cigarette tax, and should file a monthly report. She stated that the statute does not differentiate between personal and non-personal consumption. She stated that individuals who have been detected of transporting goods into the State for personal use have been treated "very leniently." Co-Chair Green asked whether the transport of cigarettes is viewed with "the same sort of standard" as the transport of liquor. Ms. Bales responded that "there is a very big difference" as the tax on alcohol is applicable at the point of purchase. Therefore, she informed that because the tax is paid at point of purchase, the alcohol could be legally transported, with the exception being that federal law prohibits the mailing of alcohol. Therefore she concluded that the alcohol tax "is not as problematic" as the cigarette tax. Co-Chair Wilken asked for further information regarding the sale of cigarettes bought via the Internet. Senator Bunde noted that the Internet seller does not require the purchaser to prove that they are of legal purchasing age. Co-chair Wilken asked how this legislation would enforce the tax in this case. Ms. Bales responded that this legislation would require a purchaser to apply to the Department of Revenue for a license, and upon receipt of the license, they could make a purchase. Furthermore, she explained that shipping cigarettes through the mail to an unlicensed individual is prohibited. In addition, she relayed that fines would be levied upon the common carrier shipping the cigarettes were the receiver of the cigarettes unlicensed. In conclusion, she stated that the intent of the bill is to curtail all shipment of cigarettes via interstate commerce unless it would be shipped to someone who is licensed and who is paying the tax. Co-Chair Wilken surmised therefore that rather than placing the onus on the seller, the State would require the individual "sitting at home" making the purchase to be licensed. However, he attested, this would be difficult to enforce because the State would be required to become aware of the action. Ms. Bales expounded that the federal Jenkins Act requires that anyone conducting interstate commerce by shipping cigarettes to someone who is not a licensed distributor must notify the state's Department of Commerce of that shipment. She stated that a violation of this Act would result in a misdemeanor charge. She continued that were this law violated under the federal Contraband Cigarette Act it would result in a felony charge. However, she reiterated that the Contraband Cigarette Act would not be applicable until the State incorporates a stamp tax. Co-Chair Wilken asked whether the Internet seller would ask a purchaser for his or her license number. Ms. Bales responded that this information would be required were the stamp tax legislation enacted. Ms. Bales continued that, in addition, private carriers, such as Federal Express, who might ship cigarettes would be required to verify that the person receiving the package be of legal age and be licensed. Senator Bunde pointed out that rather than the State being responsible for the enforcement, charges at the federal level could be levied. He stated that cigarette suppliers in the "sovereign nations, the Indians [indiscernible] are potentially going to ignore it." Co-Chair Green asked whether a person, with cigarettes and doing interstate travel, would be required to follow these same licensing regulations. Ms. Bales stated that it depends on the individual state's law; however, she continued, were that a state's law similar to this legislation, the person should pay the state's tax. She noted that some states allow a person to transport a specified number of cigarettes for personal consumption without penalty. Co-Chair Wilken exampled a scenario wherein a business might order cigarettes via the Internet, and upon receipt of the cigarettes, would sell them at the going market value and "pocket the tax." He asked whether this type of activity occurs. Ms. Bales declared that this does happen. She further exampled the difficulty of enforcing the current State cigarette tax by sharing that a licensed distributor could present the State examiner with a legitimate invoice on which the State tax is reflected as being paid. However, she continued that without a stamp being affixed to each packet of cigarettes, the examiner has no method by which to identify the packs of cigarettes on which a tax has been or has not been paid. Co-Chair Wilken asked who is authorized to apply the stamp to the pack. Ms. Bales clarified that generally the distributor would affix the stamp to the pack; however, the retailer could purchase the equipment and the stamp from the Department and affix the stamp. Senator Taylor asked for the amount of the total current State tax on cigarettes. Ms. Bales explained that the State tobacco tax is currently five cents per cigarette or one dollar per pack of twenty cigarettes. Senator Taylor asked whether, according to State statute, he would be required to remit to the State of Alaska 97-cents were he to purchase a pack of cigarettes, for example in Kentucky which charges a three-cent per pack cigarette tax. Ms. Bales clarified that the State of Alaska would not credit a purchaser for the amount of tax they paid in another state; therefore, she stated that the State tax of one dollar per pack of cigarettes should be remitted to the State. However, she stated that Kentucky would issue a credit to an Alaskan distributor for the Kentucky tax, were the cigarettes purchased in Kentucky for resale in Alaska. Additionally she noted that Kentucky would not require the Kentucky stamp to be affixed to packs being shipped to Alaska for consumption. Co-Chair Wilken referred the Committee to the "State Tax Guide" comparison chart, dated January 1, 2003 [copy on file] that was supplied by Senator Bunde. He noted that Kentucky, with a cigarette tax of three cents per pack, has the lowest tax while Massachusetts, with the highest state tax, charges $1.50 tax per pack. MIKE ELERDING, Owner, Northern Sales Company, testified via teleconference from Ketchikan, and stated that his company and other Alaska-based wholesale tobacco distributors support this legislation. He avowed that the stamp tax would enable the State to collect a ten-dollar per carton cigarette excise tax on every carton of cigarettes imported into the State. In addition, he attested that the legislation would provide Alaskan-based distributors with the ability "to compete on a level playing" with out-of-state distributors. He urged the Committee to support this legislation. Senator Olson asked whether there are concerns regarding stamp counterfeiting. Ms. Bales confirmed that counterfeit stamps are a nationwide problem. She continued that stamp