Legislature(2001 - 2002)
04/15/2002 03:25 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 429-TOBACCO TAXATION; LICENSING CHAIR MURKOWSKI announced that the first order of business would be HOUSE BILL NO. 429, "An Act relating to certain licenses for the sale of tobacco products; relating to tobacco taxes and sales and 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 sales; relating to notification regarding a cigarette manufacturer's noncompliance with the tobacco product Master Settlement Agreement or related statutory provisions and to confiscation of the affected cigarettes; and providing for an effective date." CHAIR MURKOWSKI reminded the committee that some time ago the committee heard the Department of Revenue's introduction of HB 429 and some limited public testimony. Since that time, the committee has received a couple of amendments. She informed the committee that she has been working with the department as well as Mike Elerding, who had expressed concerned with regard to how the stamping procedure would take place in Alaska. There was concern that local Alaskan distributors would be at a competitive disadvantage with those large out-of-state businesses who already perform tax stamping. She said that there was the hope that something could be worked out that would allow the department to eliminate/limit the amount of cigarette contraband while allowing small Alaskan businesses to compete. Number 0238 NEIL SLOTNICK, Deputy Commissioner, Office of the Commissioner, Department of Revenue, informed the committee that the department did consider Mr. Elerding's proposal that the stamping be required to take place in Alaska. However, Mr. Slotnick suggested that the aforementioned requirement not be pursued because he believes there would be serious constitutional problems. Requiring the stamping to take place in Alaska would exclude an interstate business from participating in Alaska trade. The U.S. Supreme Court is chary of allowing states to use their tax code to create a competitive advantage for in-state businesses versus out-of-state interstate businesses. Furthermore, Mr. Slotnick said he believes it would create difficulties for certain retailers who have done all they can to work with Alaska and comply with our tax. Moreover, such a requirement wouldn't address the competitive advantage the large wholesalers would have. Mr. Slotnick noted his agreement with Mr. Elerding that there is an economy of scale in stamping these cigarettes. MR. SLOTNICK reminded the committee that in the original legislation he had proposed a split discount rate in which the distributor who stamps the cigarettes would keep a small portion of the tax in order to compensate that distributor for their costs. That split discount rate was in recognition of the aforementioned economies of scale. In discussions with Mr. Elerding, Mr. Elerding proposed a three-tiered discount rate. Mr. Slotnick said that the goal was to make stamping neutral so that the cost per cigarette so that everyone's cost per cigarette was approximately the same regardless of the size of the wholesaler. The discount worked out to be about eight- tenths of a cent per cigarette per stamping for most of the wholesalers. The proposal was that for $1 million or less in stamps, a 3 percent discount would be given. For all purchases of stamps between $1 million to $2 million there would be a 2 percent discount. Above $2 million but not more than $5 million there is only a .5 percent discount. Stamp purchases above $5 million don't receive a discount. This is the best formula that could be developed to eliminate any additional competitive advantage being provided by the discount. Number 0563 CHAIR MURKOWSKI requested that Mr. Slotnick provide her with some idea as to [which wholesalers] fall where [in regard to the amount of stamps purchased]. She asked if there would be any wholesaler that would purchase over $5 million and which wholesalers would fall into the category that receives the 3 percent discount. MR. SLOTNICK answered that he could only say, due to confidentiality, that there would be wholesalers that would fall in both categories. CHAIR MURKOWSKI asked if it would be the Wal-Mart and Costco type stores that would have volumes over $5 million. She said that she was trying to understand whether there would be a local Alaskan distributor that would fall in the over $5 million category. MR. SLOTNICK indicated that the big box wholesalers do represent the largest category and those big box wholesalers have told the department that they probably will be stamping in the state, although there has been no firm commitment. MR. SLOTNICK, in response to Representative Meyer, answered that this legislation only addresses cigarettes because the stamp