Legislature(2017 - 2018)BARNES 124

05/03/2017 03:15 PM LABOR & COMMERCE

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Audio Topic
03:17:21 PM Start
03:18:10 PM Presentation: Beer & Malt Beverages Tax by Britteny Cioni-haywood, Director, Div. of Economic Development, Dcced & Ken Alper, Director, Div. of Tax, Dor
04:12:15 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Beer & Malt Beverages Tax by TELECONFERENCED
Britteny Cioni-Haywood, Director, Div. of
Economic Development, DCCED & Ken Alper,
Director, Div. of Tax, DOR
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                          May 3, 2017                                                                                           
                           3:17 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Sam Kito, Chair                                                                                                  
Representative Adam Wool, Vice Chair                                                                                            
Representative Andy Josephson                                                                                                   
Representative Louise Stutes                                                                                                    
Representative Chris Birch                                                                                                      
Representative Colleen Sullivan-Leonard                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Gary Knopp                                                                                                       
Representative Mike Chenault (alternate)                                                                                        
Representative Bryce Edgmon (alternate)                                                                                         
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION: BEER & MALT BEVERAGES TAX BY BRITTENY CIONI-                                                                      
HAYWOOD~ DIRECTOR~ DIV. OF ECONOMIC DEVELOPMENT~ DCCED & KEN                                                                    
ALPER~ DIRECTOR~ DIV. OF TAX~ DOR                                                                                               
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRITTENY CIONI-HAYWOOD, Director                                                                                                
Division of Economic Development                                                                                                
Department of Commerce, Community & Economic Development (DCCED)                                                                
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Gave a PowerPoint presentation of Alaska's                                                               
brewing industry.                                                                                                               
                                                                                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Offered a PowerPoint presentation related                                                                
to small brewery exemption.                                                                                                     
                                                                                                                                
BRANDON SPANOS, Deputy Director                                                                                                 
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Answered  questions during the  presentation                                                            
on Alaska's beer and malt brewing tax.                                                                                          
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:17:21 PM                                                                                                                    
                                                                                                                                
CHAIR  SAM  KITO called  the  House  Labor and  Commerce  Standing                                                            
Committee meeting  to order at  3:17 p.m.  Representatives  Birch,                                                              
Sullivan-Leonard, Stutes,  Josephson, Wool, and Kito  were present                                                              
at the call to order.                                                                                                           
                                                                                                                                
^PRESENTATION:  BEER  &  MALT BEVERAGES  TAX  BY  BRITTENY  CIONI-                                                              
HAYWOOD,  DIRECTOR,  DIV. OF  ECONOMIC  DEVELOPMENT,  DCCED &  KEN                                                              
ALPER, DIRECTOR, DIV. OF TAX, DOR                                                                                               
    PRESENTATION: BEER & MALT BEVERAGES TAX BY BRITTENY CIONI-                                                              
  HAYWOOD, DIRECTOR, DIV. OF ECONOMIC DEVELOPMENT, DCCED & KEN                                                              
               ALPER, DIRECTOR, DIV. OF TAX, DOR                                                                            
                                                                                                                              
3:18:10 PM                                                                                                                    
                                                                                                                                
CHAIR KITO  announced that the only  order of business  would be a                                                              
Presentation  on Beer  &  Malt Beverages  Tax  by Britteny  Cioni-                                                              
Haywood,  Director, Division  of Economic  Development, DCCED  and                                                              
Ken Alper, Director, Tax Division, Department of Revenue (DOR).                                                                 
                                                                                                                                
3:19:12 PM                                                                                                                    
                                                                                                                                
BRITTENY   CIONI-HAYWOOD,    Director,   Division    of   Economic                                                              
Development,   Department  of  Commerce,   Community   &  Economic                                                              
Development (DCCED),  offered a PowerPoint  presentation [hardcopy                                                              
included  in the  committee packet],  regarding "Alaska's  Brewing                                                              
Industry."    She  specified  that  she  would  be  talking  about                                                              
breweries, not  distilleries, during the presentation.   Referring                                                              
to information  on slide 2, she  stated that the  brewing industry                                                              
in Alaska  brews, packages, and  sells beer across the  state, the                                                              
nation, and  the world.   She  said the  industry is considered  a                                                              
basic  economic  sector.    The  industry  is  also  considered  a                                                              
secondary sector,  which means it transforms raw  materials into a                                                              
finished product.                                                                                                               
                                                                                                                                
MS. CIONI-HAYWOOD  turned  to slide 3,  which displays  statistics                                                              
provided  by  the national  Brewers  Association.   She  said  the                                                              
slide shows that  the overall market for beer  is "flat"; however,                                                              
the  market  for craft,  import,  and  export  beers has  seen  an                                                              
increase  in  sales.   In  response  to  Representative  Sullivan-                                                              
Leonard, she explained  that "bbls" means barrels,  and one barrel                                                              
comprises 31  gallons.  In  response to Representative  Birch, she                                                              
offered her understanding  that hard cider is not  included in the                                                              
information within the presentation.                                                                                            
                                                                                                                                
