Legislature(2003 - 2004)
05/18/2003 11:20 AM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 168(FIN) am
"An Act relating to issuance and revocation of licenses
for the importation, sale, distribution, or manufacture
of cigarettes and tobacco products; relating to a tax
refund or credit for unsaleable, returned, or destroyed
tobacco products; relating to restrictions on and
penalties for shipping or transporting cigarettes;
relating to records concerning the sale of cigarettes;
amending and adding definitions relating to cigarette
taxes; relating to the payment of cigarette taxes;
relating to penalties applicable to cigarette taxes;
relating to the definition of the wholesale price of
tobacco products; relating to payment of cigarette
taxes through the use of cigarette tax stamps; relating
to provisions making certain cigarettes contraband and
subject to seizure and forfeiture; relating to certain
crimes, penalties, and interest concerning tobacco
taxes and stamps; relating to cigarette sales; and
providing for an effective date."
SENATOR CON BUNDE, SPONSOR, provided information about the
bill. He noted that the bill is not "anti tobacco"
legislation, nor was it the intent to address taxation. The
genesis was a radio spot by an Eastern company, which
advertised the sale of tax-free cigarettes that would not be
reported to the state [for tax purposes]. The Department of
Revenue has been trying to address the leakage in the state
of Alaska's tax law on cigarettes. The Department has
indicated that they cannot enforce the tax law effectively
without a tobacco tax stamp. The Department of Revenue,
during litigation proceedings, was able to obtain a list of
companies that do pay their tax. The federal government will
not join the state in the enforcement of federal law
[Jenkins Act] without a tobacco tax stamp. He referenced the
state of Michigan, which also has a tobacco tax, and noted
that tax revenues in Michigan increased 9 percent when they
added a tax stamp. Hawaii saw a 25 percent increase with a
tax stamp. He stated that for every one percent that tax
revenues increase, Alaska would gain $400 thousand. He
stated that distributors acknowledged that the increase in
tobacco price decreases use by youth. Distributors are
concerned with fair business practices and have asked for a
minimum price, which would prevent sales to youth and
undercutting prices. He concluded that selling tobacco below
price was poor public policy.
Senator Bunde noted that the Heart Association and the
Alaska Tobacco Distributors both supported the bill.
Vice-Chair Meyer expressed support for the legislation but
questioned if it were possible to put the burden on the
distributor. Representative Bunde noted that other states
have forced the industry to bear the full tax burden. The
legislation allows the industry to deduct the costs of
collecting the tax, for example investment in equipment
needed to stamp the cigarettes.
Vice-Chair Meyer observed that even though the bill will
cost the state some money, it would increase tax revenues.
Representative Bunde predicted a $3 million net gain or
more.
Representative Hawker asked if the bill changed the timing
of the tax collection. Representative Bunde speculated that
it did not.
JOHANNA D. BALES, TAX AUDITOR, DEPARTMENT OF REVENUE
testified via teleconference. She noted that she was the
auditor for the state cigarette excise tax. She confirmed
that the tax would continue to be collected monthly. In
response to a question by Representative Hawker, Ms. Bales
noted that the stamp would be purchased up front.
Distributors could post a bond, which is what most
distributors do, to put the actual payment of the tax off
for a month and a half. This is the current practice of the
reporting system. The tax payment is due about a month and a
half after cigarettes are imported.
In response to a question by Representative Stoltze,
Representative Bunde noted that his motivation is to make
tobacco less assessable to teenagers. The motivation of
tobacco distributor is to ensure a fair playing field.
Representative Stoltze asked if using tools for unfair trade
practices might be a more appropriate vehicle, rather than
focusing on a particular industry. Representative Bunde
maintained that a great number of under-priced cigarettes
would be sold before another tool would be effective.
Representative Berkowitz noted that Hawaii and Michigan
achieved different revenue results, and asked if their
statutes were different. Representative Bunde stated that
Hawaii had an aggressive enforcement program.
Ms. Bales confirmed that Hawaii hired eleven enforcement
individuals. She stated that the proposed bill was modeled
after the state of Hawaii's. She added that the amount of
tax collected in Hawaii resulted in an initial increase of
25 percent, the final numbers showed a 50 percent increase,
from $40 million to $61 million in tax.
Co-Chair Harris noted his support of the bill, but reference
complaints by wholesalers. Representative Bunde stated that
smaller companies complained that larger wholesalers, like
Costco, could sell tobacco under cost. He acknowledged that
every business wants to preserve their advantage, but
emphasized that every carton sold below cost promotes
smoking, since it has been proven that price affects
consumption, especially by young people. He also noted that
imposing a minimum might affect fairness across the market.
Co-Chair Harris stated that wholesalers had threatened to
close their stores in Alaska if the bill passes.
Representative Bunde speculated that a company whose profit
margins were so narrow might not be doing viable business.
Representative Kerttula asked if the tax was the same
regardless of price. Representative Bunde noted that the tax
was $1 per pack, regardless of price. He clarified that
companies would now have to meet the minimum price.
Ms. Bales explained that the minimum price stated that
cigarettes could not be sold for less than the wholesale
purchase price, plus tax, plus cost of doing business.
Companies could use a 4.5 percent for wholesale or 6 percent
at retail above wholesale to determine price. The price is
not a dollar figure.
BOBBY SCOTT, JAN'S DISTRIBUTING, ANCHORAGE, testified via
teleconference in support of the bill. He noted that his
company had worked on the bill with Representative Bunde and
Ms. Johanna D. Bales, Tax Auditor, Department of Revenue.