was too difficult to place on the other tobacco products. There is no state that requires a stamp on other forms of tobacco because there is no automation available to stamp those products. The legislature has made a policy decision that individual importation of other tobacco products without the stamp liability is acceptable. Number 0798 MIKE ELERDING, Northern Sales Company of Alaska, noted that the committee packet should include his written testimony. House Bill 429 seeks to create a tax stamp for cigarettes in Alaska. Currently, only four states, including Alaska, don't have some form of tax stamping. Alaska is also among the minority of states that doesn't have an unfair trade practices law. Mr. Elerding informed the committee that his concern with HB 429 is related to the unfair trade practices used by a number of nationally recognized chain stores in Alaska. These stores are selling cigarettes at or below cost. Basically, these stores are using cigarettes as a loss "leader" to attract shoppers. Furthermore, predatory pricing practices make it extremely difficult for Alaska-based distributors to make a profit on the products sold. For every $1 profit [distributors] make on cigarettes, the State of Alaska makes a profit of $14.29. The wholesale list price to the large grocers in Juneau is $14.29. Mr. Elerding directed the committee to a chart in the committee packet entitled, "Juneau, Alaska - April 2002 Wholesale List Price $39.12." He explained that of the $39.12 wholesale list price for a [carton of cigarettes], $26.81 represents the [wholesaler's] cost to the manufacturer, which amounts to 68 percent. The state receives $10 [per carton], which amounts to 26 percent. The City & Borough of Juneau's excise tax is $1.61 [per carton], which is 4 percent. He noted that the City & Borough of Juneau and the Municipality of Anchorage are the only two areas that charge an excise tax for cigarettes. The wholesale distributor profit for Northern Sales Company of Alaska is $.70 [per carton], which is 2 percent. Mr. Elerding said that although he isn't making a lot of money on cigarettes, there is at least one nationally recognized store in Juneau that is selling cigarettes in Juneau below their cost. With stamping there will be additional costs. Therefore, it's going to be difficult for Northern Sales Company of Alaska to continue in the cigarette business if the state doesn't develop an unfair trade practices law. Mr. Elerding wasn't opposed to stamping in and of itself, but the unfair trade practices law is necessary before implementing a law requiring state wholesale distributors to stamp cigarettes before selling them in the state. Number 1032 REPRESENTATIVE MEYER asked whether it's a fairly common practice to have loss leaders to get people in the store in the hopes that loss is made up on other items. MR. ELERDING agreed with the premise suggested by Representative Meyer. However, when it becomes a predatory practice it tends to drive competitors out of business and seems illegal. Furthermore, Mr. Elerding didn't believe it is in anyone's best interest to continue to sell cigarettes below cost to the detriment of local wholesalers. Mr. Elerding informed the committee that there is only one manufacturer that makes stamping equipment, and this manufacturer isn't currently doing business in Alaska. This stamping equipment manufacturer can't quote him a price for the stamping equipment and presently, this manufacturer has no plans to establish maintenance for this equipment. Mr. Elerding pointed out that [Northern Sales Company of Alaska] sells about 350,000 cartons of cigarettes a year, and therefore if there is a problem with the stamping equipment, there would need to be an immediate fix to the equipment. Mr. Elerding expressed the need for HB 429 to be coupled with assurances that [a company] in Alaska would be able to purchase the equipment to actually perform the stamping in the state and receive maintenance for that equipment. Number 1140 REPRESENTATIVE ROKEBERG expressed concern with Mr. Elerding's comment that Alaska doesn't have an unfair trade practices statute. Representative Rokeberg said there is an unfair trade practices statute and surmised that perhaps [Mr. Elerding meant] that Alaska's statute doesn't speak to predatory pricing. Representative Rokeberg related his assumption that Costco and Wal-Mart, due to their purchasing power, are able to obtain cigarettes at a lower cost-to-goods-sold pricing. Therefore, those businesses would still make a profit although they could sell the cigarettes below what [Northern Sales Company of Alaska] could in Juneau or Anchorage. Representative Rokeberg asked if other states would consider such situations a predatory practice. MR. ELERDING explained