3:22:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WOOL offered  his  understanding  that cider  does                                                              
fall under "the same barrel taxing."                                                                                            
                                                                                                                                
MS. CIONI-HAYWOOD  expressed the  need to  do further  research to                                                              
confirm that information.                                                                                                       
                                                                                                                                
MS.  CIONI-HAYWOOD  directed attention  to  slide  4, which  shows                                                              
production volume.                                                                                                              
                                                                                                                                
3:23:52 PM                                                                                                                    
                                                                                                                                
CHAIR KITO,  in response to  Representative Birch,  clarified that                                                              
the  [circular  chart]  on  slide  4  shows  [2016  craft  brewing                                                              
production    volumes]    for    contract    brewing    companies,                                                              
microbreweries, brew pubs, and regional craft breweries.                                                                        
                                                                                                                                
MS.  CIONI-HAYWOOD  noted that  at  the bottom  of  slide  4 is  a                                                              
graph, in which  regional craft breweries are depicted  in a blue-                                                              
green  color; microbreweries  are shown  in a  darker blue,  [brew                                                              
pubs are  in gold-brown, contract  brewing companies  are depicted                                                              
in red-brown,  and  the production  information spans  2004-2016].                                                              
In  response to  Representative  Birch, she  said Alaskan  Brewing                                                              
Company  in Juneau,  Alaska, would  fall under  the category  of a                                                              
regional  craft brewery,  based on  the volume  it produces.   She                                                              
said microbreweries produce under 15,000 bbls.                                                                                  
                                                                                                                                
MS.  CIONI-HAYWOOD drew  attention  to slide  5,  which shows  the                                                              
numbers the  Brewers Association has for  Alaska up to  2014.  She                                                              
stated, "Some  of the  economic modeling that  I've been  told the                                                              
Brewers Association  does on the  national level can get  a little                                                              
wonky when  it comes  to Alaska,  because we don't  have a  lot of                                                              
economic  data that they  typically use."   As  shown on  slide 5,                                                              
she said  Alaska ranked forty-third  in terms of  economic impact,                                                              
at  $239  million;  however,  when   considering  the  impact  per                                                              
capita, Alaska ranks fifth.                                                                                                     
                                                                                                                                
3:26:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WOOL said  27 craft  breweries  [in Alaska]  seems                                                              
low,  and  he  surmised that  Ms.  Cioni-Haywood  must  have  more                                                              
updated information.                                                                                                            
                                                                                                                                
MS. CIONI-HAYWOOD  confirmed she  does - through  2015.   She said                                                              
she spoke  to "the guild" and  found that Alaska currently  has 39                                                              
breweries;  however, perhaps only  30 are  in production,  while 9                                                              
are in the planning stage.                                                                                                      
                                                                                                                                
MS. CIONI-HAYWOOD  turned to  information on  slide 6,  which read                                                              
as follows [original punctuation provided]:                                                                                     
                                                                                                                                
     Sales  of craft beer  have more  than tripled in  Alaska                                                                   
     during  the past 10  years from  one million gallons  to                                                                   
     3.6 million,  and sales  of locally-produced craft  beer                                                                   
     increased  more  than  fourfold  during  the  same  time                                                                   
     period.                                                                                                                    
                                                                                                                                
MS. CIONI-HAYWOOD  stated that  of the  39 breweries currently  in                                                              
Alaska:   all but one are  microbreweries that produce  fewer than                                                              
15,000  bbls/year;  9 of  the breweries  are  brew  pubs that  are                                                              
combined  restaurant/breweries selling  25 percent  of their  beer                                                              
on  site;  and  one  is a  regional  brewery  with  production  at                                                              
approximately 160,000 bbls/year.                                                                                                
                                                                                                                                
3:28:07 PM                                                                                                                    
                                                                                                                                
MS.  CIONI-HAYWOOD  directed attention  to  slide  7, which  shows                                                              
beverage  manufacturing   employment;   the  source  is   Alaska's                                                              
Department  of Labor  & Workforce  Development (DLWD).   She  said                                                              
she  thinks  most   of  the  numbers  indicate   craft  breweries;                                                              
however, she  cautioned that they  could also include  information                                                              
from distilleries and  soda manufacturing.  She said  there was no                                                              
way  to get  any finer  detail.   Ms.  Cioni-Haywood stated,  "The                                                              
employment  in  this  sector  has grown  every  year  since  2006.                                                              
Average monthly  employment in the  sector was 419 jobs,  and then                                                              
average wages are around $2,700 per person, per month."                                                                         
                                                                                                                                
