Legislature(2003 - 2004)
04/21/2004 09:09 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
April 21, 2004
9:10 AM
TAPES
SFC-04 # 88, Side A
SFC 04 # 88, Side B
SFC 04 # 89, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:10 AM.
PRESENT
Senator Gary Wilken, Co-Chair
Senator Lyda Green, Co-Chair
Senator Con Bunde, Vice Chair
Senator Ben Stevens
Senator Lyman Hoffman
Senator Donny Olson
Senator Fred Dyson
Also Attending: SENATOR RALPH SEEKINS; JOHANNA BALES, Excise Audit
Manager, Tax Division, Department of Revenue; MIKE ELERDING,
President and Owner, Northern Sales Company of Alaska; MIKE
BARNHILL, Assistant Attorney General, Commercial/Fair Business
Section, Civil Division (Juneau), Department of Law; KEITH TEEL,
Attorney with Covington & Burling
Attending via Teleconference: From Anchorage: JAMES BRENNAN,
Attorney, representing Anchorage Taxicab Permit Owners Association;
ELI SCHOENBERG, Project Citizen Student, Golden View Middle School;
ANNIE SNEED, Project Citizen Student, Golden View Middle School;
ALEENA JOBE Project Citizen Student, Golden View Middle School;
KYLE STERSLE, Project Citizen Student, Golden View Middle School;
MARIN CHAMBERS, Project Citizen Student, Golden View Middle School;
JESSICA FAUST, Project Citizen Student, Golden View Middle School;
RUSSELL JOHNSTON, Project Citizen Student, Golden View Middle
School; CODY FLOERCHINGER, Project Citizen Student, Golden View
Middle School; MORGANE EVANS-VOIGT, Project Citizen Student, Golden
View Middle School; SAMANTHA NOVAK, Project Citizen Student, Golden
View Middle School; From Anchorage: EMILY NENON, Alaska Advocacy
Manager, American Cancer Society
SUMMARY INFORMATION
HB 347-EXEMPT TAXIS FROM VEHICLE RENTAL TAX
The Committee rescinded previous action on an amendment and held
the bill in Committee.
SB 368-TOBACCO TAX; LICENSING; PENALTIES
The Committee heard from the Department of Revenue, the Department
of Law, and the industry. Six amendments were adopted; one
amendment failed to be adopted; and one amendment was withdrawn
from consideration. The bill was held in Committee.
SB 307-APPEAL BONDS: TOBACCO SETTLEMENT PARTIES
The Committee heard from the sponsor and the industry. The bill was
held in Committee.
SB 311-INSURANCE & WORKERS' COMPENSATION SYSTEM
This bill was scheduled but not heard.
AT EASE 9:12 AM / 9:13 AM
HOUSE BILL NO. 347
"An Act exempting taxicabs from the passenger vehicle rental
tax; and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken explained that this legislation would exempt
taxicabs from the passenger vehicle rental tax by removing them
from the definition of a passenger vehicle. He reminded that this
tax, which specified that a ten-percent vehicle would be imposed on
the rental and lease of passenger vehicles, was enacted during the
previous Legislative Session. He informed the Committee that the
fiscal "unintended consequence" of adopting Amendment #1 during the
first hearing on this bill was a $400,000 decrement to the budget.
Amendment #1: This amendment changes the bill's title to read as
follows.
"An Act exempting taxicabs and certain other motor vehicles
from the passenger vehicle rental tax; and providing for an
effective date."
In addition, the amendment deletes, in Section 1, subsection
(2)(E), the word "or" on page two, line two and inserts language on
page two, line three following the word "taxicab." This language
would read as follows.
(E) a taxicab, [or]
(f) a vehicle that is used exclusively for the hauling or
delivery of cargo;
Furthermore, the amendment inserts new language in Sec. 2, page
two, line seven following "taxicabs" as follows.
IMPLEMENTATION. The Department of Revenue shall refund any tax
collected and remitted to the department under AS 43.52.010 -
43.52.099 on the rental of taxicabs and other rentals that are
exempt from the passenger vehicle rental tax because of the
amendments to AS 43.52.099(2) made by sec.1 of this Act for
rentals made on or after January 1, 2004,…
New Text Underlined [DELETED TEXT BRACKETED]
Co-Chair Green moved to rescind the March 9, 2004 Committee action
of adopting Amendment #1.
There being no objection, the Committee action of adopting
Amendment # 1 was RESCINDED.
Co-Chair Wilken specified, therefore, that HB 347, Version 23-
LS1311\D is before the Committee.
JAMES BRENNAN, Attorney, representing Anchorage Taxicab Permit
Owners Association, testified via teleconference from Anchorage and
commented that he is available to answer questions. He noted that a
copy of his April 7, 2004 letter [copy on file], addressed to
Senator Wilken is included in Members' packets.
Senator Olson asked the Association's position on the legislation.
Mr. Brennan responded that the Association "is strongly in favor"
of this legislation as the tax "accidentally" imposed a burden on
taxicab drivers. He explained that the sponsor of the tax
legislation that was adopted the previous year, were unaware that,
"imbedded in the Anchorage taxicab industry" was a rental
arrangement in which independent drivers rent their taxicab vehicle
from "an operator," who maintains the taxicab and pays for such
things as liability insurance. Therefore, he continued, the taxicab
drivers rent the vehicle and are therefore subject to the ten-
percent tax. Furthermore, he detailed that these rentals are
considered daily rentals. He shared that there are 158 general
permits and that a taxicab could be rented out for both a day shift
and night shift. In all cases, he continued, the taxicab drivers
are local Anchorage residents. He stated that it came to "a shock"
to the bill's sponsor, Representative Pete Kott, and to the
Department of Revenue that these drivers would be subject to this
tax. Therefore, he urged that this legislation be adopted to remove
this burden from taxicab drivers.
Co-Chair Wilken surmised therefore, that the testifier is "strongly
in favor" of the legislation.
Mr. Brennan concurred.
The bill was HELD in Committee.
SENATE BILL NO. 368
"An Act relating to taxes on cigarettes and tobacco products;
relating to tax stamps on cigarettes; relating to forfeiture
of cigarettes and of property used in the manufacture,
transportation, or sale of unstamped cigarettes; relating to
licenses and licensees under the Cigarette Tax Act; and
providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken explained that the Senate Rules Committee sponsors
this legislation by request of the Governor, Frank Murkowski. He
stated that the legislation would increase the cigarette tax from
one dollar per pack of twenty cigarettes to two dollars per pack.
Furthermore, he informed that the Tobacco Products tax would
increase from 76 percent to 100 percent of the wholesale cost.
JOHANNA BALES, Program Manager, Cigarette and Tobacco Products
Excise Tax and Revenue Auditor, Tax Division, Department of
Revenue, noted that she would respond to questions that arose
during the first hearing on this bill.
Senator Bunde informed the Members that on teleconference are
students from Anchorage's Golden View Middle School, who are
participating in a public interest issue school project named
"Project Citizen." As part of the project, he noted, the students
elected to research and testify regarding this tobacco tax bill, as
"it is a public policy issue that is important to our State" and to
communities. He shared that Golden View Middle School is located
within the Anchorage district he represents.
ELI SCHOENBERG, Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and shared that
"Project Citizen" is a civic education program that allows students
to work on a policy or issue that would affect the students and
their community. He stated that the issue chosen by the students
was tobacco enforcement; particularly focusing on minors' access to
tobacco and solutions to counteract the problem. He stated that
this tobacco tax legislation was chosen, as it was determined that
"this was the best chance to solve the problem and save lives for
generations to come."
Senator Hoffman, noting that this tax would generate a
"substantial" amount of money for the State, asked the testifier
whether a portion of these funds should be earmarked to support
advertising campaigns geared to prevent kids from smoking.
Mr. Schoenberg responded in the affirmative.
ANNIE SNEED, Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and avowed that this
bill could save lives. She referenced statistics generated by
Tobacco Free Kids that indicate that enactment of this legislation
would save 2,900 youth from premature smoking related deaths. She
calculated that this would equate to one percent of the population
of the Municipality of Anchorage's population or to the entire
student population of Anchorage's Service High School.
ALEENA JOBE Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and pointed out that
were the cigarette tax raised by one dollar per pack, the State
would save, over a five-year period, $1.6 million as the result of
fewer smoking related pregnancy and birth complications. This
money, she continued, would then be available to support other
State programs.
Senator Hoffman asked the testifier whether a portion of the
anticipated revenue should be used to discourage teenagers from
smoking.
Ms. Jobe responded in the affirmative.
KYLE STERSLE, Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and informed the
Committee that "the State Medicaid program currently spends $60
million on smokers" and smoking related health problems each year.
Were this legislation adopted, he declared, less money would be
required to address associated health care costs. He noted that the
additional revenue generated from this tax could be used to provide
for the balance of Medicaid expenses.
MARIN CHAMBERS, Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and declared that the
number of smokers would decrease were a one-dollar per pack tax
increase to occur. She shared that Governor Murkowski stated that
3,500 current smokers would quit smoking, and as a result, 800
lives would be saved. She also quoted the Governor as saying that
within the first year of the current one-dollar a pack tax
implementation, the number of cigarettes consumed in the State,
declined by 15-percent and still has not risen to its pre-tax
level. She noted that numerous legislators and health organizations
such as the American Heart Association and the American Cancer
Society support increasing this tax level.
