Legislature(2001 - 2002)
04/29/2002 03:20 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 512-UNFAIR CIGARETTE SALES VICE CHAIR HALCRO announced that the last order of business would be HOUSE BILL NO. 512, "An Act relating to cigarette sales; and providing for an effective date." The committee took an at-ease from 4:27 p.m. to 4:28 p.m. VICE CHAIR HALCRO reminded the committee that Version 22- LS1646\F, Ford, 4/26/02, had been adopted [on April 26, 2002] and thus Version F was before the committee. Number 1712 NEIL SLOTNICK, Deputy Commissioner, Office of the Commissioner, Department of Revenue, testified via teleconference. Mr. Slotnick specified that HB 512 isn't legislation from the Department of Revenue, although it certainly impacts the department. This legislation provides the department with the authority to enforce the Unfair Cigarette Sales Act. Mr. Slotnick informed the committee that the committee substitute (CS) was drafted because the original legislation contained many technical problems with the licensing scheme. Mr. Slotnick thanked the sponsor and Mike Elerding, Northern Sales, for working on the CS. However, Mr. Slotnick noted that there are additional technical problems with [Version F] that may result in additional conceptual amendments to achieve technical accuracy. Mr. Slotnick pointed out that the Department of Revenue does not urge that this legislation be passed out of committee. This legislation maintains a minimum price for cigarette sales in the state. Mr. Slotnick stressed, "This is not a revenue measure. We, the Department of Revenue, are given the mandate to enforce this act but it is not a tax act, it is not a revenue act. There will be costs associated with the passage of this act." However, there is no funding source connected with this legislation, he pointed out. This legislation deals with a program that addresses alleged unfair business practices, which falls outside of the Department of Revenue's mandate, opined Mr. Slotnick. Number 1565 MIKE ELERDING, President, Northern Sales Company of Alaska, Inc., testified via teleconference. Mr. Elerding provided the following testimony: There are 25 states in the union and the District of Columbia that have specific legislation dealing with Unfair Cigarette Sales practices. House Bill 512 identifies and addresses predatory pricing practices and would end unfair cigarette practices in Alaska. The intent of the legislation is three-fold: 1. To end predatory pricing practices with regard to selling cigarettes at or below cost. 2. To create a level playing field for competition for the sale and distribution of tobacco products in Alaska. 3. To reduce youth access to cigarettes by ending below cost sales of cigarettes. The climate in cigarette sales has changed dramatically over the years. Due to efforts of the health service community, the American Cancer Society and, bolstered by the Master Settlement Agreement, government, business and the public as a whole have come to recognize that cigarettes are a commodity with which there are associated certain health risks and, as such, must be marketed and sold in a manner different from the common "free enterprise" products. These changes reflect a philosophical change toward more control of how commerce in cigarette [sales] is conducted and how to prevent youth access, together with the philosophy of assisting the legitimate business interest in complying with tobacco laws without losing the ability to sell these products. In Alaska the manufacturer's list price on a carton of cigarettes is the same for every wholesale distributor regardless of the volume purchased. The current manufacturer's list price for a carton of full revenue cigarettes is $27.64. The state of Alaska collects $10.00 in excise tax for every carton, bringing the [basic] wholesale cost on a carton of cigarettes to $37.64. The Department of Revenue receives a copy of every manufacturers invoice for each carton of cigarettes imported into the state. These invoice copies assure the state that licensed wholesalers are remitting the appropriate amount of excise tax to the state. And based on these invoice copies the department can verify that the invoice cost on cigarettes is the same for all wholesalers .... The actual retail price on a carton of cigarettes can range anywhere from the mid thirty dollar range to the high forties. Today in Ketchikan you can buy a carton of Marlboro's at retail from a large national chain store for $35.15, which is $2.49 below the manufacturer's list price to wholesale. Large Multi- state chain stores are employing predatory pricing practices by using price promotions on cigarettes to attract store traffic. The result of these pricing practices is to keep the cost on a carton of cigarettes artificially low. Large national chain stores can absorb the cost of selling cigarettes below cost because they are looking to make a sale on a TV or VCR to a consumer who comes in to purchase the cheap cigarette prices. Tobacco wholesalers do not have the luxury of making up for low margin sales by selling high end consumer goods. And these predatory pricing practices by the large multi-state operators are injuring fair competition in the wholesale distribution community. And one unintended consequence of this pricing practice is that by keeping the cost of cigarettes artificially low it