MS. CIONI-HAYWOOD  turned to  slide 8  - information sourced  from                                                              
the  U.S. Department  of  Treasury, Alcohol  and  Tobacco Tax  and                                                              
Trade Bureau  - which shows that  as of the first quarter  of 2017                                                              
there  were 40  breweries [in  Alaska],  which she  admitted is  a                                                              
slight  discrepancy compared  to  the aforementioned  total.   She                                                              
speculated  that perhaps  one has  not  "come to  fruition."   She                                                              
cautioned   that  the   federal  government   usually  pulls   the                                                              
information  from  tax  data,  and  Alaska  does  "not  have  that                                                              
necessarily."   As shown on slide  8, she said from 2011  to 2015,                                                              
there has  been a:   52  percent growth  in breweries;  66 percent                                                              
growth  in employment;  72  percent growth  in  wages; 33  percent                                                              
growth in  production; and  27 percent  growth in taxes  collected                                                              
on beer qualifying for the reduced tax rate.                                                                                    
                                                                                                                                
3:30:25 PM                                                                                                                    
                                                                                                                                
MS. CIONI-HAYWOOD  turned to  slide 9 -  sourced from  the Brewers                                                              
Guild  of Alaska  - which  shows economic  impact information  for                                                              
2015, published  in February 2016.   It shows direct  and indirect                                                              
impacts.   She explained  that direct  spending  is that which  is                                                              
spent by  a brewery on payroll,  taxes, rent, and  owner's income;                                                              
indirect   spending   includes   money   from   "instate   brewing                                                              
activities,"  for example, going  to Costco  or purchasing  "a raw                                                              
input  from  a  farmer."   She  said  induced  impacts  mean  when                                                              
employees spend their  paychecks within the community.   The slide                                                              
shows the  following total  impacts:   full-time equivalent  jobs,                                                              
[2,281.4];  business income, [$492,118,669];  payroll  and owners'                                                              
income,  [$96,313,690]; fees  and taxes  paid, [$35,568,630];  and                                                              
rents and  dividends paid, [$37,204,577].   She reported  that the                                                              
total  economic  impact by  the  brewery sector  is  approximately                                                              
$169 million.   The  percent retained  in Alaska is  approximately                                                              
34 percent.                                                                                                                     
                                                                                                                                
3:31:59 PM                                                                                                                    
                                                                                                                                
CHAIR KITO asked  Ms. Cioni-Haywood if she has any  idea "what the                                                              
fees paid would be."                                                                                                            
                                                                                                                                
MS. CIONI-HAYWOOD  said she could check  the study to find  out if                                                              
that information is referenced there.                                                                                           
                                                                                                                                
3:32:41 PM                                                                                                                    
                                                                                                                                
MS.  CIONI-HAYWOOD continued  with  the PowerPoint,  to slide  10,                                                              
which  shows   two  on-line  articles   related  to   the  brewing                                                              
industry.   She mentioned  the Bourbon Trail  in Kentucky  and the                                                              
idea  of tourist  attractions  [related to  brewing].   She  said,                                                              
"The  Alaska brand  is  strong  through other  marketing  outlets,                                                              
such  as  [the Alaska  Seafood  Marketing  Institute]  (ASMI)  and                                                              
Alaska  tourism, and  this is  just  another option  where we  can                                                              
play  off  onto  that strong  branding  and  appeal  to  audiences                                                              
outside  of  the  U.S."   She  indicated  this  is  good  for  the                                                              
economy.                                                                                                                        
                                                                                                                                
MS.   CIONI-HAYWOOD  turned   to   slide   11,  regarding   export                                                              
potential.    She  said  the  industry   manufactures  value-added                                                              
products  that offer  an opportunity  for export  to national  and                                                              
international  markets.   She  indicated  that the  Department  of                                                              
Commerce,  Community  &  Economic   Development  (DCCED)  and  the                                                              
University of  Alaska Center for  Economic Development  produced a                                                              
study  last  year  related  to  export  opportunities  for  Alaska                                                              
distilleries  and  breweries.   The  study detailed  four  foreign                                                              
markets:   Canada,  China, Germany,  and South  Korea.  The  study                                                              
showed  that Canada,  China,  and South  Korea  scored highest  as                                                              
export markets  for Alaska beer;  the study was based  on consumer                                                              
trends  within  those  countries  and took  into  account  trading                                                              
pacts, such  as the  North American  Free Trade Agreement  (NAFTA)                                                              
and what tariffs  might be on the products; millennials  are among                                                              
the  most  important  consumption  groups  in  each  country;  and                                                              
millennials  have  driven the  market  growth  of craft  beer  and                                                              
liquor in the US, as well.                                                                                                      
                                                                                                                                
3:35:36 PM                                                                                                                    
                                                                                                                                
MS. CIONI-HAYWOOD  explained that the  purpose of [the  study] was                                                              
to provide small,  fast-growing producers with  useful information                                                              
about  the aforementioned  countries.   She  said U.S.  Commercial                                                              
Services reopened  its office  in Alaska about  a year ago;  it is                                                              
focused on  exporting Alaska products.   She said it is  a federal                                                              
agency located in  Anchorage.  She indicated that  the Division of                                                              
Economic Development  has conversed with U.S.  Commercial Services                                                              
to get  these products  [exported].   She said  there are  several                                                              
distilleries  reaching the  point where they  are considering  the                                                              
export of  their products,  nationally and  internationally.   Ms.                                                              
Cioni-Haywood  concluded  by  stating that  the  emerging  brewing                                                              
industry comprises  small, start-up firms, and she  emphasized its                                                              
export potential.                                                                                                               
                                                                                                                                