JESSICA FAUST, Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and urged that this
legislation be adopted as, she noted, the Alaska Tobacco Control
Alliance estimates that were the tax to increase, there would be a
15-percent decrease in youth smokers. She attested that this
reduction would result in 15 out of 100 youth having fewer tobacco
related illnesses in the future. She also noted that a reduction in
the number of people who smoke would reduce the $130 million that
is, according to the American Heart Association, spent annually on
tobacco health related illnesses. Furthermore, she noted that the
proposed tax increase would generate in excess of $35 million per
year. She concluded that increasing the price of cigarettes would
be the most effective approach to lowering the number of youth
smokers. She urged the Committee to pass this legislation by
noting, "that adults don't start smoking, kids do."
Senator Hoffman asked the testifier whether she would support using
a portion of the $35 million generated by the tax increase for
anti-smoking advertising messages directed at youth.
Ms. Faust responded that she would support using a portion of the
funds for an advertising campaign as well as for education.
RUSSELL JOHNSTON, Project Citizen Student, Golden View Middle
School, testified via teleconference from Anchorage and stated
that, in addition to generating more revenue for the State, an
increased tobacco tax would further reduce the number of youth
smokers as attested by the decline in youth smokers that occurred
after the one-dollar a pack tax was implemented. He urged that a
portion of the money be used to support teen smoking prevention
enforcement, were the legislation enacted.
CODY FLOERCHINGER, Project Citizen Student, Golden View Middle
School, testified via teleconference from Anchorage and pointed out
that the "immediate problem" is that currently there is no penalty
imposed upon an underage person who attempts to purchase tobacco.
Therefore, he urged the Committee to consider implementing
legislation such as a penalty of up to a $300 fine were an underage
person to do so. He attested that this would make a difference. He
also suggested that some of the revenue generated by this proposed
tax be used to support enforcement efforts associated with the
"purchase attempt" legislation. He declared that teen smoking is a
serious issue, and that a purchase attempt violation combined with
the higher price per pack would further efforts to control teen
smoking.
MORGANE EVANS-VOIGT, Project Citizen Student, Golden View Middle
School, testified via teleconference from Anchorage and addressed
the argument that imposing a cigarette tax is un-Constitutional "as
it prohibits and represses the smokers rights" by stating that,
while a smoker has rights, so does the rest of the population.
Continuing, she stated that people who make the choice to smoke
should assume the consequences of their decision. She declared that
non-smokers' health should not be negatively affected by smokers'
second-hand smoke. She stated that this bill, by reducing the
number of people who smoke, would assist non-smokers with their
right to live healthier lives.
SAMANTHA NOVAK, Project Citizen Student, Golden View Middle School,
testified via teleconference from Anchorage and thanked the
Committee for allowing the students to present their testimony. She
urged the Committee to consider the concerns brought forward today.
Senator Bunde voiced appreciation for the organization and thought
that has been exerted by these students.
Senator Hoffman voiced support for using a portion of the money
that might be generated by this bill to support tobacco prevention
efforts. He concluded that the students, rather than desiring the
State to use all the money, would support some of the funding going
toward prevention efforts to assist in reducing teen smoking.
Co-Chair Wilken pointed out that SB 368, Version 23-GS2116\A, is
before the Committee.
Amendment #1: This amendment proposes to insert a new bill section
on page eight, line nine, as follows.
*Sec. 15. AS 43.50.710 is amended by adding a new subsection
to read:
(e) A wholesaler or retailer may not sell cigarettes at
less than the presumptive cost to the wholesaler or retailer
unless the wholesaler or retailer receives prior approval from
the department. The department may not grant prior approval
for sale of cigarettes at less than the presumptive cost as
described under this subsection, unless the wholesaler or
retailer provides proof satisfactory to the department that
the wholesaler's or retailer's actual cost is less that the
presumptive cost for the wholesaler or retailer. Approval for
cigarette sales at less than the presumptive cost authorized
under this subsection may not be granted for a period longer
than one year.
*Sec. 16. AS 43.50.800(a) is amended to read:(a) For purposes
of AS 43.50.710-43.50.849,
(1) the basic cost of cigarettes is equal to the [LOWER
OF THE TWO FOLLOWING AMOUNTS];
(A)[THE} invoice cost of cigarettes to the
wholesaler [OR RETAILER}, less any off-invoice allowance
required to be passed on to the retailer [ALL TRADE DISCOUNTS
INCLUDING CUSTOMARY DISCOUNTS FOR CASH ACTUALLY TAKEN, PLUS
THE FULL FACE VALUE OF ANY TAX THAT MAY BE REQUIRED BY THIS
CHAPTER IF NOT ALREADY INCLUDED IN THE INVOICE COST OF THE
CIGARETTES TO THE WHOLESALER OR RETAILER]; and [OR]
(B) invoice cost of cigarettes to the retailer [THE
LOWEST REPLACEMENT COST OF CIGARETTES TO THE WHOLESALER OR
RETAILER, WITHIN 30 DAYS BEFORE THE DATE OF SALE, IN THE
QUANTITY LAST PURCHASED, WITHIN OR BEFORE THE 30-DAY PERIOD,
LESS ALL TRADE DISCOUNTS INCLUDING CUSTOMARY DISCOUNTS FOR
CASH ACTUALLY TAKEN, PLUS THE FULL FACE VALUE OF ANY TAX THAT
MAY BE REQUIRED BY THIS CHAPTER IF NOT ALREADY INCLUDED IN THE
INVOICE COST OF THE CIGARETTES TO THE WHOLESALER OR RETAILER];
(2) the actual cost to the wholesaler is equal to the
presumptive cost determined by the department under (b) of
this section.
(3) IN THE ABSENSE OF PROOF OF A LESSER OR HIGHER COST OF
DOING BUSINESS BY THE WHOLESALER MAKING THE SALE,] the cost of
doing business by the wholesaler is presumed to be four and
one-half percent of the basic cost of the cigarettes to the
wholesaler; a fraction of a cent used in computing the cost of
doing business shall be rounded off to the next highest cent;
(4) the actual cost to the retailer is equal to the lower
of
(A) the basic cost of the cigarettes plus the cost
of doing business by the retailer; the cost of doing business
may be proven by regular [THE] standards and methods of
accounting [REGULARLY EMPLOYED BY THE RETAILER] and must
include labor costs, rent, depreciation, selling costs,
maintenance of equipment, delivery costs, all types of
licenses, taxes, insurance, and advertising; or
(B) The presumptive cost determined by the
department under (b) of this section;
(5) In the absence of proof of a lesser or higher cost of
doing business by the retailer making the sale, the cost of
doing business by the retailer is presumed to be six percent
of the basic cost of cigarettes to the retailer; a fraction of
a cent used in computing the cost of doing business shall be
rounded off to the next highest cent.
New Text Underlined [DELETED TEXT BRACKETED]
Co-Chair Wilken noted that Amendment # 1, which he had sponsored,
by request, would not be offered for consideration.
Amendment #2: This amendment proposes to change language in the
bill as follows.
On page three, line 16, the word "or" is deleted and replaced with
"[OR]"
In addition, the amendment inserts the following language on page
three, line 18 following "retailer".
"or to an individual for personal consumption; or
(4) brings, or causes to be brought, a tobacco product into
the state from outside the state for personal consumption.
Furthermore, this amendment would insert a new bill section on page
three, following line 18 as follows.
*Sec. 10. AS 43.50.320 is repealed and reenacted to read:
Sec. 43.50.320. Licensing. (a) Except as provided in (i)
of this section, a person must be licensed as a distributor by
the department if the person engages in an activity described
in AS 43.50.300(1) - (3) or as a buyer if the person engages
in an activity described in AS 43.50.300(4).
(b) The department, upon application and payment of a fee
of $50, shall issue a license for one year to a person who
applies for a distributor license under (a) of this section.
(c) The department, upon application and payment of a fee
of $25, shall issue a license for one year to a person who
applies for a buyer license under (a) of this section.
(d) The department may refuse to issue a license under
this section if there is reasonable cause to believe the
information submitted in the application is false or
misleading and is not made in good faith.
(e) A distributor license issued under this section must
include the name and address of the licensee, the type of
business to be conducted, and the year for which the license
is issued.
(f) The department may renew a distributor license issued
under this section for a fee of $50.
(g) The department may renew a buyer license issued under
this section for a fee of $25.
(h) The department may suspend, revoke, or refuse to
renew a license issued under this section as provided in AS
43.50.070.
(i) A license required by this section is in addition to
any other license required by law, except that a person who is
licensed under AS 43.50.010-43.50.180 is exempt from the
licensing requirements of this section.
(j) A license issued under this section is not assignable
or transferable, except that in the case of death, bankruptcy,
receivership, or incompetency of the licensee, or if the
business of the licensee is transferred to another by
operation of law, the department may extend the license for a
limited time to the executor, administrator, trustee,
receiver, or the transferee.