manufacturers are diligently addressing this issue and are producing stamps that are difficult to counterfeit. She announced that, as specified in the Department's fiscal note, the State is proposing "to purchase the most expensive stamps which have the most up-to-date counterfeit measures" including special inks. Co-Chair Wilken commented that the Members' backup material addresses the counterfeit issue and includes information about Meyercord, a stamp manufacturer. Co-chair Wilken asked the distributor to explain the process whereby the State stamp is affixed to each pack of cigarettes. Mr. Elerding explained that wholesale distributors, who order cigarettes directly from manufacturers, would be required to have stamping equipment in their facility and would affix the stamp on each pack at that location. He stated that his company would be required to centralize the stamping operation at a single location rather than conducting it at each of its five distribution centers. Co-Chair Wilken asked for clarification that each pack, rather than each carton, would require a stamp. Mr. Elerding verified that while the stamp must be affixed to each pack, the automated stamping equipment would provide an efficient stamping process. He communicated that the legislation provides for a State "reimbursement to the distributors that is close to covering the cost of the stamp operation." Nonetheless, he communicated that the process would be an expense and that small distributors could not amortize the expense as well as larger distributors. He noted however, that the Unfair Cigarette Sales Measure, defined in Article 6 of Section 17 of the bill, would assist distributors in offsetting the additional expense associated with the stamping process. Co-Chair Wilken asked whether a uniform State stamp or an individual distributor stamp would be used. Mr. Elerding clarified that the State stamp would be the only stamp allowed. Co-chair Wilken asked the amount the distributor anticipates spending on this project. Mr. Elerding stated that, in addition to the cost of the equipment, the company would be required to locate adequate space in which to conduct the stamping procedure and must provide the necessary labor. He estimated the total expense to be approximately $75,000 a year, with $50,000 of that being reimbursed by the State by means of a discount on the purchase of the stamps. Senator Taylor understood that Canada has experienced "huge problems" with bootlegging, hijacking, and counterfeiting since the nation increased its cigarette taxes. He asked whether the State of Alaska has experienced an increase in bootlegging or black- marketing since the cigarette tax was raised to one dollar a pack. Ms. Bales responded that the State has experienced an increase in these activities; particularly, in "gray market" activities where cigarettes manufactured for other countries are finding their way to the United States. She noted that while the State might be aware of this situation, there are no current provisions in Alaska law that would allow these cigarettes to be seized. She asserted that enacting a stamp tax would address this situation. Senator Olson asked the projected costs associated with the enforcement of this legislation. Ms. Bales responded that while the Department of Law has a zero fiscal note attached to this legislation, the Department of Revenue's $251,700 fiscal note would provide for three positions to handle the purchase, sale, administration, and enforcement of the new tax stamp program and cigarette shipping restrictions. Senator Olson asked whether this tax stamp legislation would encompass all types of tobacco. Ms. Bales responded that the tax would be limited to cigarettes as it would be impossible to automate a stamp process for the various packaging or variety of product sizes. Senator Olson asked whether the intent of this legislation is to penalize transporters of cigarettes. Ms. Bales responded yes, that private carriers would be penalized were they to knowingly deliver cigarettes to an underage and unlicensed individual. Senator Olson voiced concern that transporters would be responsible for enforcing this legislation. Senator Bunde voiced the importance of noting that the key element regarding the responsibility of transporters is the term "knowingly." Senator Olson furthered that "the last thing" on a small rural transporting company's mind would be to monitor each pack of cigarettes. He continued to voice concern regarding the transporting issue. Amendment #1: This amendment inserts a new subsection into Section 43.50.849 Definitions. of the bill on page 21, line 28 as follows. (12) "trade discount" means a price reduction that is offered by a cigarette manufacturer on the date of sale, is reflected on the invoice as a deduction from the manufacturer's list price and is fully earned and determininable on the date of sale. Senator Bunde moved for the adoption of Amendment #1. Co-Chair Wilken objected for explanation. Senator Bunde stated that, at the request of distributors, this amendment would define the term "trade discount" which is a price reduction offered by a cigarette manufacturer on the date of sale. He explained that the discount would be reflected on the invoice and would be a factor in the "minimum markup" determination of the retail price of the cigarettes. He stated that the Department of Revenue does not object to the amendment. Ms. Bales clarified that the intent of the amendment is to assure that cigarettes could not be sold below "cost" which is defined as the price paid less the discount. Co-chair Wilken surmised that this amendment, rather than address concerns regarding the tax stamp, addresses industry trade concerns. Senator Bunde voiced that it addresses minimum price concerns. Co-chair Wilken removed his objection. There being no further objection, Amendment #1 was adopted. Senator Taylor moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. Senator Taylor then objected to his motion. He voiced his continuing objection to taxation legislation; specifically tax legislation that would result in expenses and enforcement difficulties to the State. He reminded Members of testimony indicating that the cigarette tax has resulted in bootlegging and other illegal activities, and he worried that this legislation would further those activities. He voiced that while Alaskan retailers and wholesalers have legitimate concerns, the expense associated with this legislation is "far greater" than its projected benefit. Senator Taylor removed his objection. There being no further objection, CS SB 168 (FIN) was REPORTED from Committee with fiscal note #1 in the amount of $251,700 from the Department of Revenue and zero fiscal note #2 from the Department of Law.