3:36:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WOOL  asked  if  there are  other  [breweries]  in                                                              
Alaska, beside the Alaskan Brewing Company, that export.                                                                        
                                                                                                                                
MS. CIONI-HAYWOOD said  she would ask the Alaska  Guild and return                                                              
with an answer.                                                                                                                 
                                                                                                                                
REPRESENTATIVE  WOOL offered  his understanding  that "that's  the                                                              
only one."   He said he does not  know if "they go  outside of the                                                              
U.S. and into the world."                                                                                                       
                                                                                                                                
MS. CIONI-HAYWOOD responded, "My guess might be Canada."                                                                        
                                                                                                                                
REPRESENTATIVE  WOOL asked  Ms.  Cioni-Haywood if  she knows  much                                                              
about "the tasting room law."                                                                                                   
                                                                                                                                
MS. CIONI-HAYWOOD answered, "A little bit."                                                                                     
                                                                                                                                
REPRESENTATIVE  WOOL  explained  that in  2006,  a law  went  into                                                              
place, which  allowed breweries  to be manufacturer,  distributer,                                                              
and retailer  on premises,  which  he surmised  is the reason  for                                                              
the growth in the brewing industry.                                                                                             
                                                                                                                                
MS.  CIONI-HAYWOOD agreed  that has  been an  important factor  in                                                              
growing  this sector.   She said  she moved  from Colorado,  which                                                              
has fostered  its reputation  for  brewing.   She said she  thinks                                                              
the  law  has  had  the  same affect  in  terms  of  a  growth  in                                                              
distilleries.                                                                                                                   
                                                                                                                                
REPRESENTATIVE WOOL  asked if the entire market is  growing, or if                                                              
there has been a shift in that which is being sold and consumed.                                                                
                                                                                                                                
MS. CIONI-HAYWOOD  reiterated that there  has been a shift  to the                                                              
craft brew market.                                                                                                              
                                                                                                                                
3:41:33 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 3:41 p.m. to 3:43 p.m.                                                                       
                                                                                                                                
3:43:12 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  Director, Tax Division,  Department of  Revenue (DOR),                                                              
offered  a  PowerPoint  presentation  [hardcopy  included  in  the                                                              
committee  packet]  related  to   small  brewery  exemption.    He                                                              
explained that the  division was asked to look at  the reduced tax                                                              
rate for  small craft brewers,  how it  is applied, and  what some                                                              
of  the   underlying  numbers  are.     He  indicated   that  this                                                              
information  surfaced  in  the process  of  creating  an  indirect                                                              
expenditure  report.   As shown  on slide 3,  Mr. Alper  explained                                                              
that [House Bill  306], sponsored by Representative  Thompson, was                                                              
passed  in  2014  and  requires  an  indirect  expenditure  detail                                                              
report every  two years  from DOR  to the  legislature.   Then the                                                              
Legislative  Finance  Division  comes  up  with  a  more  detailed                                                              
report,  by department,  on  a rotating  schedule.    He said  two                                                              
reports  have been  submitted thus  far to the  legislature:   the                                                              
first in 2014 and the second in 2016.                                                                                           
                                                                                                                                
MR. ALPER  turned to  information  on slide 4,  which states  that                                                              
"indirect expenditure"  is defined under [AS  43.05.095(d)], which                                                              
read as follows:                                                                                                                
                                                                                                                                
          (d) In  this section, "indirect expenditure"  means                                                                   
     an  express  provision  of  state law  that  results  in                                                                   
     foregone revenue for the state by providing                                                                                
          (1) a tax credit or other credit;                                                                                     
          (2)  an exemption,  but  does not  include  federal                                                                   
     tax exemptions adopted by reference in AS 43.20.021;                                                                       
          (3) a discount;                                                                                                       
          (4)  a  deduction,  but   does  not  include  costs                                                                   
     incurred  in the ordinary  course of  business that  are                                                                   
     deducted in  the calculation of  a tax under  this title                                                                   
     or in the  calculation of a royalty or net  profit share                                                                   
     payment for a lease issued under AS 38;                                                                                    
          (5) a differential allowance.                                                                                         
                                                                                                                                
MR.  ALPER, in  regard  to slide  5,  stated  that the  division's                                                              
report  showed  details on  231  different  line items  across  11                                                              
departments  and agencies,  including  78 provisions  administered                                                              
by DOR.  He  said many agencies worked in cooperation  with DOR in                                                              
this effort.   He highlighted  the information  on slide  6, which                                                              
expresses  that  each  department   was  required  to  report  the                                                              
following  information for  each item:   name  and description  of                                                              
the  indirect  expenditure;  statutory   authority;  repeal  date;                                                              
legislative  intent;  public purpose;  estimated  revenue  impact;                                                              
estimated  cost to  administer;  and the  number of  beneficiaries                                                              
and who benefits.                                                                                                               
                                                                                                                                