* Sec 11. AS 43.50.330(a) is amended to read:
AS 43.50.330. Returns. (a) On or before the last day of
each calendar month, a licensee shall file a return with the
department. The return must state the number or amount of
tobacco products sold or imported for personal consumption by
the licensee during the preceding calendar month, the selling
or purchase price of the tobacco products, and the amount of
tax imposed on the tobacco products.
*Sec. 12. AS 43.50.390(2) is amended to read:
(2) "licensee" means a distributor or buyer who is
(A) licensed under AS 43.50.320; or
(B) exempted by AS 43.50.320(i)(g) from licensing
under AS 43.50.320;
*Sec. 13. AS 43.50.390 is amended by adding a new subsection
to read:
(6) "buyer" means a person who imports tobacco products
for the person's own consumption from any source other than a
distributor.
New Text Underlined [DELETED TEXT BRACKETED]
Senator Bunde moved for the adoption of Amendment #2.
Co-Chair Green objected for discussion.
Senator Bunde explained that this amendment would require people
who transport tobacco products into the State for distribution, via
such methods as mail order or Internet purchases, be licensed.
This, he continued, would ensure that the tobacco tax would be paid
and that Alaskan distributors would be protected from out-of-State
entities. He asserted that when taxes rise, these types of sales
increase as people attempt to circumvent price increases.
Ms. Bales informed the Committee that the Department of Revenue
supports this amendment, as it would serve to protect both the
revenue stream to the State as well as in-State businesses that
could be harmed by people choosing to purchase out-of-State. She
noted that, while it is currently "not illegal" for Alaskans to
purchase tobacco products out-of-State or via the Internet, this
situation does allow those people to avoid paying the State tax
imposed on those products and, thereby, she continued, reducing
revenue to the State as well as diverting those sales from local
retailers.
Ms. Bales shared that the primary reason the Department supports
this amendment is the fact that since the Tobacco Master Settlement
Agreement (MSA) was approved, there has been an influx of new
businesses introducing such things as "'little cigars' which do not
meet the definition of cigarettes for tax purposes." Continuing,
she noted that while these products could meet the definition for
MSA payments, they would not qualify unless the State were to tax
them. Those tobacco manufacturers who did not sign the MSA
agreement, she explained, agreed upon this tax condition guideline.
She displayed a product that is currently being offered as "a
substitute for cigarettes," and she noted that while it looks like
a cigarette in that it is filtered, machine made, and smoked like a
cigarette, it is less expensive and non-taxable because, it is
"wrapped in tobacco and not in paper." Therefore, she stressed,
while the intent of this legislation is to increase prices in order
to encourage people to quit smoking, that objective is being
circumvented by products such as this that "are becoming much more
prevalent."
Ms. Bales stated that someone could purchase these "little cigars"
over the Internet for approximately ten to twenty dollars a carton
less than cigarettes. She voiced that the Department is concerned
as it has observed that these products are replacing cigarette
usage. She disclosed that a similar brand called "Prime Time
Cigarettes," which is sold in the State as a cigar, is advertised
on its website as being "just like a cigarette." She also noted
that roll-your-own tobacco kits are available in the State for
approximately $26 including the other Tobacco Products tax (OTP).
These kits, she attested, allow someone to make their own
cigarettes at a significantly lower price than were one to purchase
a pack of cigarettes. She noted that the kit could be purchased via
the Internet for $15. This purchase, she continued, would not be
subject to the State tax as tobacco products imported for
individual consumption are currently legally exempt from the tax.
She attested that new products are continually being developed to
circumvent the tax, and she attested that the only method with
which to address this trend "is to make individuals who bring
products into the State for personal consumption, liable for
taxes."
Senator Bunde asked whether this amendment would apply to smokeless
tobacco.
Ms. Bales verified that it would.
Co-Chair Green asked whether all the language in Section 10, as
specified in the amendment, is new language.
Ms. Bales responded that not all of the language in that section is
new. She clarified that the language in the section applying to a
$25 buyer license is new in that it would require those who would
import other tobacco products for personal consumption to purchase
a buyer license. She stated that currently this requirement is
limited to people who import cigarettes for personal consumption.
Co-Chair Green questioned the reason for this change being
presented in the amendment in this format rather than the
traditional manner of deleting or adding language into existing
wording. That method, she attested, makes new language more easily
identifiable.
Ms. Bales further pointed out that new language in the amendment
includes "or as a buyer if the person engages in an activity
described in AS 43.50.300(4)" which is the section regarding
importation of a tobacco product for personal consumption that
would be inserted were this amendment adopted.
Ms. Bales continued that subsection (c) of the amendment, which
pertains to the $25 buyer license fee, is a new section as is
subsection (g) that refers to license renewal.
Co-Chair Green commented that were the entire section new language,
she would have required a line-by-line review; however, she
continued, as the new sections are limited, this discussion would
suffice.
Senator Hoffman inquired to the cost of implementing subsection (c)
of the amendment.
Ms. Bales understood that the costs would be "very minimal". Upon
further questioning from Senator Hoffman, she stated that there
would be no additional expense associated with the section,
because, she continued, no one has of yet purchased a buyer license
to import cigarettes for personal consumption. This is the case,
she attested, because when the cost of the license is factored in,
most people decide to purchase from an in-State distributor.
Senator Hoffman asked how someone would be aware that a buyer
license would be required.
Ms. Bales responded that the Department would be required to
educate the public regarding this requirement.
Senator Hoffman asked for confirmation that the expenses associated
with the education process to include the application process,
advertising, and enforcement, would incur minimal expense.
Ms. Bales responded that while there would be some additional
enforcement required where the other tobacco products are
concerned, the Department does not feel that additional funding
would be necessary as these things are currently in place for
cigarettes.
Senator Hoffman stated that while the expenses would be minimal in
comparison to the projected $35 million in new revenue that the tax
would raise, he could not agree that the expense would be
considered minimal to the Senate Finance Committee, who, he
attested has argued over $35,000 amounts. Therefore, he stated
there is concern regarding how much money would be required to
implement this requirement.
Co-Chair Wilken understood the expense to range from "minimal to
zero." Continuing, he stated that a more detailed fiscal note could
be developed, as the bill progresses, were the concern to continue.
Co-Chair Green removed her objection.
Senator Olson understood that the alternate products exampled would
be subject to the tax were Amendment #2 adopted.
Ms. Bales affirmed. She stated that while these products are
currently taxable when purchased in the State, this amendment would
ensure that they would be subject to the tax when imported into the
State.
There being no further objection, Amendment #2 was ADOPTED.
AS 43.50.330. Returns. (a) On or before the last day of
each calendar month, a licensee shall file a return with the
department. The return must state the number or amount of
tobacco products sold or imported for personal consumption by
the licensee during the preceding calendar month, the selling
or purchase price of the tobacco products, and the amount of
tax imposed on the tobacco products.
Co-Chair Green asked whether language in Sec. 11, AS 43.50.330 (a)
on page three, line seven, specifically means that the products
being imported would be for the licensee's personal consumption.
Ms. Bales responded that were a licensee to import items for
personal consumption, they would be required to report the quantity
and value of the product imported in order for the tax to be
calculated. She stated that a licensee who imports products for
resale would also be required to report this information.
Co-Chair Green asked for verification that there are licensees who
import only for personal consumption.
Ms. Bales responded that there have been people, "in the past under
the cigarette tax," who were licensed in this regard; however, she
reiterated, once they realized that paying the tax increased the
price to a comparable level at which they could buy it locally,
they did not renew their licenses.
Co-Chair Green asked for further explanation regarding the report
individual licensees must file.
Ms. Bales stated that all licensees "are required to file a monthly
return and report your activity of importation of product for sale,
and in this case, for personal consumption." She stated that this
language "mirrors" the existing requirements for cigarette tax
licensees. She furthered that these returns are required because
they provide information necessary to determine the tax that should
be remitted to the Department.
Amendment #3: This amendment would insert a new bill section into
the bill on page three, following line 30 as follows.
Sec. 11. AS 43.50.550(b) is amended to read:
(b) A licensee who submits an application for the
purchase of stamps on a deferred-payment basis shall, as a
condition of approval of the application, post a bond
acceptable to the department in an amount equal to
(1) 200 percent of the maximum dollar amount of
allowed monthly purchases under this section; or
(2) 100 percent of the maximum dollar amount of
allowed monthly purchases under this section if the licensee
(A) holds a license issued under AS 43.50.010
for a physical location in this state; and
(B) has been in full compliance with the
provisions of this title and regulations adopted under this
title during the preceding 60 months [ AS A CONDITION OF
APPROVAL OF THE APPLICATION].
New Text Underlined [DELETED TEXT BRACKETED]
Co-Chair Wilken moved for the adoption of the amendment and
objected for discussion. He stated that Members' packets contain an
April 4, 2004 letter [copy on file] he had received from Mike
Elerding, an operator of a wholesale distribution company in
Ketchikan, who, he noted, has assisted "in defining" this
legislation and who would be commenting on how some of the proposed
amendments would effect the business community.
