Legislature(2003 - 2004)

05/06/2003 08:06 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
              HB 224-CIGARETTE SALES REQUIREMENTS                                                                           
CHAIR SEEKINS announced HB 224 to be up for consideration.                                                                      
MR. MIKE BARNHILL,  Assistant Attorney General, supported  HB 224,                                                              
which  is the  companion  to  SB 162.  This  bill  relates to  the                                                              
Master  Settlement  Agreement,  which is  the  settlement  between                                                              
Alaska,  45  other   states  and  the  major   tobacco  companies.                                                              
Litigation  was  settled  in  1998 in  exchange  for  a  permanent                                                              
revenue stream  and a few weeks  ago, Alaska got our  first annual                                                              
payment of about $17.5 million.                                                                                                 
The agreement  has provisions for  reducing the revenue  stream in                                                              
certain  circumstances.   One  of  them  is   a  non-participating                                                              
manufacturer  adjustment (NPM) (manufacturers  who haven't  signed                                                              
on to  the Master Settlement agreement  with the states).  The way                                                              
to avoid that is  to do two things: first, the  state has to enact                                                              
a NPM  statute,  which we did  in 1999.  It requires  all NPMs  to                                                              
deposit  a  certain   amount  of  money  into   escrow  for  every                                                              
cigarette  they sell  in the  State of  Alaska. For  the past  two                                                              
years, they have had to deposit about 1.5 cents per cigarette.                                                                  
The other  thing they  have to  do to  avoid the downward  revenue                                                              
adjustment  is to  diligently  enforce  that statute.  Alaska  has                                                              
been doing that  since it's enactment in 1999.  However, they have                                                              
found  in certain  circumstances,  enforcement  can be  difficult,                                                              
because  many of  the NPMs  are small  tobacco manufacturers  that                                                              
are located  in far  flung parts  of the  world like India,  China                                                              
and  the Philippines.  As an  example,  a company  in India  makes                                                              
hand  rolled   candy  flavored   cigarettes  and  was   selling  a                                                              
substantial   amount  of   them  into  the   state,  but   weren't                                                              
depositing  the  escrow.  The Department  of  Revenue  (DOR)  sent                                                              
several  letters advising  them of  our laws  and they refused  to                                                              
comply. Finally,  the case was referred  to him and he  decided to                                                              
sue.  They  had  to  hire a  process  server  to  hand  carry  the                                                              
complaint and summons  that was filed in Juneau to  India and they                                                              
ultimately got a default judgment.                                                                                              
Other states  have had similar  experiences with this  company and                                                              
others  and decided  there  has to  be another  way  to deal  with                                                              
them.  In  2001,  legislation  that is  designed  to  enhance  our                                                              
ability  to enforce  our laws was  enacted. It  created a  contra-                                                              
band list of companies  that did not comply with  our escrow laws.                                                              
By  last summer,  about 15  other states  followed suit.  However,                                                              
the problem  was that  each of the  statutes was different.  Then,                                                              
the National  Association  of Attorneys General  got involved  and                                                              
with  the  help of  the  states  a  uniform  law was  drafted.  It                                                              
creates a directory  of cigarette companies that  are permitted to                                                              
sell cigarettes  in Alaska. To get  on the list,  the manufacturer                                                              
has  to certify  annually  either that  they  are a  participating                                                              
manufacturer under  the Master Settlement  Agreement or  that they                                                              
are a  NPM, but in  compliance with  our laws. Local  distributors                                                              
look up the web  page on the Department of Revenue's  web site and                                                              
import cigarettes accordingly.                                                                                                  
Other provisions  in the bill  concern monitoring  compliance with                                                              
information  supplied  to  the  DOR and  the  penalties  for  non-                                                              
compliance.  There is a  tax credit  for cigarettes a  distributor                                                              
brings  into the  state relying  on the  DOR list  and then  finds                                                              
that the company  is out of compliance. There is  also a provision                                                              
for  service   of  process,   which  allows   him  to   serve  the                                                              
commissioner   of  the  Department   of  Community   and  Economic                                                              
SENATOR   OGAN  asked   if  other   states   were  enacting   this                                                              
legislation verbatim.                                                                                                           
MR.  BARNHILL replied  the 12  states  that have  enacted it  have                                                              
done so nearly  verbatim. Our tax credit provision  is a variance,                                                              
but the DOR thought it important to do that.                                                                                    
SENATOR OGAN  said he  thought it  didn't look like  streamlining,                                                              
but more like adding more regulations and hoops to jump through.                                                                
SENATOR  THERRIAULT said  the escrow  was set  up as  a source  of                                                              
paying possible  future judgments.  He didn't understand  how this                                                              
prevents them from becoming judgment proof.                                                                                     
MR. BARNHILL  explained  that the  context of  this is the  Master                                                              
Settlement   Agreement.  The   states  sued   the  major   tobacco                                                              
companies, not  the hundreds  of small ones.  To fund  the revenue                                                              
stream the tobacco  companies raised the price  of cigarettes. The                                                              
concern was that  only the major companies were  raising the price                                                              
of cigarettes  and the  smaller companies could  come in  and grab                                                              
market  share. That  would  essentially undermine  the  agreement.                                                              
This provision  was  put in to  level the  economic playing  field                                                              
for  those smaller  companies. The  money  sits in  escrow for  25                                                              
years.  In  Alaska, the  total  amount  of  escrow that  has  been                                                              
required  to be  deposited over  the  3.5 years  this program  has                                                              
been in  effect is about  $40,000. So,  there's not much  point in                                                              
suing  the companies,  because there's  not much  to recover  from                                                              
the escrow accounts.                                                                                                            
SENATOR  THERRIAULT  asked  how  they get  to  be  judgment  proof                                                              
before liability arises.                                                                                                        
MR.  BARNHILL replied  if they  are a  small company  and they  go                                                              
bankrupt  in 10  years,  there's  no money  to  recover from  them                                                              
unless  there is  money sitting  in  the escrow  account. The  tax                                                              
provision  is on page  5, line  16, and  is paid  at the point  of                                                              
importation, not at the point of sale to the consumer.                                                                          
SENATOR  FRENCH asked  if this  legislation  works in  conjunction                                                              
with tax stamps  and pricing floors in other  legislation they are                                                              
discussing this year.                                                                                                           
MR.  BARNHILL  replied  he  is   aware  of  that  legislation  and                                                              
although  HB 224 doesn't  work in  conjunction  with it, it's  not                                                              
inconsistent with it, either.                                                                                                   
SENATOR  FRENCH said  that he  needed  more time  to consider  the                                                              
CHAIR SEEKINS said they would hold the bill for further work.                                                                   

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