3:45:54 PM                                                                                                                    
                                                                                                                                
MR.  ALPER directed  attention  to  slide 8  and  spoke about  the                                                              
background on alcoholic  beverage tax.  As shown on  the slide, he                                                              
stated  that the  related  statute  is AS  43.60.    He said  that                                                              
directly following  prohibition there was  a 5 cent/gallon  tax on                                                              
beer and wine enacted  in 1933.  Shortly thereafter,  that tax was                                                              
added onto distilled  spirits.  He said the basic  statute has not                                                              
changed  dramatically  in the  last  80-plus years;  however,  the                                                              
rate  has increased  over  time.   He explained  that  the tax  is                                                              
collected at  the wholesale transaction.   He advised there  was a                                                              
major rate  increase in 2002, and  the idea of "dime a  drink" was                                                              
instigated wherein  part of the money collected in  taxes was used                                                              
for  treatment of  "people with  problems."   He highlighted  that                                                              
the  "dime a  drink" equated  as  follows:   distilled spirits  at                                                              
$12.80  per gallon,  with 128 ounces  per gallon,  means 10  cents                                                              
per ounce  of liquor; wine  at $2.50 a gallon  or 10 cents  per 5-                                                              
ounce glass;  and beer and cider  at $1.07 per gallon  or 10 cents                                                              
per 12-ounce  bottle.  Mr. Alper,  in answer to a  previous query,                                                              
related  that  "hard  cider  is calculated  within  the  beer  tax                                                              
framework."                                                                                                                     
                                                                                                                                
MR. ALPER  stated  that the  tax on beer,  prior  to 2002, was  35                                                              
cents  per gallon,  so the tax  was essentially  tripled in  2002.                                                              
He  stated that  as shown  on slide  9, as  part of  the 2002  tax                                                              
bill,  the  legislature  created  a separate  rate  for  breweries                                                              
meeting the qualifications  of 26 USC 5051(a)(2).   The definition                                                              
is  less than  2 million  barrels of  beer produced  in the  U.S.;                                                              
only a  handful of domestic breweries  are larger than  that size,                                                              
although  they represent  a  large percentage  of  the beer  sold;                                                              
imported  beer,  by  definition,  does not  meet  the  definition.                                                              
Showing  slide 10,  Mr. Alper related  that the  exception  to the                                                              
$1.07  per gallon tax  is in  AS 43.60.010(c),  which states  that                                                              
the  first 60,000  barrels of  beer per  year sold  in Alaska  are                                                              
taxed at  the pre-2002, 35-cent  tax rate.   He said that  with 31                                                              
gallons per  barrel, a single  brewery can potentially  benefit up                                                              
to 1.86 million  gallons or $1.34  million.  He explained  that 72                                                              
cents per gallon  is the difference in the offset.   He said 38 of                                                              
the  39   breweries  in  Alaska   are  much  smaller   than  that;                                                              
microbreweries  produce less  than 15,000  barrels per  year.   He                                                              
stated that  25-30 percent  of the beer  sold in Alaska  qualifies                                                              
for the reduced tax rate.                                                                                                       
                                                                                                                                
3:50:07 PM                                                                                                                    
                                                                                                                                
MR.  ALPER turned  to slide  11, entitled  "Who Pays  Taxes?"   He                                                              
stated that  only beer sold  in Alaska is  taxed:  beer  brewed in                                                              
Alaska  but  sold Outside  is  not  taxed;  beer brewed  in  other                                                              
states  and  brought into  Alaska  is  taxed.   He  said  Alaska's                                                              
taxpayers   are  typically  beverage   distributors,   who  handle                                                              
multiple brands,  which makes it difficult to  precisely determine                                                              
volumes  of in-state  versus  Outside-brewed  beer.   Some  Alaska                                                              
breweries distribute  their own  product, and therefore  pay taxes                                                              
directly.                                                                                                                       
                                                                                                                                
MR. ALPER  presented information from  a chart on slide  12, which                                                              
shows  the  impact  of  small brewery  reduced  rate  on  a  table                                                              
showing  growth  trend  for  small  breweries.    He  stated,  "In                                                              
general, we're  finding [that]  35 to 40  percent of  the reduced-                                                              
price beer  is brewed  in Alaska;  the other 60  percent or  so is                                                              
brewed in other states."                                                                                                        
                                                                                                                                
3:51:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL  regarding the cut-off of 60,000  bbls for the                                                              
beer discount, asked if the beer must be produced in Alaska.                                                                    
                                                                                                                                