Ms. Bales explained the amendment in that, under current law, when
a licensee such as a wholesale distributing company, purchases
cigarette tax stamps, they have the option of either paying for the
stamps upfront and thereby eliminating the requirement to post a
bond or they could defer payment to the end of the following month
in which they purchased the tax stamp. In this latter case, she
continued, it is required that a bond equating to 200 percent of
the amount of the cigarette tax stamps being purchased be posted.
She explained that this bonding level is required because two
month's worth of cigarette tax stamps could be purchased in this
scenario "before the first payment would be due." She stated that
this 200-percent bond "is actually 100 percent of what you owe."
Ms. Bales noted that were the cigarette tax stamp rate increased
there is concern among the distributors that "the bonding
requirement would be difficult for them to obtain." Therefore, she
noted, they have requested that the Department lower the bonding
requirement to 100 percent of the amount being purchased. This, she
explained, would equate "to 100 percent of one month and the
Department would extend credit to them for the purchase for the
second month of cigarette tax stamps."
Ms. Bales continued that in order for this scenario to occur, the
licensee would be required "to be in good standing with the
Department for the previous five years and also have physical
presence in the State." She concluded that the Department, "at this
time, is comfortable" with Amendment #3.
Senator Olson asked regarding the cost of the bond.
MIKE ELERDING, President and Owner, Northern Sales Company of
Alaska, responded that a nine-month, one million dollar bond costs
his company $3,500. Continuing, he noted that rather than the cost
being a factor, it is the availability of the bond that is the
issue as currently, he noted, the insurance market is "a little bit
jittery about Alaska in general and the availability of bonding in
particular for in-State distributors is difficult to get."
Therefore, he summarized, were the bonding requirement to double,
the ability to secure a bond "would more difficult."
Co-Chair Wilken removed his objection.
There being no further objection, Amendment #3 was ADOPTED.
Amendment #4: This amendment inserts ", as amended by sec. 8 of
this Act," following "AS 43.50.190" on page eight, line 17.
In addition, this amendment deletes, in Sec. 8 on page eight, line
25, the language "no later than 30 days after the effective date of
this Act" and inserts "in six sequential monthly installments. The
first installment shall be paid not later than the last day of the
month in which this Act takes effect."
Co-Chair Wilken moved for the adoption of Amendment #4, and
objected for explanation. He noted that this amendment would
address the floor tax.
Ms. Bales stated that SB 368, Version "A", states that a
distributor or retailer must conduct an inventory on the date the
bill becomes effective and remit the difference between the new tax
rate and the old tax rate within 30 days of that date. This
amendment, she noted, would allow those entities to remit the
difference in six monthly installments in order to alleviate the
burden of one lump sum cash payment. She stated that the Department
"is comfortable" with Amendment #4.
Mr. Elerding noted that, while the industry supports the amendment,
it would prefer that the section of the bill pertaining to the
floor stock tax be deleted. [NOTE: The testifier's reference to
Section 25 is in error as there is no Section 25 in Version A;
however, the floor stock tax is addressed in Section 15 of the
bill.] He acknowledged that wholesalers and retailers did stockpile
cigarettes in 1997 before the State cigarette tax was increased
from $2.90 to ten dollars per carton. However, he stated that since
that time, the cost of cigarettes has escalated due to excise taxes
and the cost of goods as well as the fact that cigarettes have
increasingly become a target of counter fitters and bootleggers.
These circumstances, he continued, have resulted in tobacco
manufacturers tightly controlling "the distribution and supply of
cigarettes in the retail trade." He shared that due to cigarette
supply constraints, when his company recently opened a facility in
Anchorage, they were unable to acquire sufficient quantities of
cigarettes to meet demand. Therefore, he concluded, the marketplace
is different from that experienced in 1997, as tobacco
manufacturers are not "allowing wholesalers and/or retailers to buy
additional product." Therefore, he assured that the opportunity to
stockpile would be difficult.
Mr. Elerding also suggested that the Legislature approve an
"immediate or shortly thereafter" effective date were the bill
enacted as, he communicated, following the bill's passage in 1997
there was a six to eight month effective date delay that allowed
stockpiling to occur. He stated that an immediate effective date
would further negate the stockpiling concern.
Mr. Elerding commented that the State has further control in
regards to the stockpiling concern by the fact that it, as the
seller of the tax stamps, would be able to monitor suspicious
activity, based on the quantities of stamps being purchased. He
disclosed that as a result of the 1997 cigarette tax increase,
Alaska-based distributors' costs of carrying inventory and the
level of accounts receivables increased by approximately one-third,
bonding requirements increased, and security on facilities had to
be increased because cigarettes became a target of theft.
SFC 04 # 88, Side B 09:58 AM
Mr. Elerding requested therefore that the floor stock tax be
eliminated in order to allow distributors "to gain a little bit of
capital, to increase our ability to carry the inventory, carry the
receivables, and cover the other costs." He characterized
distributors as partners with the State in that they collect the
excise tax, and he stressed that elimination of the floor stock tax
would enable distributors to continue "to be strong, viable
economic partners with the State."
Co-Chair Wilken removed his objection.
There being no further objection, Amendment #4 was ADOPTED.
Amendment #5: This technical amendment proposes the following
changes.
On page one, line 14, following "state" insert "who"; on page one,
line 14, following "and", insert "who"; on page two, line one,
following "chapter" delete ", must" and insert "shall"; on page
two. Line three, delete "distributions" and insert "distributions";
on page two, line 12, following "43.50.700," insert "who"; on page
two, line 13, following "and" insert "who"; on page two, line 26,
delete "brings or causes to be brought cigarettes" and insert
"brings cigarettes or causes cigarettes to be brought
[CIGARETTES]"; on page three, line one delete "per cent" and insert
"percent [PER CENT]"; on page three, line five, following "AS
43.50.010," delete "but" and insert "and"; on page three, line 24,
following "stamps" insert "."; on page three, lines 24-25 delete
"[AND ALL RISKS OF POSSIBLE LOSS OR DAMAGE WHILE IN TRANSIT]."; on
page three, line 30, following "them" delete "." and insert "[AND
ALL RISKS OF POSSIBLE LOSS OR DAMAGE WHILE IN TRANSIT]."
In addition, this amendment changes the following language: on page
four, line five, delete "(i)" and insert "(A)"; on page four, line
seven delete "ii" and insert "(B)"; on page four line eight delete
"it" and insert "the licensee"; on page five, line 21 delete "no"
and insert "not"; on page five, line 28, following "and" insert
","; on page five, line 29 following "forfeiture" insert ","; on
page five, line 31 delete "no" and insert "a" and following "is"
insert "not"; on page six, line 12 and line 14 delete "had no" and
insert "did not have"; on page six, line 15 delete "had"; and on
page six, line 16, following "(A)" insert "had".
Furthermore, this amendment changes the following language: on page
six, line 19 delete the second occurrence of "to" and insert "of";
on page six, line 22, following "that" insert "the person"; on page
six, line 23 following "I" delete "the person"; on page six, lines
25 and 27 delete "had no" and insert "did not have"; on page six,
line 28 delete "had"; on page six, line 29, following "(A)" insert
"had"; on page six, line 31 delete "no" insert "not a"; on page
seven, line 12, following "43.50.650" insert ","; on page seven,
line 13 delete "the court"; on page seven, line 14 delete "and" and
following the second occurrence of "section" insert "the court"; on
page seven, line 24, delete "it" and insert "the vehicle or
vessel"; on page eight, line four delete ","; on page eight, line
eight delete "As used in" and insert "in"; on page eight, line 17
following "AS 43.50.190" insert ", as amended by sec. 8 of this
Act,"; on page eight, line 25, delete "no" and insert "not"; and on
page eight, line 30 delete "heading" and insert "catchline".
Co-Chair Wilken moved for the adoption of technical Amendment #5.
There being no objection, Amendment #5 was ADOPTED.
Amendment #6: This amendment inserts new bill sections on page
eight, line nine that read as follows.
*Sec. 15. AS 43.50.710 is amended to add a new subsection to
read:
(e) Nothing in this section prohibits a manufacturer from
offering promotions to a wholesaler or a retailer provided the
wholesale promotion is the same for all participating
wholesalers and the retail promotion is the same for all
participating retailers.
*Sec. 16. AS 43.50.770 is amended to read:
In establishing the actual [BASIC} cost of cigarettes to
a wholesaler or retailer, the invoice cost [OR THE ACTUAL
COST] of cigarettes purchased at a forced, bankrupt, or
closeout sale, or other sale outside the ordinary channels of
trade may not be used.
*Sec. 17. AS 43.50.800 is repealed and reenacted to read:
(a) For purposes of AS 43.50.7104-43.50.849, actual cost
is presumed to be
(1) for wholesalers, the presumptive wholesale cost as
determined by the department plus the costs of doing
business which is presumed to be four and one-half
percent of the presumptive wholesale cost; for purposes
of this section presumptive wholesale cost is
manufacturer's list price, less trade discounts, plus the
full face value of all cigarette taxes;
(2) for retailers, the presumptive retail cost is the
presumptive wholesale cost plus the costs of doing
business which is presumed to be six percent of the
presumptive wholesale cost.
