Legislature(2003 - 2004)
05/06/2003 08:06 AM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 Development. 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 bill. CHAIR SEEKINS said they would hold the bill for further work.