MR.  ALPER offered  his  understanding  that initially  there  had                                                              
been discussion regarding  limiting the benefit to  beer brewed in                                                              
Alaska; however,  there were constitutional issues  with doing so.                                                              
He said, "We can  favor American beer, but we can't  favor Alaskan                                                              
beer."   He clarified  that the  cut-off pertains  to beer  brewed                                                              
anywhere  in the U.S.  at less  than 2  million barrels  per year.                                                              
In that case,  the first 60,000  bbls sold in Alaska  are eligible                                                              
for the reduced  rate.  Any amount sold above 60,000  would revert                                                              
to the higher tax rate.                                                                                                         
                                                                                                                                
REPRESENTATIVE WOOL  indicated that there may be  a discrepancy in                                                              
terms of what he  has heard from speaking with a  distributor.  He                                                              
asked for  clarification that Mr.  Alper is saying that  a brewery                                                              
qualifies for  an exemption for  the first 60,000 barrels  sold in                                                              
Alaska; at  60,001, the rate reverts  to the $1.07 per  barrel tax                                                              
rate.                                                                                                                           
                                                                                                                                
MR. ALPER  confirmed Representative  Wool is correct;  however, he                                                              
emphasized  that  to  qualify  in the  first  place,  the  overall                                                              
company "has  to be below 2  million barrels brewed in  the United                                                              
States."                                                                                                                        
                                                                                                                                
3:53:30 PM                                                                                                                    
                                                                                                                                
CHAIR KITO asked,  "How do we audit for the 2  million barrels per                                                              
year?"                                                                                                                          
                                                                                                                                
MR. ALPER  answered that "it's  a federal definition";  therefore,                                                              
there  is some  sort  of certification.    He  deferred to  Deputy                                                              
Director Brandon  Spanos for further information.   He offered his                                                              
understanding  that  the  brewery  shows [the  Tax  Division]  its                                                              
federal license for a small brewery.                                                                                            
                                                                                                                                
3:54:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  commented on  the benefit that  is given                                                              
to relatively small  producers for the first 60,000  bbls consumed                                                              
in Alaska,  and he  asked if  there is  a reciprocal benefit  that                                                              
[Alaska brewers] get by selling out of state.                                                                                   
                                                                                                                                
MR. ALPER  responded that Alaskan  brewers selling  in Washington,                                                              
for example,  are subject  to whatever  the State of  Washington's                                                              
excise tax on beer  is.  He said he does not know  if other states                                                              
have a  similar differential  tax rate  for small breweries,  "but                                                              
if they do, we would most certainly qualify."                                                                                   
                                                                                                                                
3:55:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL  surmised that it is up to  the distributor to                                                              
track the number  of barrels sold, in terms of  qualifying for the                                                              
benefit applied to less than 60,000 bbls.                                                                                       
                                                                                                                                
MR.  APLER answered  that is  correct.   He noted  that each  beer                                                              
sold in Alaska  has a single  distributor, so there is  no problem                                                              
tracking  various  amounts  sold  by more  than  one  company  and                                                              
having  to  determine "whose  10,000  ends  up paying  the  higher                                                              
tax."                                                                                                                           
                                                                                                                                
REPRESENTATIVE WOOL  indicated that the 60,000-barrel  cap is "not                                                              
a  particular  advantage for  Alaskan  beer,"  since all  but  the                                                              
Alaska  Brewery in  Juneau  are nowhere  close  to producing  over                                                              
that cap.                                                                                                                       
                                                                                                                                
MR.  ALPER  responded  that  60,000   bbls  is  nearly  2  million                                                              
gallons,  and there  are  more  than 10  beers  in  a gallon,  and                                                              
[reaching 60,000 bbls]  would mean 18 million beers  from a single                                                              
brewery.   He  said  with  only 700,000  people  in  Alaska and  a                                                              
substantial number  of those who do  not drink beer, "it  would be                                                              
hard to reach  that number for  a single brewery."   He speculated                                                              
that the Alaskan  Brewery brews more than 60,000  barrels per year                                                              
but exports  a substantial  amount of  that to  other states.   He                                                              
added, "So,  I'm pretty certain what  they sell in Alaska  is well                                                              
below  the  60,000  threshold.    That's  never  been  a  limiting                                                              
factor, to my knowledge - the 60,000 number."                                                                                   
                                                                                                                                
3:57:55 PM                                                                                                                    
                                                                                                                                
BRANDON  SPANOS,  Deputy  Director, Tax  Division,  Department  of                                                              
Revenue  (DOR),  in response  to  Chair Kito's  previous  question                                                              
about  ensuring   breweries  meet  the  2-million   barrel  [cap],                                                              
explained  that  the  division  requires  breweries  to  apply  to                                                              
qualify for  the reduced rate.   When the  application is  made to                                                              
the division,  breweries must  also supply a  federal form  to the                                                              
federal   government  that   certifies   that   "they  meet   that                                                              
requirement."                                                                                                                   
                                                                                                                                
MR.  SPANOS,  in   response  to  Representative   Wool's  question                                                              
regarding  whose responsibility  it  is to  track whether  amounts                                                              
are above  or below 60,000, stated  that the division  keeps track                                                              
of  that on  the tax  form and  would  assess the  brewery at  the                                                              
higher rate "if they don't keep track of that themselves."                                                                      
                                                                                                                                