(b)(1) A wholesaler or retailer shall request prior
approval from the department to establish an actual cost
that is less than presumed in (a) of this section. The
department may grant such approval only upon provision of
proof satisfactory to the department regarding the
wholesaler's or retailer's presumptive costs set forth in
(a) of this section. Approval for cigarette sales at less
than the actual cost authorized under this subsection may
not be granted for a period longer than one year.
(2) In making the determinations under this subsection
the department
(i) with respect to the presumptive wholesale cost
or presumptive retail cost, may consider the costs
reflected on the actual invoice, but may not
consider cash discounts;
(ii) with respect to the wholesaler's or retailer's
presumed costs of doing business, may consider the
standards and methods of accounting regularly
employed, and must include labor costs, rents,
depreciation, selling costs, maintenance of
equipment, delivery costs, all types of licenses,
taxes, insurance, advertising, preopening expenses,
provision for impaired assets and closing costs,
interest expense, and provision for merger and
restructuring expenses. The department shall
implement regulations to determine the wholesaler's
and retailer's costs of doing business for purposes
of this section.
*Sec. 17. AS 43.50.790(a) (3), and AS 43.50.849(1), (6), and
(7) are repealed.
Co-Chair Wilken moved for the adoption of Amendment #6, and
objected for explanation. He stated that this amendment pertains to
minimum pricing.
Ms. Bales characterized minimum pricing "as a very convoluted
issue." She stated that, in 2003, the Legislature adopted SB 168
that was sponsored by Senator Bunde and specified that distributors
and retailers could not sell cigarettes in the State, below cost.
This amendment, she noted, attempts to refine that bill's language
and address issues that the Department of Revenue and the industry
have identified since that bill became effective. Continuing, she
shared that SB 168 directed the Department to post on their
Internet website a minimum wholesale and retail cigarette price
"based on the manufacturer's list price less any trade discounts"
that a manufacturer provides to all their wholesalers. The
resulting amount, she continued, is then multiplied by cost of
doing business factor of 4.5 percent for wholesalers or six percent
for retailers. In conclusion, she noted that were a distributor or
retailer to sell cigarettes at the website's posted prices, they
would not be in violation of the law. In lieu of selling at that
price, she continued, a distributor or retailer could provide
information indicating that their cost of doing business is less
than the level used by the Department. She stated that the
Department's issue with the current language is that a business is
not required to obtain approval to sell at a price lower than the
posted price. This amendment, she declared would require that an
entity receive prior approval from the Department before selling
product at a lower price. She noted that the amendment would also
disallow the "customary discounts for cash" factor from the
calculation. She noted that 65 percent of the 25 states that have
minimum pricing laws do not allow customary discounts for cash in
their determination.
Ms. Bales expressed that the price regulation serves to maintain a
high price on cigarettes, which, she noted, would support the
overall goal of reducing smoking. In addition, she declared that
the minimum pricing component also provides an even playing field
for distributors. She concluded that the Department is comfortable
with the amendment.
Senator Bunde voiced support for the amendment as he stated that it
would allow small retailers to compete with large national stores.
Mr. Elerding voiced support for the amendment and acknowledged the
efforts of the Department of Law and the Department of Revenue in
developing the appropriate language. He agreed with Senator Bunde's
comments and noted that allowing cigarette prices to be lowered as
an incentive to increase purchases would be contrary to the
Governor's intent and the State's efforts to decrease consumption
by raising the price, as furthered in SB 368. Therefore, he voiced
strong support for the amendment.
Co-Chair Green asked whether other products are subject to this
sort of arrangement.
Ms. Bales affirmed that this particular statute does address
cigarettes, however, she was unaware as to whether "there are
specific laws that target other specific products." However, she
noted that the State does have an unfair trade practice statute
that specifies that no commodity could be sold at a price "with the
intent to injure competition."
Co-Chair Wilken removed his objection.
There being no further objection, Amendment #6 was ADOPTED.
Mr. Elerding referred Amendment #2, and declared that the amendment
would serve to close an existing loophole through which an out-of-
State entity could sell products to Alaskans much cheaper than a
licensed entity such as his would be able to sell it due to the
fact that un-licensed, out-of-state entities are not be obligated
to pay the Alaska tax. The amendment therefore, he attested, would
allow Alaskan businesses to compete on a level playing field with
out-of-state distributors who are not otherwise subject to Alaska
tax. He voiced strong support for Amendment #2.
Mr. Elerding also commented that, under current law, a person who
imports 100 cigarettes or less per month is exempt from the excise
tax. He concurred that this is a sufficient quantity. He noted
however, that there has been discussion in the House of
Representatives' companion bill to SB 368 that would raise this
"incidental" limit to 600. This he communicated would equate to
three cartons. He stated that the industry views this as setting as
"very dangerous precedent," as allowing the consumer to purchase
that quantity, exempt from the State tax, would serve to defeat the
purpose of the bill as people would purchase quantity via the
Internet and/or buy cigarettes directly. He clarified that the
House bill does contain language that would require the consumer to
personally transport the product from out-of-state to in-State;
however, he warned that "a liberal interpretation of this language"
might result in a broadening scope of the consumer's ability to
import those products. He urged strong language to be included to
clarify that component if it were adopted. He also urged that the
current limit of 100 cigarettes be maintained.
Amendment #7: This amendment deletes Sec.13 on page four, lines 24-
27. The language being deleted reads as follows.
Sec. 13. AS 43.50.610 is amended be adding a new subsection to
read:
(b) Cigarettes seized under AS 43.50.500 - 43.580.700 are
forfeited to the state. After notice and an opportunity for a
hearing, the commissioner shall destroy the cigarettes
forfeited under this section.
In addition, on page four, line 28, "AS 43.50.620 is repealed and
reenacted" is deleted and replaced with "AS 43.50 is amended by
adding a new section"; on page four, line 29, "Sec.43.50.620" is
deleted and replaced with "Sec. 43.50.625"; on page four, line 30,
"if" is deleted; and on page four, lines 30 and 31, "would not be
entitled to remission, they" is deleted.
Finally, the amendment deletes Section 16, in its entirety. The
language being deleted in located on page eight, lines 27 through
31 and reads as follows.
Sec. 16. The uncodified law of the State of Alaska is amended
by adding a new section to read:
REVISOR'S INSTRUCTION. The revisor of statutes is
instructed to change the heading of AS 43.50.610 from
"Unstamped cigarettes as contraband; seizure" to "Unstamped
cigarettes as contraband; seizure; forfeiture."
Co-Chair Wilken moved for the adoption of Amendment #7 and objected
for explanation.
Co-Chair Wilken noted that this amendment is recommended by
Legislative Legal Services in order to clarify the forfeiture
section of the bill in order to make it easier to read and conform
to Alaska statutes. He noted that the Department of Revenue has not
had an opportunity to review this amendment.
Therefore, Co-Chair Wilken offered to withdraw the motion in order
to provide the Department of Revenue time to review the amendment.
There being no objection, Amendment #7 was WITHDRAWN.
Amendment #8: This amendment adds intent language to the bill as
follows.
It is the intent of Legislature that twenty percent of the
funds collected under this legislation is allocated to
education/cessation programs.
Senator Hoffman moved for the adoption of Amendment #8 and objected
for explanation.
Senator Hoffman stated that during the first hearing on this
legislation, it was noted that the Administration opposes
additional funding for cessation programs. However, he stated that
were the Legislature "to really be interesting in lowering
consumption of cigarettes, we need to put our money where our
mouths are." He acknowledged that the Committee has heard testimony
stating that increasing the price of cigarettes would result in "a
drastic reduction in cigarette consumption." However, he pointed
out that the "Cigarette Importation FY 1996 - FY 2002 and Cigarette
Stockpiling in FY 1998" chart [copy on file] depicts that while the
quantities initially decreased, the amount has continued to rise
since that time as people who tried to stop smoking or tried to
limit their smoking due to the expense, failed and began to smoke
again.
Senator Hoffman also stated that people stockpiling cigarettes in
anticipation of the tax increase in 1997, was also a factor in the
chart's numbers. Continuing, he declared that while price might be
a determent, such things as advertising campaigns must be used to
reinforce people's decisions to refrain from smoking. He stated
that this amendment "is intent language only" in that it would
specify the intent to use a portion of the revenue for education,
and would not be required to be a component of the law. He opined
that the students in "Project Citizen" desire this course of
action. Therefore, he stated that rather than just increasing
revenue, the Legislature should use that revenue "to really have an
impact on the reduction of cigarette consumption."
Co-Chair Green voiced her objection to the amendment by stating
that she has "witnessed" the end result of other "intent languages
that have been added to taxation on various products." She stated,
"that it ends up being the expectation, and the campaign, and the
entire conversation that goes on from that time forward." She
stressed that Legislators "have a huge task, every year" of
determining a budget based on priorities, and furthermore, she
continued, "while some might personally feel that a tobacco
education program" is important, "it is not the only thing that we
need to consider." She also voiced being "conflicted" in that the
aforementioned chart "could be interpreted in many ways." She
stated, therefore, that were the price of tobacco a critical factor
in affecting a person's behavior, and were the educational efforts
of the Alaska Tobacco Alliance and other entities being successful,
then the chart should reflect a continuing decline and the need to
fund further advertising campaigns should be diminishing.