that everyone, whether it's [Northern Sales Company of Alaska] or Costco, purchasing [from the major tobacco manufacturer] for the same exact invoice price. Therefore, when one sels cigarettes at cost or below cost, that's the same as the raw cost from the manufacturers invoice. REPRESENTATIVE ROKEBERG remarked that he found it interesting that there is a set wholesale price on a national basis. MR. ELERDING interjected that it's also interesting that every time Phillip Morris raises its prices so do RJ Reynolds and Brown Williamson. The prices are exactly the same for the major brands. REPRESENTATIVE ROKEBERG asked if the freight on board (FOB) is at a major distribution point. MR. ELERDING answered that the FOB is the (indisc.) warehouse out of Seattle. There is only one bonded warehouse in Alaska and it's located in Anchorage. CHAIR MURKOWSKI returned to the proposal for a four-tiered approach. MR. ELERDING said that he liked the approach, which he worked on with Mr. Slotnick. In further response to Chair Murkowski, Mr. Elerding agreed that the [four-tiered approach] would help level the playing field somewhat for in-state distributors. Number 1364 BOBBY SCOTT, Vice President, Jan's Distributing, Inc., testified via teleconference. He noted his agreement with Mr. Elerding. Mr. Scott turned to the governor's fiscal notes, which do not address or target any of the actual problems with regard to curbing the black market sale of cigarettes. He expressed interest in obtaining statistics on that matter. Furthermore, the $14.29 profit the state receives is "very real" as is the additional costs the distributors would incur. Moreover, he inquired as to who would be in change of enforcement of stamping, which will probably be another cost to the taxpayers. CHAIR MURKOWSKI recalled from the initial testimony that the state doesn't have very accurate numbers with regard to seized contraband material. She asked if the tiered approach helps Mr. Scott's business in terms of competing with [out-of-state] companies. MR. SCOTT answered, "Other than having to add on extra employees to run them, it might." He agreed that it's better than the alternative of no discount. Number 1484 REPRESENTATIVE ROKEBERG pointed out that Mr. Scott had indicated in his written testimony, included in the committee packet, that a stamping machine costs about $25,000. That cost didn't include freight fees and the required maintenance agreement. Representative Rokeberg inquired as to how many people would be required to operate the stamping machine. MR. SCOTT explained that a representative of RJ Reynolds provided him with examples of [the number of employees] other states have used. The RJ Reynolds representative specified that at a minimum three people are required to operate the stamping machine. REPRESENTATIVE ROKEBERG inquired as to how often the stamping machine would have to be run in order to deal with Mr. Scott's volume of business. MR. SCOTT replied that he couldn't answer that question. REPRESENTATIVE ROKEBERG related, "I think it relates to this issue about the amendment we have and you spoke to that. What's that going to generate and see if you can either basically try to recoup your costs by the discount amount because ... this sounds like a private fiscal note, this bill, versus what we can do to soften the blow to these people." Number 1569 BOB GALOSICH, Vice President, Wholesale Operations, Alaska Commercial Company; Operator, Frontier Expediters, testified via teleconference. He informed the committee that Frontier Expediters is a DBA (ph) and the wholesale arm of the Alaska Commercial Company. The wholesale arm of the business employs about 17 people. Mr. Galosich said that he couldn't provide the committee with good numbers for cigarette sells in 2001 because the company didn't sell cigarettes for nine months of 2001 due to the municipal tax issue. However, Mr. Galosich estimated that in 2002 sales and distributions to its 24 [Alaska Commercial Company] stores will be approximately $20 million, of which about half is from tobacco products. An inventory of about $400,000 is maintained, including the $10 state tax in Anchorage. Mr. Galosich said that he was adamantly opposed to HB 429 as written because it adversely impacts small tobacco wholesalers. MR. GALOSICH said that [small tobacco wholesalers] operate on thin margins for competitive reasons. Alaska is one of approximately 17 states that do not have a minimum sell law. This legislation would cause a substantial increase in operating costs for the wholesaler and that would continue to place [the small tobacco wholesalers] at a competitive disadvantage. Although the discount structure would help, one must keep in mind that in Alaska no one has stamping machines and no one