3:59:18 PM                                                                                                                    
                                                                                                                                
MR  ALPER continued  with the  slide  presentation and,  referring                                                              
again to  slide 10, said  that 25-30 percent  of the beer  sold in                                                              
Alaska  qualifying  for  the  reduced   tax  rate  speaks  to  the                                                              
"blossoming  and explosion  of small  breweries  both locally  and                                                              
nationally."   Notwithstanding  that, he  noted that  the bulk  of                                                              
beer  consumed still  is  sourced from  major  brewers, which  are                                                              
well above the  2-million threshold.  He reviewed  the information                                                              
on slide  11, emphasizing  that some  breweries deliver  their own                                                              
truckloads, which  makes them a direct  tax payer.  He  added, "If                                                              
other  volumes of  theirs are  run through  a distributor,  [then]                                                              
the distributor is paying the taxes on that portion of it."                                                                     
                                                                                                                                
4:00:43 PM                                                                                                                    
                                                                                                                                
MR. ALPER returned  to slide 12, which shows:   a steadily growing                                                              
number of breweries  receiving the reduced tax  rate benefit, from                                                              
19 in  2012 to 31 in  2016; an increase  in the number  of reduced                                                              
rate gallons,  with  the current  number at just  over 4  million;                                                              
about 150,000  barrels, statewide,  falling under the  reduced tax                                                              
rate; a  tax impact of  the reduce rate  at just over  $3 million;                                                              
the  in-state  brewery benefit,  at  about  35-40 percent  of  the                                                              
total, was  just over $1.3 million  in 2016; and  the out-of-state                                                              
brewery benefit in 2016 was just under $1.7 million.                                                                            
                                                                                                                                
MR. ALPER  stated,  "The increase  in the number  of breweries  is                                                              
more than 50 percent;  the total volume is up by  only maybe 15 or                                                              
20  percent,  so  you're  seeing   more,  smaller  breweries,  and                                                              
therefore  a  smaller  average  production  per  brewery  as  this                                                              
industry is reaching  its next step."  He said there  are a couple                                                              
small breweries opening in Juneau in 2017.                                                                                      
                                                                                                                                
4:02:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON asked,  "Is there  an expiration  on ...                                                              
the discounted rate or is it just fixed?"                                                                                       
                                                                                                                                
MR.  ALPER answered  that  there is  not a  discounted  rate.   He                                                              
added,  "It is  simply  ... [an]  alternative  tax calculation  in                                                              
statute."                                                                                                                       
                                                                                                                                
4:02:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WOOL  reasoned  that the  benefit  favors  out-of-                                                              
state breweries because of the 60,000-barrel threshold.                                                                         
                                                                                                                                
MR. ALPER answered,  "There's simply more of them."   He explained                                                              
that a  lot of beer  brewed by small  breweries gets  brought into                                                              
the  state of  Alaska;  it more  than equals  the  amount that  is                                                              
brewed and sold  in Alaska.  He said hopefully,  over time, Alaska                                                              
would  take a  larger  percentage  of its  own  market share,  but                                                              
currently, there  are large-size  companies [Outside] that  sell a                                                              
lot of beer  in Alaska, and the  amount adds up to more  than what                                                              
is both produced and sold in Alaska.                                                                                            
                                                                                                                                
REPRESENTATIVE  WOOL  observed  that many  smaller  breweries  are                                                              
being bought  by major companies, thus  they will be above  the 2-                                                              
million  threshold,  because  they  are  owned  by  Anheuser-Busch                                                              
InBev.                                                                                                                          
                                                                                                                                
MR.  ALPER said  he thinks  Representative  Wool is  correct.   He                                                              
said, "That  would be something  in our statute that  favors those                                                              
who choose  to remain  independent."   He deferred  to Mr.  Spanos                                                              
for a more definitive answer.                                                                                                   
                                                                                                                                
4:04:09 PM                                                                                                                    
                                                                                                                                
CHAIR  KITO  clarified that  the  question  is whether  a  smaller                                                              
brewery  being  absorbed by  a  larger  brewery would  absorb  the                                                              
threshold  of the parent  company or  if it  would remain  a small                                                              
brewery for federal purposes.                                                                                                   
                                                                                                                                
4:04:29 PM                                                                                                                    
                                                                                                                                
MR. SPANOS  said he  does not  know the  answer.   Notwithstanding                                                              
that,  he surmised  that [the  smaller brewery]  would "lose  that                                                              
designation."                                                                                                                   
                                                                                                                                
4:04:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WOOL  asked what the  impetus was for  the discount                                                              
that began under statute in 2002.                                                                                               
                                                                                                                                