Co-Chair Green stated that "the hope" of a tax increase is that it
would cause people to buy less tobacco and therefore, "change
behavior." She asked whether any calculations have been done to
support this position.
Ms. Bales stated that Senator Hoffman has interpreted the chart is
a manner which was not intended. She stated that the chart has been
provided to reflect what monthly average consumption has been from
1997 through 2003 in that it indicates that consumption is higher
in the summer months than other months. The graph lines, she
continued, portray the difference incurred by the tax increase and
the stockpiling activity. She stated that, "the chart was prepared
to support the Department's position that we would like a floor
stock tax so that the State," rather than the distributors, would
benefit from receipt of the tax on floor stock.
Ms. Bales stated that another chart titled "Alaska Reported Taxable
Cigarettes" [copy on file] has been provided that reflects that the
tax implemented in 1997 has resulted in 22-percent decrease in
taxable cigarettes consumed in the State. She informed that it is
anticipated that this proposed tax increase would result in an
additional eight-to-ten percent reduction. She apologized for the
confusion associated with the first chart and stated that the
"Alaska Reported Taxable Cigarettes" chart better reflects the
decline in consumption, by year.
Co-Chair Green asked for verification that the one-dollar per pack
increase would be expected to result in a further eight to ten
percent decrease in consumption. She suggested that the Committee
amend this bill to implement an eight to ten dollar per pack tax
and call it a punitive tax. She stated that she would propose this
as Amendment #9.
Co-Chair Wilken stated that Co-Chair Green's amendment would be
addressed upon conclusion of action on Amendment #8.
Senator Olson voiced his support of Amendment #8. He stated that
were the Legislature to be serious about curbing tobacco use, then
support of "effective" education programs should be continued.
Senator Hoffman removed his objection. He noted that while the
adoption of this amendment and the spending of money on cessation
programs might negate the ability to generate $35 million as
reflected in the fiscal notes, the "underlying motive" of this
legislation is to stop people from smoking cigarettes and smokeless
tobacco; specifically to prevent "newcomers" from joining in the
smoking arena. He urged the members "to adopt these words that are
not law."
Co-Chair Wilken objected to the amendment for sake of discussion.
Senator B. Stevens asked how much money is currently spent on
cessation efforts.
Ms. Bales responded that currently "20 percent of the Tobacco
Master Settlement agreement payments go the Tobacco Use Education
and Cessation Fund." She stated that this equates to approximately
$5 million per year. She voiced the understanding that the
Department of Health and Social Services and the United States
Social Services have estimated that the State should spend
approximately $8 million each year on these efforts.
Senator B. Stevens asked for confirmation that currently five
million dollars is spent and that the national and Department
recommendation is that eight million be spent.
Ms. Bales concurred, and furthered that this is the level suggested
by the Center for Disease Control (CDC).
Senator B. Stevens asked whether that number is based on the
State's population and the level of cigarette sales.
Ms. Bales replied that it is.
Senator B. Stevens whether this "would be an additional seven to
the five."
Senator Hoffman affirmed and further argued that were the State "to
be at the upper end of the taxation level," it should also be at
the upper end of the efforts to curb smoking.
Co-Chair Green recalled that, "the greatest expense the State bears
currently is in the Medicaid arena, in the funds that are paid" to
support of health care and assistance for those who smoked "in
their earlier life." She asserted, "we spend more than 20 percent
of our budget, in total…in that one line item. "
Co-Chair Green stated that the Department of Health and Social
Services does not support the level of funding recommended by the
CDC.
Senator Olson asked for confirmation that the eight million dollar
recommendation was issued by the CDC.
Ms. Bales affirmed and stated that it is presented on the CDC
website.
Senator Olson noted that, contrary to this information, he had
received information from the American Cancer Society that the CDC
has recommended $16 million be spent. He noted that currently $4.89
million is spent on cessation programs.
EMILY NENON, Alaska Advocacy Manager, American Cancer Society,
testified via teleconference from Anchorage, and stated that "the
CDC recommends a minimum level of funding for a comprehensive
tobacco control program in Alaska to be $8.1 million" with an
optimum level to be $16.5 million. She stressed that the American
Cancer Society "recognizes that the tobacco tax has value in and of
itself." [NOTE: Due to coughing, her remaining remarks were
indiscernible.]
Senator Bunde stated that while recognizing that letters of intent
usually have a short life span per the administrations' historical
record in this regard, there has been "considerable discussion in
the past as to how much money Alaska's various health organizations
could absorb and use productively." He opined that this concern
should be part of the funding equation. He also echoed Co-Chair
Green's comments regarding "the major cost" incurred to the State's
Medicaid program as a result of smoking, and communicated that this
is his typical response to people who say that they are an adult
engaging in a legal activity. He stated that his argument would be
"disarmed" were someone to indemnify the State from the health
costs incurred by use of tobacco. However, were this not to occur,
he continued, this letter of intent would probably have a short
life span and frequent arguments would continue in favor of
providing the Legislature with sufficient budgeting flexibility "to
address issues as they ebb and flow" in the State. He concluded by
stating that he is not in favor of the letter of intent even were
it to have a longer life span that one usually has.
Senator Hoffman acknowledged that the State does receive money and
funds for tobacco cessation; however, he continued some of those
funds are used by the Department of Health and Social Services to
address smoking related illnesses. He noted that the line item for
tobacco prevention control in the House of Representatives proposed
FY 05 budget is $4.424 million, and the Senate's is $4.58 million.
These numbers, he calculated are at the fifty percent mark of the
DCD recommendation of $8.8 million and 25-percent of the optimum
$16 million level. He reiterated that were the Legislature "truly
interested in deterring smoking," this amendment should be adopted.
A roll call was taken on the motion.
IN FAVOR: Senator Olson, Senator B. Stevens, and Senator Hoffman
OPPOSED: Senator Bunde, Co-Chair Green, and Co-Chair Wilken
ABSENT: Senator Dyson
The motion FAILED (3-3-1)
Amendment #8 FAILED to be adopted.
Amendment #7: This amendment deletes Sec.13 on page four, lines 24-
27. The language being deleted reads as follows.
Sec. 13. AS 43.50.610 is amended be adding a new subsection to
read:
(b) Cigarettes seized under AS 43.50.500 - 43.580.700 are
forfeited to the state. After notice and an opportunity for a
hearing, the commissioner shall destroy the cigarettes
forfeited under this section.
In addition, on page four, line 28, "AS 43.50.620 is repealed and
reenacted" is deleted and replaced with "AS 43.50 is amended by
adding a new section"; on page four, line 29, "Sec.43.50.620" is
deleted and replaced with "Sec. 43.50.625"; on page four, line 30,
"if" is deleted; and on page four, lines 30 and 31, "would not be
entitled to remission, they" is deleted.
Finally, the amendment deletes Section 16, in its entirety. The
language being deleted in located on page eight, lines 27 through
31 and reads as follows.
Sec. 16. The uncodified law of the State of Alaska is amended
by adding a new section to read:
REVISOR'S INSTRUCTION. The revisor of statutes is
instructed to change the heading of AS 43.50.610 from
"Unstamped cigarettes as contraband; seizure" to "Unstamped
cigarettes as contraband; seizure; forfeiture."
Co-Chair Wilken noted that Amendment #7, having to do with
forfeiture, is again before the Committee for consideration.
MIKE BARNHILL, Assistant Attorney General, Commercial/Fair Business
Section, Civil Division (Juneau), Department of Law, stated that
this amendment addresses some drafting issues in that the
forfeiture provision, AS 43.56.20, that exclusively addresses
cigarettes was rolled into 43.50.625. Continuing, he noted that
Legislative Council suggests that that provision remain as it
currently is, and therefore, he contended, this amendment would
delete the language in the bill that moves that section. He advised
that this would be acceptable to the Department of Law. The other
language being addressed in this amendment, he continued, is
located in Section 14, subsection (j) on page seven, which
addresses the provision of forfeiture "regarding relief from
mandatory forfeiture." He stated that Legislative Council is
suggesting "minor word changes that would enhance the clarity of
the statute." He stated that the Department does not object to this
change.
Mr. Barnhill continued that the last change proposed in Amendment
#7 would delete language on page eight of the bill, which would
instruct the reviser to rename the heading from "Unstamped
Cigarettes as Contraband Seizure to Unstamped Cigarettes as
Contraband Seizure/Forfeiture." He stated that this is conforming
language and that the Department is not opposed to this change.
Co-Chair Green asked whether Section 14, regarding forfeiture
provisions, beginning on page four, line 28 is new language.
Sec. 14. AS 43.50.620 is repealed and reenacted to read:
Sec. 43.50.620. Forfeiture of other property. (a) The
following are subject to forfeiture.
(1) material and equipment used in the manufacture,
sale, offering for sale, possession for sale, barter, or
exchange of cigarettes for goods and services in this state in
violation of AS 43.50.500 - 43.50.700;
(2) aircraft, vehicles, or vessels used to transport
or facilitate the transportation of cigarettes manufactured,
sold, offered for sale, possessed for sale, or bartered or
exchanged for goods and services in this state in violation of
AS 43.50.500 - 43.50.700;
(3) money, securities, negotiable instrument, or
other things of value used in financial transactions derived
from activity prohibited under AS 43.50.500 - 43.50.700.
