Legislature(1999 - 2000)
03/23/1999 01:40 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 102
"An Act imposing certain requirements relating to
cigarette sales in this state by tobacco product
manufacturers, including requirements for escrow,
payment, and reporting of money from cigarette sales in
this state; providing penalties for noncompliance with
those requirements; and providing for an effective
date."
DOUGLAS GARDNER, ASSISTANT ATTORNEY GENERAL, OIL, GAS &
MINING SECTION, DEPARTMENT OF LAW, stated that during the
past two years, the Knowles Administration with the help of
the Alaska Legislature has addressed the problems caused by
tobacco and the challenge of limiting access on a number of
fronts. Joint efforts have included legislation to increase
taxes on tobacco products, measures to limit youth access to
tobacco, stepped-up enforcement activities, and litigation
and participation in the national settlement with the
industry. The Department of Law's efforts have been closely
coordinated with the Department of Health and Social
Services and Department of Revenue, local tobacco control
groups and other state attorneys general.
Mr. Gardner pointed out that the bill was contemplated by
passage of the Master Settlement Agreement. Every state and
territory legislature is considering the same legislation.
The State is not required to pass the model statute included
in the settlement to receive settlement payments. However,
if the State does not pass the model statute, the State will
risk a possible reduction in payments under the
nonparticipating manufacturers' payment (NPM) reduction
formula of the settlement. The settlement provides for an
adjustment to the State's payments if the participating
manufacturers experience a disadvantage and lose market
share for sales of their tobacco products to other
nonparticipating manufacturers as a result of the marketing
restrictions, payments, and other limits in the settlement
agreement.
Mr. Gardner continued, every state is considering basically
the same bill, however, stylistic changes have been made to
it with the inclusion of the Department of Revenue. The
bill has resulted from a lot of negotiations. With passage
of the bill, the industry will not come back to the State if
there is a decrease to the participating manufacturer's
market share as a result of passage of the settlement
agreement. Any changes to the bill could change the
industry's position whether or not it continues to be a
qualifying statute.
Mr. Gardner continued, under the terms of the settlement
agreement, the objective is to prevent small tobacco
manufacturers from taking unfair advantage given that major
companies have signed an agreement. That action would
"level the playing field" and prevent the dumping of cheap
cigarettes.
Representative Grussendorf referenced Page 3, Line 11,
"..and generally perform its financial obligations under the
Master Settlement Agreement". He asked the legal authority
of using the word "generally". Mr. Gardner advised that
language was taken from the model. He did not believe that
industry intended to somehow loosen up their obligation by
using that language. He emphasized that the Department of
Law had changed this area. Those changes were made
primarily to the enforcement section, tailoring it to the
Department of Revenue and the Department of Law concerns.
Representative Bunde asked where the escrow money would be
placed. Mr. Gardner explained that the money would be
placed into a qualifying escrow account. The money would be
in escrow, not necessarily for the State to use. It would
act as an insurance policy. The fund would continue to grow
so that when an Alaska citizen had a claim, they would be
able to satisfy the judgement. The escrow account would
prevent the small manufacturer from being "judgement proof"
in the event that they had a lawsuit. The funds would
remain in that account for 25 years.
Representative Bunde stated that if there is a pool of
money, people will sue to get at it. He suggested that
establishing such an account would create a "carrot" for
additional lawsuits.
Co-Chair Therriault asked if the State enters into a lawsuit
against one of the small, non-participating manufacturers
could those settlement costs and the legal court fees come
from that account. Mr. Gardner replied that whatever the
State receives would be a judgement and it could be
satisfied out of that account. It is possible that the
State could go against the fund to receive the recovery,
whereas, if the fund were non-existent, the State would be
out-of-luck if there wasn't "something" existent to satisfy
such a claim.
Co-Chair Therriault pointed out that large manufacturers
build possible settlement costs into their price structure.
Mr. Gardner reiterated that the legislation would "level the
playing field" and that the "dumping" of cigarettes would
not be industry driven.
Co-Chair Therriault asked if the "Findings and Purpose"
Section of the bill was necessary. Mr. Gardner explained
that section of the bill could be important to the extent
that it would be subject to a constitutional challenge or
other litigation by another participating manufacturer in
the future, who somehow felt that this was unfair or
unnecessary on commerce. That Section magnifies the public
health problem in using tobacco and it keeps the statute
consistent with the other bills throughout the nation.
Representative J. Davies questioned what a "releasing party"
was. Mr. Gardner responded that Alaska is one of the
releasing parties as would be each settling state.
Representative J. Davies asked if a municipality could sue
to gain recovery from the escrow account. Mr. Gardner
replied that they could and that anyone could access that
account, i.e., the State, a municipality, or an individual.
It would be necessary for them to have a judgment and
settlement to make that claim.
Co-Chair Therriault asked what the reference to "financial
obligations", on Page 3, Line 11, would be. Mr. Gardner
explained that those obligations are the ones, which the
participating manufacturer would be required to undertake as
specified in the Settlement Agreement. There is a sixty-day
(60) wait period for a person to become a manufacturer;
there has been discussion of extending that wait period. At
this time, approximately 99.8% of the market shares are not
either participating or subsequent participating
manufacturers. Most companies are involved in the deal.