has ever done stamping. Therefore, there is the combination of an investment, a learning curve, additional people costs, and air rate that's going to contribute to costs in the beginning. Mr. Galosich related his belief that no one has had enough time to study exactly what the impact would be other than to say that it would be a negative impact on business. Furthermore, the state has been unable to quantify the amount of lost revenue due to contraband cigarette sales. Mr. Galosich remarked that getting contraband cigarettes in Alaska is difficult. "Do the existing volumes justify the burden on the small businessmen in Alaska, I don't think at this point that they do," he concluded. Number 1746 CHAIR MURKOWSKI returned to Mr. Scott's questions. With regard to the contraband, Chair Murkowski related that there doesn't seem to be anything firm in terms of what the Department of Revenue might expect to recover from any contraband. MR. SCOTT specified that he wanted to know why the department has such a sense of urgency with the implementation of this tax stamp. Mr. Scott reminded the committee that he also inquired as to who would enforce this. MR. SLOTNICK deferred to Johanna Bales. However, he said that the department cannot quantify the amount of contraband cigarettes coming into the state, although there is knowledge that it does happen due to Ms. Bales' work. Mr. Slotnick related the hope that the contraband is small, but Hawaii, which is also remote, became a quick target for importers of untaxed cigarettes. Hawaii's stamp law significantly reduced the contraband. Mr. Slotnick specified that the goal [with HB 429] is to perform reasonable enforcement action; the department doesn't want the state to be an attractive target for the importers of untaxed cigarettes. With regard to enforcement, Mr. Slotnick informed the committee that [the department] would need at least two additional positions to help enforce this law. Moreover, the department will cross-train with law enforcement and investigative officials who are in the field, which will include Village Public Safety Officers (VPSOs), troopers, city police, investigators, department investigators, and the Department of Health & Social Services. Additionally, Mr. Slotnick expected that the public would report sightings of unstamped cigarettes. REPRESENTATIVE MEYER related his understanding then that this stamp would ensure that the state tobacco tax is being paid. He asked if there is a way in which the cities of Juneau and Anchorage could also ensure that they receive their tax as well, or will those cities need their own stamp. MR. SLOTNICK answered that he believes the cities would need their own stamp. Number 1908 JOHANNA BALES, Revenue Auditor, Tax Division, Department of Revenue, testified via teleconference. Ms. Bales said that the only city she knew of that had its own [cigarette] stamp is New York City. All the other states feel that the cities would have to have a stamp designating that the tax is paid. One of the problems with cities having their own stamp is that [the department] has confidentiality statutes that don't allow it to share information with the municipalities. REPRESENTATIVE ROKEBERG inquired as to the percent increase in revenue Hawaii experienced after implementing the [tobacco] tax. MR. SLOTNICK answered that when the stamp was imposed, Hawaii experienced a 25 percent increase in revenue collection. MS. BALES, in response to Mr. Slotnick, specified that the cigarette tax in Hawaii increased from about $.60 to $1.00 a pack. Although She pointed out that it's difficult to decipher the amount of total revenue Hawaii saw, Hawaii's collection increased from $4 million a month before the stamp to $6.5 million a month in revenue [after implementation of the stamp]. REPRESENTATIVE ROKEBERG asked if the discounts in the amendment would be sufficient to cover the costs of applying the stamps. MS. BALES pointed out that [the department] has seen a 22 percent reduction in reported taxable cigarettes once Alaska's tax rates increased. [The department] believes that is the result of a combination of people who have stopped smoking or cut back and bootlegging. Without a stamp, it's impossible for the department to determine what makes up the 22 percent. However, for every 1 percent increase, after implementing the stamp, [the state] will receive $400,000 more in revenue each year. A 10 percent increase would amount to an additional $4 million in revenue. MR. SLOTNICK added that although this [discount proposal] won't cover all the distributor's costs, it narrows it to less than $.01 per cigarette. Mr. Slotnick related the belief that the distributors will experience an increase in revenue if there is, in fact, an increase in taxable