Legislature(2003 - 2004)
05/17/2003 09:15 AM House JUD
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* first hearing in first committee of referral
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+ teleconferenced
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SB 168 - CIGARETTE SALE/DISTRIBUTION Number 1356 CHAIR McGUIRE announced that the next order of business would be CS FOR SENATE BILL NO. 168(FIN) am, "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." Number 1407 SENATOR CON BUNDE, Alaska State Legislature, presented SB 168 on behalf of the sponsor, the Senate Labor and Commerce Standing Committee, which he chairs. He indicated that SB 168 would bring added revenue to the state. The genesis for the bill, he explained, was his hearing a radio commercial that offered to send people untaxed cigarettes. After hearing that commercial, he said he asked the Department of Revenue (DOR) to look into the issue; according to the DOR, there is a significant "gray market" of untaxed cigarettes coming into the state. During a recent attempted court action against a Washington company that was sending untaxed cigarettes into Alaska, it came to light that this company had "hundreds and hundreds" of Alaskan customers. Subsequently, the DOR notified those customers that they were "busted" and owe cigarette tax to the state. He noted, however, that it appears that if Alaska doesn't have a tax stamp on its cigarettes, the federal government will not aid the state in prosecuting illegal interstate trade to avoid taxes. SENATOR BUNDE, after saying that SB 168 is a "tax stamp and minimum pricing" bill, held up an example of a tax stamp for members to view. When the DOR goes into a store that sells cigarettes, unless there is a tax stamp, there is virtually no way to tell which products have had taxes paid on them. He opined that SB 168 is a distributor-friendly bill. And although Internet sales are significant, Internet companies are unable to verify the age of those purchasing tobacco products. The bill will require that all cigarettes in Alaska have a tax stamp, and this will allow the federal government to assist the state in prosecuting those that seek to avoid paying Alaska's cigarette tax. He mentioned that the DOR anticipates, with the adoption of SB 168, an additional $3 million to $3.5 million in revenue, that Hawaii saw a 25-percent increase in cigarette-tax revenues after enacting a tax stamp, and that Michigan saw an increase of 9 percent. According to the DOR, he relayed, for every 1 percent that collections go up, the state will gain $400,000. Number 1649 SENATOR BUNDE noted that SB 168 includes a provision for minimum pricing, and that this provision was requested by Alaska's tobacco distributors. He mentioned that although these same companies testified during hearings of the legislation initially raising the tobacco tax that doing so would have no impact on tobacco use among youth, they now claim that raising the price will have a substantial impact. Inclusion of the minimum price provision is one of the reasons Alaskan distributors favor SB 168; this provision will prevent large stores from using cigarettes as a loss leader, and discourage cigarette "fire sales." In conclusion, Senator Bunde described SB 168 as a win- win bill, adding that it is supported by the American Heart Association as well as Alaska-based tobacco distributors. He asked the committee to give SB 168 favorable consideration. REPRESENTATIVE GARA asked whether SB 168 would raise as much money as would a bill sponsored by Representative Harry Crawford. SENATOR BUNDE said he is not familiar with Representative Crawford's legislation. REPRESENTATIVE SAMUELS asked who collects the tax. SENATOR BUNDE said that wholesalers pay for the tax stamp. He added that a provision in SB 168 defers a portion of the tax in order to help wholesalers pay for stamping and recordkeeping. REPRESENTATIVE GRUENBERG asked Senator Bunde whether he is familiar with something called "tobacco sampling." SENATOR BUNDE indicated that he does not support tobacco sampling. [Chair McGuire turned the gavel over to Vice Chair Anderson.] Number 1899 JOHANNA BALES, Revenue Auditor, Audit Group I, Tax Division, Department of Revenue (DOR), explained that since the tax increase went into effect in 1997, the state has seen an approximate 20-percent decrease in taxable cigarette sales; there are now between 40 million and 42 million packs sold each year. She mentioned that Internet companies are now actively advertising that they can send Alaskans untaxed cigarettes; these companies do not follow federal laws pertaining to the sale of cigarettes, one of which is called the "contraband cigarette trafficking Act" and which does not apply to anything that doesn't have a state tax stamp. She, too, remarked that adoption of a state tax stamp would allow the federal government to assist the state in prosecuting those that commit tax fraud. Without a tax stamp, that assistance will not be forthcoming. MS. BALES relayed that there are approximately 150 Internet sellers of cigarettes, and that 46 other states currently require a tax stamp. Kentucky's tax is 3 cents per pack, and Virginia's tax is 2.5 cents per pack, but even with such low tax rates, those states have found the tax stamp to be an invaluable enforcement tool. Currently, only four states do not have a tax stamp, and Alaska is one of them. It is very important for Alaska to adopt a tax stamp, she opined. With regard to Representative Crawford's bill, she said that that bill is essentially the same bill that was introduced last year by Governor Knowles, and that the same language is included in SB 168. [Vice Chair Anderson returned the gavel to Chair McGuire.] REPRESENTATIVE HOLM asked for information regarding the fiscal note. MS. BALES said that the current fiscal note contains an estimate of possible revenue collections. When the tax rate increased in 1997, it was estimated that there would be a 17-percent drop in consumption; however, the actual drop in sales has turned out to be approximately 20 percent, and so the DOR has based its latest estimate on that actual data. She mentioned that the current fiscal note reflects the addition of five positions, and this is expected to increase the amount of revenue collected. She offered that when Hawaii put its tax-stamp program in place, it resulted in an increase in revenue of approximately 50 percent in the first year; however, Hawaii also filled 11 fulltime positions that did nothing but tax-stamp enforcement. If Alaska is to see similar increases in revenue, it will also have to have an active enforcement program, she predicted. Number 2159 MICHAEL J. ELERDING, President, Northern Sales Company of Alaska, Inc., said simply that he supports SB 168 and would provide the committee with additional written testimony. He added that his company has never done "cigarette sampling," and asked that the committee vote in favor of the bill. Number 2224 JENNIFER APP, Alaska Advocacy Director, American Heart Association, said that she is testifying in support of SB 168 on behalf of Alaskans for Tobacco-Free Kids, a youth tobacco policy coalition that includes the American Heart Association, the American Lung Association of Alaska, the American Cancer Society, and the Alaska Native Health Board. She said that all of these organizations support SB 168 because it will do two important things. She elaborated: First, it will decrease the ability of individuals and businesses to illegally avoid the current tobacco tax. And second, it will help keep cigarettes out of the hands of youth. The ongoing increase in Internet and mail order sales of cigarettes is a major challenge to public health efforts to reduce smoking. Non "state to state" sales will account for 14 percent of all tobacco sales by 2005; that's just ... two years from now. By failing to require adequate age verification, the sharply growing number of mail order and web sites selling cigarettes makes it easier and cheaper for kids to buy cigarettes. The mail order offers, and web sites also offer, smokers a way to avoid paying the state tobacco taxes, thereby keeping cigarette prices down and smoking levels up, and depriving the state of a very legitimate source of revenue. In conclusion, the bill allows legitimate commerce to continue unimpeded, while closing existing loopholes. The bill allows the state to more easily collect existing legitimate taxes, and at the same time, the bill helps make sure that individual consumers can't access cigarettes without an adequate age verification process. Thank you very much for this opportunity to testify .... CHAIR McGUIRE, after determining that no one else wished to testify, closed public testimony on SB 168. The committee took an at-ease from 10:00 a.m. to 10:02 a.m. Number 2302 REPRESENTATIVE ANDERSON moved to report CSSB 168(FIN)am out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSSB 168(FIN)am was reported from the House Judiciary Standing Committee.
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