provides greater access to these products by underage consumers. The question you have to ask yourself is "are cigarettes the type of commodity that should be marketed and promoted in Alaska on the basis of price?" Based on the fact that we are among one of the few states charging the highest cigarette excise taxes in the nation, I suspect that the answer is ... that Alaska does not advocate the marketing of cigarettes based on price. The passage of HB 512 will create a new law that will mandate minimum price requirements for cigarettes at wholesale and retail. This law will minimize the potential for wholesalers and retailers to reduce the price of these products as a means of marketing cigarettes to minors. And it creates a level playing field for Alaska based wholesale distributors by ending predatory pricing practices of large multi- state operators. The department of revenue had some initial reservations regarding this legislation however, we have worked closely with representatives from the Department and I believe that the legislation in its current form addresses most or all of their concerns. I urge your support of HB 512 and ask for a favorable recommendation from this committee. [original punctuation provided] Number 1363 REPRESENTATIVE ROKEBERG asked if stores such as Costco could receive shipments from its outside distributions warehouses and bypass any Alaskan wholesalers. MR. ELERDING pointed out that anyone selling cigarettes in the state must be licensed by the state. He emphasized that the manufacturer's list price on a carton of cigarettes is the same for any wholesaler doing business [in the nation]. In further response to Representative Rokeberg, Mr. Elerding specified that manufacturers don't have promotions lowering the list price. REPRESENTATIVE ROKEBERG informed the committee that recently he purchased a five-pack of Marlboros in which he received two packs free for the price of five. MR. ELERDING said that's a contract arrangement whereby the manufacturer was under a contract with a retail store which will provide a buy-down for those products. Those buy-downs are available to all retail outlets. Mr. Elerding highlighted his point that he could purchase cigarettes from Wal-Mart at a cheaper price than he could from the manufacturer. Therefore, he questioned whether cigarettes are being promoted as a loss leader and are the sale cigarettes being promoted at a reduced price. He said he wasn't sure that is what the state would support in terms of the state's policy and practice on the sale of cigarettes. Number 1203 REPRESENTATIVE MEYER related his understanding that large companies are doing with cigarettes the same thing that can be done with various other items being sold. He noted that it's common for large companies to use loss leaders. MR. ELERDING agreed, but pointed out that cigarettes and tobacco are controlled products that have laws with regard to the consumption of tobacco. "My question is does Alaska really want to endorse price promotions ... with tobacco products as a means of getting people in the store to buy other products." He further pointed out that as the price of tobacco is lowered, the product becomes more available to underage consumers. REPRESENTATIVE MEYER disagreed because underage consumers should not purchase the tobacco to begin with, which is why the law to place tobacco products behind the counter was passed. Representative Meyer asked if Mr. Elerding would recommend extending this to all tobacco products and alcohol. MR. ELERDING said that this legislation deals specifically with cigarettes, which he supports. However, he recognized that there are disparities in how tobacco products are taxed in the state as an in-state distributor versus a mail order distributor. REPRESENTATIVE MEYER related that a Brown & Williamson representative had expressed concern that retailers were being paid by Phillip Morris in order to obtain prime shelf space. MR. ELERDING clarified that HB 512 addresses both the wholesale cost and the retail price of a carton of cigarettes by mandating minimum prices. The Brown & Williamson issue is one regarding the display of products and how Phillip Morris controls contracts for buy-downs. If one participates in the Brown & Williamson program, then the Phillip Morris buy-down isn't available. He noted that Phillip Morris sells the most tobacco products. Number 0983 BOB GALOSICH, Vice President, Wholesale Operations, Alaska Commercial Company, Frontier Expediters, testified via teleconference. He informed the committee that Alaska Commercial Company operates Frontier Expediters. Mr. Galosich related that Frontier Expediters is in agreement with Mr. Elerding's statements. With regard to loss leaders, Mr. Galosich pointed out that loss leader pricing is a retail issue not a wholesale issue. He explained that there are two ways to go to market. There is either the high:low philosophy that uses loss leaders and the margins are picked up from other items or the every day low pricing scheme. Both ways can be used because there is a broad line products. Therefore, the large box retailers with wholesale buying privileges employ 0 percent to draw folks in the store and use 14 percent on general merchandise, which is where the profit is made. However, wholesalers are typically in the specialty business with short lines of distribution that