Legislature(2003 - 2004)
05/06/2003 08:06 AM Senate JUD
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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.
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