(b) Property subject to forfeiture under this section may
be actually or constructively seized under an order issued by
the superior court upon a showing of probable cause that the
property is subject to forfeiture under this section.
Constructive seizure is effected upon posting a signed notice
of seizure on the item to be forfeited, stating the violation
and the date and place of seizure. Seizure without a court
order may be made if
(1) the seizure is incident to a valid arrest or
search;
(2) the property subject to seizures is the subject
of a prior judgment in favor of the state; or
(3) there is probable cause to believe that the
property is subject to forfeiture under (1) of this section;
property seized under this paragraph may be held for no more
than 48 hours unless an order of forfeiture is issued by the
court before the end of that time period.
(c) Within 30 days after a seizure under this section,
the Department of Public Safety shall make reasonable efforts
to ascertain the identity and whereabouts of any person
holding an interest, or an assignee of a person holding an
interest, in the property seized, including a right to
possession, or a lien, mortgage, or conditional sales
contract. The Department of Public Safety shall notify the
person ascertained to have an interest in the seized property
of the impending forfeiture, and before forfeiture the
Department of Law shall publish, once a week for four
consecutive calendar weeks, a notice of the impending
forfeiture in a newspaper of general circulation in the
judicial district in which the seizure was made, or if no
newspaper is published in that judicial district, in a
newspaper published in the state and distributed in that
judicial district.
(d) Property subject to forfeiture under (a) of this
section may be forfeited
(1) upon conviction of a person for a violation of
AS 43.50.640 or 43.50.650; or
(2) upon judgment by the superior court in a
proceeding in rem that the property was used in a manner
subjecting it to forfeiture under (a) of this section.
(e) The owner of property subject to forfeiture under (a)
of this section is entitled to relief from the forfeiture in
the nature of remission of the forfeiture if, in an action
under (d) of this section, the owner shows that the owner
(1) was not a party to the violation;
(2) had no actual knowledge or reasonable cause to
believe that the property was used or was to be used in
violation of the law; and
(3) had no actual knowledge or reasonable cause to
believe that the person committing the violation had
(A) a criminal record for violating this
chapter; or
(B) committed other violations of this chapter.
(f) A person other than the owner holding, or the
assignee of, a lien, mortgage, or conditional sales contract
on, or the right to possession to property subject to
forfeiture under (a) of this section is entitled to relief
from the forfeiture in the nature of remission of the
forfeiture if, in an action under (d) of this section, the
persons shows that
(1) the person was not a party to the violation
subjecting the property to forfeiture;
(2) had no knowledge or reasonable cause to believe
that the person committing the violation had
(A) a criminal record for violating this
chapter; or
(B) committed other violations of this chapter;
(g) It is no defense in an in rem forfeiture proceeding
brought under (d)(2) of this section that a criminal
proceeding is pending or has resulted in conviction or
acquittal of a person charged with violating AS 43.50.640 or
43.50.650.
(h) Property forfeited under this section shall be placed
in the custody of the commissioner of public safety for
disposition according to an order entered by the court. The
court shall order destroyed any property forfeited under this
section that is harmful to the public and shall order any
property forfeited under this section that was seized in a
municipality to be transferred to the municipality in which
the property was seized. Other property shall be ordered sold
and the proceeds used for payment of the expenses of the
proceeding for forfeiture and sale, including expenses of
seizure, custody, and court costs. The remainder of the
proceeds shall be deposited in the general fund.
(i) Upon conviction of a person for violation of AS
43.50.640 or 43.50.650 the court, if an aircraft, vehicle, or
vessel is subject to forfeiture under (a) of this section, and
subject to remission to innocent parties under this section,
shall order the forfeiture of
(1) the aircraft to the state;
(2) the vehicle or vessel to the state if the
defendant
(A) has a prior felony conviction for a
violation of AS 11.41;
(B) is on felony probation or parole; or
(C) has a prior conviction for violation of AS
43.50.640 pr 43.50.650.
(j) Notwithstanding (i) of this section, a court is not
required to order the forfeiture of a vehicle or vessel if the
court determines that
(1) it is the sole means of transportation for a
family residing in a village;
(2) either
(A) the members of the family would be entitled
to remission under this section if they were owners of or held
security interests in the vehicle or vessel; or
(B) if the members of the family would not be
entitled to remission, they were unable as a practical matter
to stop the violation of this chapter making the vehicle or
vessel subject to forfeiture; and
(3) the court can impose conditions that will
effectively prevent the defendant's use of the vehicle or
vessel,
(k) The title to a vehicle or vessel, forfeited to the
state under this section may be transferred by the state to a
municipality or the local governing body of a village for
official use by the municipality or village, on condition that
the vehicle or vessel not be available for use by the
defendant.
(i) As used in this section, "village" means a community
of less than 1,000 persons located off the interconnected
state road system.
Mr. Barnhill responded that Section 14 is this new section
addressed by Legislative Council. He stated that existing language
regarding cigarettes, as currently specified in AS 43.50.620, would
remain as is.
Co-Chair Green asked for clarification as to whether a forfeiture
provision had been in effect prior to this.
Mr. Barnhill responded that there currently exists a forfeiture
provision pertinent to the forfeiture of cigarettes only. This
bill, he continued, "would expand that language to include assets
used in trafficking cigarettes."
Co-Chair Green voiced objection to the amendment.
Senator Olson voiced concern regarding the forfeiture of expensive
transportation assets; specifically aircraft, helicopters and boats
that are used in areas of the State that are not connected by a
road system. He asked what types of provisions are included in the
bill to provide safeguards in this arena; specifically to address
common carrier aircraft concerns that they might be "unduly
inhibited if they for some reason are charged with transportation
of tobacco products."
Mr. Barnhill responded that this is a valid concern. He shared that
the Alaska Supreme Court addressed the issue of forfeiture several
years prior in a case titled State vs. Wilder. This case, he noted
involved a hunter who while aerial hunting in a Cessna airplane and
violated the hunting laws, and consequently, the State seized the
aircraft. Continuing, he noted that the Cessna financing
corporation who had a security interest in the airplane protested
the forfeiture. The Court, he continued, ruled that the corporation
had a Constitutional right to be protected from forfeiture. He
shared that "ever since that case, all forfeiture statutes in the
State have been drafted to protect the rights of innocent owners,
including rights of interested owners with security interest in
assets. This bill, he assured, has the provisions to protect
innocent owners as well as a village situation where a family might
rely on a mode of transportation. He stressed that, "even if the
forfeiture is supposed to be mandatory, this bill provides for
relief from mandatory forfeiture." He stressed that the intention
of this forfeiture provision "is to go after the bad guys, the
traffickers of un-stamped cigarettes that are doing it for re-
sale…that are criminally trying to make a business out of this."
Senator Olson understood to whom the bill is intended to target;
however, he voiced concern for the unintended circumstance in which
some innocent person's aircraft might be "red-tagged," and
therefore unavailable. He understood that that person is not
protected.
Mr. Barnhill responded that an innocent person is protected and
that the likelihood that their aircraft would get red-tagged by the
Department of Public Safety "is very small." However, he
communicated that were their aircraft red-tagged, there are
provisions through which they could get their property back "if
indeed they are innocent."
Senator Olson continued that their innocence would be decided by a
court, however, if an aircraft were red-tagged, it would therefore
be unavailable for perhaps sixty days.
Mr. Barnhill, reiterating that Senator Olson's concerns are valid,
pointed out that provisions on page five, lines ten through 22, of
Section 14, subsection (3) (b) specify that before an asset could
be seized, the Department of Public Safety must appear before a
Court and establish that there is probable cause to seize the
asset. He stated that this is the same standard that is in place to
obtain a search warrant. Therefore, he stressed, the Court must be
convinced that there is probable cause. He understood that
forfeitures are relatively rare as there has been, he recalled,
only twelve in the past year. He stated that there are provisions
in the bill pertaining to grabbing property without a court order
but that the Department of Public Safety would be required to go to
the Court within 48-hours of the seizure and present probable
cause. Therefore, he concluded that provisions are in place to
address Senator Olson's concerns.
Senator Bunde asked whether this forfeiture provision is similar to
those in place regarding illegal alcohol activity.
Mr. Barnhill stated that "this provision was patterned after the
alcohol forfeiture provision" and improved upon.
Senator Bunde opined that were this the case, it would not be
abused.
Co-Chair Green asked whether the transportation of un-stamped
cigarettes might differ from the alcohol forfeiture provision as it
addresses "the importation of a product into an area where it is
illegal to bring the product into the area."
Mr. Barnhill responded that both would be violations of the law "to
which the remedy of forfeiture is available."
Co-Chair Wilken clarified that this is a technical amendment to the
law rather than a change in the forfeiture provision.
Mr. Barnhill concurred.
Co-Chair Green removed her objection.
There being no further objection, Amendment #7 was ADOPTED.
Conceptual Amendment #9: This amendment would impose a ten-dollar a
pack tax.