sales. Mr. Slotnick acknowledged that the discount rate could be changed so that it covers all the distributor's costs, but it would result in a much higher fiscal note. Furthermore, Mr. Slotnick reiterated his belief that the distributors will experience an increase in sales with the passage of HB 429 and thus the [discount amendment] is generous. Number 2072 REPRESENTATIVE ROKEBERG surmised then that Mr. Slotnick believes [under HB 429] sales would increase, and therefore the increased cost would be offset with the discount and the increased sales. MR. SLOTNICK responded, "I'm not sure I'm willing to go quite that far. I don't know whether they will, in fact, offset all of their costs, but at least there's no competitive advantage." REPRESENTATIVE ROKEBERG envisioned Wal-Mart or Costco doing this with a stamp machine outside of the state, and perhaps doing so cheaper. MR. SLOTNICK said that the department expects there to be some out-of-state stamping. He reiterated that [some of the larger distributors] have indicated a high probability that they will stamp in the state. Some of the smaller wholesalers who operate out of Seattle and ship to remote communities will probably stamp out of state. CHAIR MURKOWSKI informed the committee that Mark Johnson, Department of Health & Social Services, is present to answer any additional questions regarding the tobacco enforcement aspect of this. There were no questions of Mr. Johnson. Number 2173 MR. ELERDING related that since the arrival of the national box stores in Anchorage, the volume of cartons that move through the bonded warehouse has steadily declined. Therefore, in Mr. Elerding's opinion, the majority of the stamping by the larger stores will be performed outside of Alaska. CHAIR MURKOWSKI, determining there to be no one else to testify, closed public testimony. Number 2215 REPRESENTATIVE MEYER commented that he is having difficulty getting excited about HB 429. Even with the amendments, [stamping] could still hurt the small business wholesalers in Alaska. He related that he wasn't convinced that Alaska has a [tobacco] bootlegging problem. CHAIR MURKOWSKI said that was her concern when the committee first heard the bill. However, the proposal being discussed as the four-tiered system addresses the competitive disadvantage and levels the playing field a bit. She recognized Representative Meyer's concern to be in regard to whether it's necessary to have a stamping operation in this state. She said the state doesn't want to be a target for contraband and she questioned whether that would be the case if Alaska is one of the last states to monitor [cigarette contraband]. REPRESENTATIVE MEYER recalled an earlier point with regard to the difficulties of having a stamping machine in Alaska. The only state that would be similarly situated would be Hawaii, which has a larger population base that could fix a broken stamping machine. TAPE 02-57, SIDE B REPRESENTATIVE MEYER expressed concern that there could be some other inherent risks that could hurt the small businesses other than the volume. Number 2331 REPRESENTATIVE HAYES moved that the committee adopt Amendment 1, which reads as follows: Page 7, lines 23-27: Delete: "For the first $1,000,000 in denominated value of stamps purchased by a licensee under this section in the same calendar year is equal to one percent of the denominated values of the additional stamps." Page 7, line 31, following "AS 43.50.500-43.50.700.": Insert: "The discount under this subsection is equal to the sum of the amounts calculated using the following percentages of denominated value of stamps purchased by a licensee under this section in a calendar year: (1) $1,000,000 or less, three percent; (2) the amount that is more than $1,000,000, but not more than $2,000,000, two percent; (3) the amount this is more than $2,000,000, but not more than $5,000,000, 0.5 percent; (4) the amount that is over $5,000,000, zero percent." There being no objection, Amendment 1 was adopted. REPRESENTATIVE HAYES related his belief that it's probably safe to assume that Alaska has some bootleg contraband because Alaska is one of only four states that doesn't know. Amendment 1 places a safeguard in the bill, which Representative Hayes said made him more comfortable. With regard to the concerns that this stamping machine couldn't be fixed in Alaska, Representative Hayes said he believes there are plenty of good mechanics in the state who could probably fix it. Number 2238 REPRESENTATIVE HALCRO moved to report HB 429 as amended out of committee with individual recommendations and the accompanying fiscal note. There being no objection, CSHB 429(L&C) was reported from the House Labor and Commerce Standing Committee.
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