are generally competitive lines that don't allow variance in profit. Furthermore, the [wholesalers] have a very fine margin on which to operate. Therefore, there is no level playing field. Mr. Galosich pointed out that with issues of pricing, one must compare retail versus retail and wholesale versus wholesale because the two operate and go to market differently. In conclusion, Mr. Galosich reminded the committee that the intent of HB 512 is to place wholesalers and retailers on a level playing field with everyone making [some profit] in the end. Number 0836 BOBBY SCOTT, Jan's Distributors, testified via teleconference. He noted the he has e-mailed his comments to the committee. Mr. Scott turned to the issue of the buy-down at the retail level. He related his understanding, after speaking with his RJ Reynolds's contact, that in the states with a minimum sale law the promotions for buying down go away. Therefore, some of the aforementioned concerns may be eliminated. REPRESENTATIVE ROKEBERG directed attention to page 6, line 11, Section 43.50.560 and inquired as to the meaning of paragraph (3). MR. SCOTT explained that if a carton of cigarettes costs $5 to everyone then the $10 tax would be added to that, totaling $15. From that total, a 4 percent mark up would be added to the price. REPRESENTATIVE ROKEBERG asked whether the mark up would be 5.5 percent due to the cartage. Furthermore, he asked whether there would be a cost differential due to the location of the store. MR. SCOTT answered no. In further response to Representative Rokeberg, Mr. Scott explained that the cartage prices would be the same as well because it represents the cost to deliver the product to store level. He confirmed that the cost to deliver the product to the premises is absorbed in the 4.5 percent. REPRESENTATIVE ROKEBERG inquired as to how the 4.5 percent reflect the current types of mark up on average. He asked, "Is that approximately what your mark ups are currently?" MR. SCOTT replied no. REPRESENTATIVE ROKEBERG related his understanding that there can only be a mark up of only 4 or 4.5 percent under this legislation. MR. SCOTT emphasized that the [aforementioned mark up] isn't being obtained now. [The current mark up] is a little less than half [4.5 percent]. In further response to Representative Rokeberg, Mr. Scott confirmed that everyone in wholesale would have to [mark up] 4 percent and thus the playing field would be level and whatever one chooses to sell above the 4.5 percent is up to the individual [business]. The 4.5 percent is a threshold that an entity can't go below. Number 0457 CYNTHIA DRINKWATER, Assistant Attorney General, Fair Business Practices Section, Civil Division (Anchorage), Department of Law, testified via teleconference. Ms. Drinkwater expressed concern that HB 512 is anti-competitive and unnecessary. The intent of the legislation is to address predatory pricing. However, there are statutes addressing this at the state and federal levels. Ms. Drinkwater turned attention to page 2, line 5, where Section 43.50.460 specifies the prohibited conduct and the penalties for such. She also directed attention to page 5, line 15, Section 43.50.540, which specifies the remedies for the violations. She explained that Alaska's anti-trust provisions allow for an injured person to bring an action seeking injunctive relief. If the defendant's conduct was shown to be wilful, the injured person is entitled to treble damages. Alaska law also provides for criminal penalties as well, although the current statutes are stricter. MS. DRINKWATER said that the case law on predatory pricing makes it clear that anti-trust laws are established not to prevent competitive price-cutting but to address conduct that goes beyond that. The Supreme Court has, on numerous occasions, emphasized that simple below cost pricing isn't enough to equate anti-trust violations. Anti-trust laws are in place for the protection of competition not for the protection of competitors. Therefore, anti-trust laws are intended to promote and maintain legitimate price competition. Because the courts have been skeptical of predatory pricing claims, she suggested that businesses may be seeking an alternative or means to circumvent the established statutory law and case law. Therefore, HB 512 would make it easier for a plaintiff to obtain injunctive relief for damages while shifting the burden from private parties using the judicial process to resolve disputes. Ms. Drinkwater noted that although [Version F] makes this less expensive for the Department of Revenue, [tape changes]... TAPE 02-69, SIDE A MS. DRINKWATER continued by pointing out that there are still costs involved for the department in following the requirements of [HB 512]. [Version F] has a provision that would allow DCED to spend or revoke licenses of retailers who have tobacco endorsements. Therefore, there is the potential for 1,700 tobacco endorsements to be subject to action if the retailers were found to be in violation of the provisions of the statute and thus there could be a huge administrative expense related to HB 512. Ms. Drinkwater reiterated that this bill is unnecessary due to the already existing laws addressing predatory pricing. VICE CHAIR HALCRO announced that HB 512 would be held over and public testimony would not be closed.
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