Chair Green moved for the adoption of Amendment #9. She stated that
"were the purpose of this legislation to stop all consumption of
tobacco products" and result "in a tobacco-free State" then this
amendment should be adopted, as, she stated, a one-dollar tax
increase would not accomplish that goal. She characterized this
legislation "as a punitive tax" as it is designed to change
behavior.
There being no objection, Co-Chair Green WITHDREW her amendment.
Co-Chair Wilken stated that a committee substitute would be drafted
that would incorporate the amendments.
SFC 04 # 89, Side A 10:46 AM
Co-Chair Wilken asked regarding the decision to alter the
percentage of revenue breakout for the School Fund and the general
fund.
Ms. Bales responded that the revenue allocation formula is a policy
call of the Administration. She understood that the entire 1997 tax
increase was allocated to the School Fund, which is a dedicated
fund. She also understood that the reason for allocating funding
into the general fund is to allow those monies to be used for
broader uses such as Medicare reimbursement and possibly as Senator
Hoffman has proposed, to the tobacco use, education, and cessation
fund. She noted that she had developed a worksheet titled "Taxes
and Revenues" [copy on file] for the Committee.
Co-Chair Wilken asked that information be provided to counter his
suggestion to switch the revenue for the general fund to the School
Fund.
Ms. Bales agreed to provide this information.
Co-Chair Wilken ordered the bill HELD in Committee.
Senator Bunde, in response to Co-Chair Wilken's question regarding
whether the revenue generated from this legislation could be
dedicated to the School Fund voiced the understanding that the
cigarette tax was identified as a special fund for the School Fund
prior to Statehood and therefore is grandfathered in as such.
However, he noted that the other tobacco products tax could not be
dedicated in this manner.
Ms. Bales confirmed his remarks.
Co-Chair Wilken understood therefore that the "Taxes and Revenues"
chart appropriately depicts the breakout of the School Fund, as it
exists under current law compared to that proposed in this
legislation. He thanked Senator Bunde for the explanation.
CS FOR SENATE BILL NO. 307(JUD)
"An Act relating to the amount of the bond required to stay
execution of a judgment in civil litigation involving a
signatory, a successor of a signatory, or an affiliate of a
signatory to the tobacco product Master Settlement Agreement
during an appeal; amending Rules 204 and 205, Alaska Rules of
Appellate Procedure; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken explained that this bill, which is sponsored by the
Senate Judiciary Committee, would establish "a $100 million limit
on the appeal bond" that the State requires tobacco Master
Settlement Agreement signatories to "post to stay of payment in
regard to a Court judgment."
SENATOR RALPH SEEKINS, Chair, Senate Judiciary Committee, voiced
that he is not associated in any manner with the tobacco industry
and therefore has no conflict of interest in this regard. He
explained that this bill relates to tobacco product Master
Settlement Agreement (MSA), which provides millions of dollars to
Alaska as well as to 45 other participatory states. He cautioned
that the continuing receipt of those funds is being jeopardized "by
huge settlements and judgments that have been awarded against the
tobacco companies" that fund the settlement. Continuing, he
explained, "that defendants facing large judgment almost always
have the right to appeal them" and oftentimes, their appeal is
successful in either reducing the level of the judgment or negating
it. "In order to stay the execution" of a judgment on appeal," he
continued, "the defendant must post an appeal bond "that usually
equals the amount of the judgment." He disclosed that other states
have enacted regulations placing limits on the amount of the appeal
bond.
Senator Seekins informed that the appeal bond required in Alaska is
"ordinarily the amount of the judgment remaining unsatisfied, plus
appeal costs and interest." This bill, he explained would instill
"a $100 million dollar limit on the appeal bond that MSA
signatories must post to stay the execution of any future
judgment."
Senator Seekins clarified that this bond limit would not alter any
other existing component in law including such things as how a
trial is conducted or who might win or lose a lawsuit, and it does
not affect plaintiff's rights to fully collect a judgment were it
upheld on appeal. Furthermore, he stressed that provisions in the
bill would allow the court "to require a bond amount up to the
value of the judgment" were it determined that "the appellant were
dissipating his assets to avoid paying a judgment."
Senator Seekins declared that were this legislation adopted, Alaska
would join with 30 other states that have enacted similar efforts
in order to protect the continuation of the Master Settlement
Agreement payments.
Co-Chair Wilken noted that CS SB 307(JUD), Version 23-LS1609\I is
before the committee. He pointed out this version differs from the
original bill in that it would increase the level of the required
bond from $25 million to $100 million.
Senator Seekins concurred.
Co-Chair Wilken pointed out that Members' packets contain a
spreadsheet titled "Enacted Appeal Bond Legislation" [copy on file]
that denotes other states' legislative action regarding the appeal
bond limit and a handout titled "Alaska Should Join Other State To
Limit The Size Of Appeal Bonds and Protect Its Tobacco Settlement
Revenues," [copy on file], both of which have been provided by the
Covington & Burling law firm.
KEITH TEEL, Attorney with Covington & Burling, a Washington D.C.
law-firm representing the four principal payers of the MSA: Philip
Morris USA, R.J. Reynolds, Lorillard Tobacco Company, and Brown &
Williamson Tobacco Corporation, noted that while Senator Seekins is
correct in that 46 states are participants in the MSA, the
remaining four states had established individual settlement
agreements with the tobacco companies prior to the MSA. Therefore,
he clarified that all 50-states are receiving settlement agreement
payments.
Mr. Teel communicated that the MSA awards eight billion dollars
annually to the fifty States "and would do so into perpetuity." He
clarified that by perpetuity he means that the payments would
continue, "as long as states are around and the companies are
around and solvent." He warned however, that the litigation issue
has surfaced since the inception of the MSA. This issue, he
communicated, consists of such things as class action law suits
"which have proven to be particularly troublesome" at the trial
level. He noted that twelve of these class action lawsuits have
gone to trail, and he noted that the Engle case in Florida resulted
in an award of $145 billion, and he stated that, as part of the due
process rights afforded in this country, the tobacco companies
appealed that judgment. However, he noted that difficulty could
arise were a plaintiff to request, as is their right, an immediate
start to the payment of the judgment. This payment, he communicated
could transpire via such means as attaching the plaintiff's bank
account, "and basically taking its working capital." Therefore, he
noted, plaintiffs "who get hit" with these types of large judgments
often choose to put a stay on the execution of these payments.
Avenues to do this, he disclosed, would be to file a supersedeas,
or appeal, bond or, he noted a notice to appeal without a bond as
is permissible in some states. He reviewed the history of appeal
bonds, and stated that, in Alaska, the amount of the appeal bond
would equate to the amount of the judgment plus interest and appeal
costs.
Mr. Teel disclosed that "the problem" with the appeal bond is that,
in the Florida case for instance, the cost of the bond amounted to
$181 million. Some bond expenses, he declared, could result in
bankruptcy and ultimately a company's going out of business. Were a
company unable to afford to post a bond in the amount determined by
the Court, he attested, that company could be forced to file for
bankruptcy in order to stop the plaintiff from taking its assets
during the appeal. He disclosed that, "the problem with being
driven into bankruptcy is that it impacts all kinds of things,"
including the company's payment obligations. He noted that the
Florida case, which took more than three years to appeal, was
important to the companies as the judgment was ultimately reduced
to zero. He also noted that had Florida Legislature not reduced its
limit on the appeals bond prior to the judgment, the companies
might have been forced into bankruptcy, which would have prohibited
any MSA payments.
Mr. Teel stressed that absent a limitation on the expenses
associated with appeal bonds, the ability of companies to pay MSA
payments would be interrupted. Therefore, he attested, legislation
such as this is important.
Mr. Teel referred the Committee to the aforementioned spreadsheet
depicting legislation that states have adopted to address the
appeal bond situation. Some states, he noted, have expanded the
legislation to apply to other types of appeals. He warned that,
without addressing this situation in Alaska, were a class action
lawsuit to transpire and result in a multi-billion dollar verdict,
a negative impact could arise.
Mr. Teel stressed that the goal of this legislation is to limit the
amount of the appeal bond "under State law and to avoid a
bankruptcy situation that might impair" the State or the company's
finances rather than to affect any other aspect of the litigation
process. He noted that the only opposition that has been presented
during the bill's committee process has been from public health
groups who were concerned that this legislation would protect the
industry from liability. This concern, he communicated, is
misplaced as due process allows the right to appeal.
Mr. Teel pointed out that were MSA payers driven into bankruptcy
and thereby placing MSA payments in jeopardy, the State might
suffer a huge fiscal impact during the appeal process. He stressed
that adoption of the legislation would incur no fiscal impact to
the State.
Senator Olson commented that it appears that the plaintiffs in the
Florida class action lawsuit suffered "a disservice" by the action
of the Florida court to reduce the $145 billion judgment to zero.
Mr. Teel agreed that at the end of the appeal process, a lot of
people ended up with zero. However, he reiterated that the appeals
process is very important to defendants dealing with class action
lawsuits, particularly those dealing with personal injury
situations such as the Florida case. He noted that there are
tremendous law requirements involved in getting a class action suit
properly certified. He noted that the duration of that trial was
one year at a cost of millions of dollars.
Co-Chair Wilken ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 11:06 AM
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