4:05:06 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  answered  that  at that  point,  the  legislature  was                                                              
tripling  the tax  on  beer, and  he  said he  is  sure the  small                                                              
breweries must  have "raised  a complaint"  that the higher  taxes                                                              
would  drive them  out  of business;  therefore,  the benefit  was                                                              
created  to maintain  competitiveness  for small  businesses.   He                                                              
reiterated that the  original intent was to carve  this protection                                                              
out for beer  brewed in Alaska; however, he reiterated  that there                                                              
was an issue of constitutionality.                                                                                              
                                                                                                                                
REPRESENTATIVE WOOL  suggested that the "tasting  room law," which                                                              
allowed establishments  to brew in a  back room and sell  the brew                                                              
at retail  prices in the front  room, was the biggest  impetus for                                                              
the blossoming of Alaskan breweries.                                                                                            
                                                                                                                                
MR.  ALPER  responded   that  it  is  not  unusual   for  start-up                                                              
breweries  to concentrate  on on-site consumption  and then  start                                                              
delivering some  kegs to local restaurants; however,  the bottling                                                              
line sometimes does not get added until several years later.                                                                    
                                                                                                                                
4:06:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON recollected that  about 14  months prior                                                              
there  had  been  consideration  given  to  doubling  the  alcohol                                                              
excise tax  and increasing  trade tax across  the board.   At that                                                              
time, he  said, his  greatest reluctance had  been related  to the                                                              
tax on  alcohol, because "we  already had  the highest rate."   He                                                              
asked, "Is  part of the  reason it doubled  because we  were going                                                              
to do away with this in-state brewery benefit?"                                                                                 
                                                                                                                                
MR.  ALPER answered  that  the governor's  alcohol  tax bill  from                                                              
2016 was  a doubling of  all the rates.   He showed slide  8 again                                                              
and  noted that  [the doubling]  would  mean rates  of $25.60  per                                                              
gallon  for distilled  spirits,  $5.00 per  gallon  for wine,  and                                                              
$2.14 per  gallon for  beer and  cider.  He  said that  would have                                                              
been 20  cents per portion  [compared to the aforementioned  "dime                                                              
a drink"].    He said,  "That bill  contained an  increase in  the                                                              
small brewery  exempted tax from 35  cents to 70 cents,  so it was                                                              
actually doubling  it; but,  it actually  increased the  delta, as                                                              
you were, between the full tax and the small brewery tax."                                                                      
                                                                                                                                
4:08:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  inquired, "Is  there an ask  associated with                                                              
this?"                                                                                                                          
                                                                                                                                
4:08:38 PM                                                                                                                    
                                                                                                                                
MR.  ALPER answered  that currently  the  administration does  not                                                              
have "any  statutory asks" regarding  the alcoholic  beverage tax.                                                              
He said  he was present  for today's  presentation at  the request                                                              
of  the   committee,  to  show   "the  impact  of   this  specific                                                              
exemption," possibly to consider whether to modify it.                                                                          
                                                                                                                                
4:09:00 PM                                                                                                                    
                                                                                                                                
CHAIR  KITO  confirmed that  [the  committee]  was asked  to  look                                                              
deeper  into  the  issue  by the  chair  of  the  House  Commerce,                                                              
Community &  Economic Development  Finance Subcommittee.   He said                                                              
it is  up to the  House Labor and  Commerce Standing  Committee to                                                              
determine  whether   there  are  opportunities  to   maintain  the                                                              
economy or  possibly increase  revenue, and  the information  from                                                              
Mr. Alper  can be part  of the discussion.   He reviewed  that Mr.                                                              
Alper's presentation  showed that there  are $3 million  of impact                                                              
based on  the reduced  rate.  Options  range from eliminating  the                                                              
reduction  to  saving  $3  million in  revenue  to  "somewhere  in                                                              
between or not touching it at all."                                                                                             
                                                                                                                                
4:10:02 PM                                                                                                                    
                                                                                                                                
MR. ALPER  proffered that  Alaska's alcoholic  beverage taxes  are                                                              
among the highest  in country.  He added, "The $1.07  is very much                                                              
in  the high  end of  beer taxes;  the 35-cent  reduced rate  [is]                                                              
kind  of middle  of  the  pack,  as far  as  beer taxes  in  other                                                              
states."                                                                                                                        
                                                                                                                                
CHAIR KITO  thanked Mr. Alper  for the informative  and clarifying                                                              
information.                                                                                                                    
                                                                                                                                
4:12:15 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being  no further business  before the committee,  the House                                                              
Labor and  Commerce Standing  Committee meeting  was adjourned  at                                                              
4:12 p.m.                                                                                                                       

Document Name Date/Time Subjects
DOR HFIN BSC HLAC recommendation.pdf HL&C 5/3/2017 3:15:00 PM
Memo Rep Seaton Requesting Committee Action 3.6.17.pdf HL&C 5/3/2017 3:15:00 PM
Presentation DCCED Alcohol Tax 5.3.17.pdf HL&C 5/3/2017 3:15:00 PM
Presentation DOR Alcohol Tax 5-3-17.pdf HL&C 5/3/2017 3:15:00 PM