Representative G. Davis noted that the proposed legislation
would provide a means for the State to "catch" those
manufacturers who did not sign the master agreement.
Representative Bunde questioned how that law would be
enforced. Mr. Gardner advised that the Department of
Revenue currently tracks all tobacco volume coming into the
State. They have a long-standing practice of doing this
accounting. The importer is responsible for paying State
taxes. He elaborated that the tobacco industry is a very
"cut-throat" business and self-policing industry, and
consequently, if there is any deviation the Department hears
about it quickly.
Co-Chair Mulder referenced Page 3, regarding the amounts
placed into the escrow account. He asked if that amount was
determined per pack or per cigarette. Mr. Gardner replied
that it had been distilled down per unit, per cigarette.
Mr. Gardner did not know the formula used to determine that
figure.
Co-Chair Therriault referenced Page 4: "The Commissioner of
Department of Revenue shall adopt regulations to ascertain
the amount of excise tax on cigarettes". Mr. Gardner
explained that the purpose of that section was to guarantee
that to the extent that the Department of Revenue could,
under existing statute or regulation, they would be given
the regulatory authority to adopt regulations. The escrow
account will be based on taxable sales of tobacco into the
State.
Representative J. Davies asked if the deposit of money into
the escrow account would limit the liability of these
companies. Mr. Gardner acknowledged that was an interesting
perspective and that the industry might try to make that
argument, however, he thought such an argument would be a
"loser". There is no intention to limit liability but
rather to provide for some sort of compensation.
Representative J. Davies questioned the earnings of the
escrow account. Mr. Gardner advised that no money could be
released from the escrow account for a period of twenty-five
(25) years. It is intended that it become an income-
producing stream for companies.
Co-Chair Mulder calculated that the State would need to sell
130 million packs of cigarettes in order to arrive at the
$20 million dollar amount for the escrow account. Mr.
Gardner suggested that Department of Revenue would be better
able to generate information regarding those calculations.
Representative Grussendorf asked if payment on an agreement
would be tax deductible. Mr. Gardner did not know, however,
thought that there would be a difference between a
settlement and an agreement.
Representative Foster referenced the letter from the
Governor in member's packets. He asked if the items
recommended by the Governor would be the best use for the
funds. Mr. Gardner reiterated that the proposed statute
would create an escrow account. The purpose of the statute
would not be revenue generating for the State but rather to
provide a claim to potentially satisfy a judgment or
settlement against a company. Discussion followed between
Representative Foster and Mr. Gardner regarding the
Governor's letter and its relationship to the legislation.
Co-Chair Therriault referenced Page 4 & 5, "Certificate of
Compliance" requirement. He asked if that action would
consist of a written letter. Mr. Gardner agreed that the
"letter" was not well defined, leaving that statute open, in
order that the Commissioner of Department of Revenue,
through regulation, could recommend considerations. Mr.
Gardner suggested that the letter would need to address
taxable volume coming into the State.
(Tape Change HFC 99 - 52, Side 2).
Representative J. Davies asked the intent of the model
issue. Mr. Gardner explained that within a provision under
state law, advertising would be restricted from those
companies and would be considered unconstitutional. There
is a limit as to what the State can legislate.
Co-Chair Therriault asked without a settlement, could the
State require tobacco companies to set up an escrow system
like this. Mr. Gardner believed that it was possible that
the State could have done that, however, it would be
difficult because the litigation brought out all the
problems with tobacco and health related issues. If there
had been no litigation, it would have been difficult for the
Legislature to make a "finding" to create such escrow
accounts for protecting the public.
Co-Chair Therriault stressed that there has been no court
finding, only a settlement. Mr. Gardner agreed that it was
during a settlement, however, that the litigation process
unearthed the documents which illustrate all the problems
and health effects. Ultimately, those documents have
painted the picture of serious health problems. Without the
litigation and settlement, it would have been difficult for
the Legislature to have done this.
Representative Bunde characterized the model legislation as
a "take it or leave it" piece. Mr. Gardner pointed out that
every word and punctuation mark in the bill was determined
through extensive negotiation with the industry. He
reiterated, it took 1.5 months of hard bargaining to create
the bill before the Committee. Three (3) of the 46
jurisdictions have adopted the model legislation.
Co-Chair Therriault asked if the State does not participate
in the program, would payments be reduced by 60%. Mr.
Gardner explained that if the model statute is passed, the
way that it is, the State of Alaska would not be subject to
any non-participating manufacturer adjustments, however, if
Alaska determined that the statute was unconstitutional,
that would not be the result. In that event, the State
would be subject to a 65% reduction. Co-Chair Therriault
asked if it were not passed, would the State be subject to
100% lose. Mr. Gardner replied that it could be zeroed out.
Co-Chair Therriault asked if there had been any unanswered
questions from the meeting in the House Judiciary Committee.
Mr. Gardner replied that the Attorney General Botelho had
testified before that Committee. He did not know if all
questions had been answered.
Representative Grussendorf requested that if amendments were
being offered, on Page 3, Line 11, the word "generally" be
deleted. Co-Chair Therriault additionally request further
clarification of "financial obligation". Representative
Bunde asked why the bill would sunset in 25 years.
HB 102 was HELD in Committee for further consideration.
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