MIKE ELERDING, NORTHERN SALES, testified via teleconference
in support of the bill. He summarized his written testimony
(copy on file.) He discussed the history of the bill, and
noted favorable testimony received along the way. He
concluded that the legislation: provides increased revenue
with no new taxes, provides a reasonable profit margin,
creates a level playing field for Alaskan distributors, and
ends predatory pricing that attracts youth consumption. He
pointed out that 25 other states have similar laws.
JOHN AYERS, KEYSTONE DISTRIBUTION SERVICES, ANCHORAGE,
testified via teleconference in support of an amended
version of the bill. He noted that his company provides
storage and distribution for tobacco companies. He asked
that the bill be amended to remove the requirement for a
customs bonded warehouse. He stated that it would cost his
company $100 thousand to become a customs bonded warehouse.
He maintained that the requirement would result in products
being distributed from Seattle. He also questioned the need
for a minimum price. He asked what would happen if other
products were sold at a loss, whether legislation would fix
those prices. He also noted that tribal entities were
exempted and questioned what would happen to the revenue
stream if tribal status were enlarged.
TOM MCKAY, SR., VICE PRESIDENT, COSTCO WHOLESALE expressed
concerns regarding minimum pricing and discounts for fixing
stamps. He noted that he was responsible for the operations
and purchasing for the three Alaskan stores. He noted that
Costco had been unaware of the attachments regarding minimum
pricing. He referred to page 9, line 22, which would allow a
discount to some for fixing stamps. He noted that Costco did
not oppose tax stamps, but questioned the need for discounts
for certain distributors. He stated that under this
provision, those distributing through Costco would be
penalized, and asked that this be addressed.
Mr. McKay referred to the wholesale level of distribution,
and stated that Costco was a wholesaler as well as retailer.
He stated that they supplied small operations, and noted
that the price affected where these businesses chose to buy.
He noted that if this provision were enacted, there would be
a loss of 68 jobs in Anchorage, and a great loss of business
in Juneau. He observed that Costco has a strict policy of
never selling goods below cost. He maintained that tobacco
is not generally sold below cost by anyone. He noted that
markups range around 14 percent. The marketplace and
efficiency in sales determine price. The cost of selling
tobacco is below other products.
Mr. McKay explained that the cost for a carton of cigarettes
was $2 thousand; on this they are discounted 2 percent for
paying in a prompt fashion, which is built into their price,
as they do with all products. Under the bill, these savings
cannot be passed on. He referred to page 20, line 21,
Section 3, and quoted: "exempts the customary discount for
cash". He explained that he must now take a markup of $90
for this exemption. He contrasted this to lower markups for
other products, and stressed that the State was now going to
monitor these markups.
Mr. McKay noted a provision that might also force Costco to
prove a higher cost of doing business. He stated that his
labor costs were 4 percent, rent was 1 percent, depreciation
and selling costs (which he stated was ambivalent) and
licenses, and taxes, were all included in costs of doing
business. He noted that their costs were 80 percent. He
concluded that the bill was onerous and difficult from a
business standpoint. He maintained that to discourage
smoking, the tax should simply be raised. He stated that he
was aware of only one other state has minimum pricing on
tobaccos: Montana. He suggested that the legislation be
changed to state that the product cannot be sold below cost,
and allow cost to be set in a fair fashion.
Representative Berkowitz observed that a rational business
response might be to set up a subsidiary to handle
exclusively tobacco products. Mr. McKay acknowledged that it
would be a possibility, but questioned the implications of
such a practice.
Vice-Chair Meyer asked if the competitors were retailers or
wholesalers. Mr. McKay noted that wholesalers were their
competitors, and noted that they handled 15 percent of the
cigarettes distribution market. Vice-Chair Meyer asked how
Alaska would differ from Hawaii and Washington. Mr. McKay
noted that these states did not have a minimum price
requirement.
TAPE HFC 03 - 101, Side B
In response to a question by Representative Whitaker, Mr.
McKay clarified that they purchase from RJR and Brown
Williamson through a bonded warehouse in Alaskan, which is a
different class than a distributor.
Representative Whitaker observed that there would be a
sliding scale paid for stamps based on volume, and asked the
effect on Costco. Mr. McKay noted that they would not get
the discount due to their volume and observed that the
sliding scale was inverse of the normal economy of scale.
Representative Hawker clarified that in large volumes for
significant distributors; there would be no discount
available for those purchasers at lesser levels. He referred
to Page 9, Line 27:
The discount under this subsection is equal to the sum
of the amounts calculated using the following
percentages of denominated value of stamps purchased by
a licensee under this section in a calendar year:
(1) $1,000,000 or less, three percent;
(2) The amount that is more than $1,000,000 but
not more than $2,000,000, two percent;
(3) The amount that is over $2,000,000, zero
percent., regarding the discount, and speculated
that all distributors were availed of the same
discount.
Representative Hawker summarized that everyone is availed of
an equal discount. Mr. Kay acknowledged that he
misunderstood the provisions. Representative Hawker
concluded that there is no objection.
Representative Hawker refuted the statement that only one
other state has minimum pricing on tobacco products.
According to the Minnesota House of Representative Research
Department there are 25 states that prohibit the sell of
cigarettes below cost. An additional seven states have
general fair trade law that prohibits the sell of cigarettes
below cost. Mr. McKay reiterated that he was only aware of
the state of Montana.
Representative Hawker MOVED to report CSSB 168 (FIN) am out
of Committee with individual recommendations and the
accompanying fiscal note. There being NO OBJECTION it was so
ordered.
CSSB 168 (FIN) (am) was REPORTED out of Committee with "no
recommendation" and two fiscal notes: one new fiscal impact
note from the Department of Revenue and zero fiscal note #2
from the Department of Law.
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