Legislature(2005 - 2006)CAPITOL 120
04/13/2005 01:00 PM JUDICIARY
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* first hearing in first committee of referral
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HB 260 - TOBACCO: BONDS; TAX; POSSESSION BY MINORS 1:31:51 PM CHAIR McGUIRE announced that the next order of business would be HOUSE BILL NO. 260, "An Act relating to purchase and possession of cigarettes or tobacco products by a person under 19 years of age, to licenses for persons engaged in activities involving tobacco products, to taxes on cigarettes and tobacco products, and 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, 205, and 603, Alaska Rules of Appellate Procedure; and providing for an effective date." REPRESENTATIVE KEVIN MEYER, Alaska State Legislature, as chair of the House Finance Committee, sponsor, presented HB 260. He said that HB 260 addresses the issues of tobacco taxation, possession and purchase of tobacco products by minors, and limits on the supersedeas bond that signatories of the Master Settlement Agreement (MSA) must post to stay an execution of judgment in civil tobacco-related litigation. He said his main goal in carrying the bill is to further the efforts being made to prevent children from starting to smoke in the first place. Studies indicate that if a person doesn't start smoking before the age of 19, there is a 90 percent chance that he/she will never start smoking. The bill increases the tax on "smokeless" tobacco products from 75 percent to 100 percent of the wholesale cost, and accelerates the currently instituted increase on cigarettes. REPRESENTATIVE MEYER relayed that under HB 260, individuals who import tobacco products for their own personal consumption will be required to purchase a buyer's license from the Department of Revenue (DOR) for a fee of $25; such licensure will enable the DOR to collect the required taxes from the buyer. The bill also proposes to set the supersedeas bond limit at $100 million. He offered his understanding that this bond limit will not change any other aspect of the law, will not change the rules by which a trial is conducted, will not affect who ultimately wins the lawsuit, and will not affect the rights of plaintiffs to fully recover damages. Placing a limit on such bonds will ensure that the state will continue to receive its MSA payments, he posited, and predicted that because Alaska is such a small state, it is doubtful that the proposed bond limit would ever be reached anyway. REPRESENTATIVE MEYER said it is important to keep the MSA payments coming into the state, because that money goes toward the state's education/cessation programs. Currently 26 other states have established supersedeas bond limits, and it would be appropriate for Alaska to do the same, he concluded. 1:37:30 PM MICHAEL PATTERSON, President, Lucky Raven, Inc., said he would like to see improvements made to the enforcement provisions of the bill. Currently, for a first offense, a business will lose its license. So for some businesses, such as his, that type of penalty would in essence shut the business down, whereas for other businesses, such as those that are not primarily in the business of selling tobacco, that type of penalty wouldn't have that great an impact. He suggested that substantial financial penalties - both on the individual that performs the illegal sale, and on the business itself - would be a greater deterrent; for example, a financial penalty of $5000 for a first offense, and $10,000 for a second offense. "I believe ... making the clerk also liable for the offense ... will help clear up part of the difficulties," he remarked. MR. PATTERSON said he would also like to see more done in the way of education regarding tobacco sales; for example, currently the alcohol industry is benefiting from the "techniques in alcohol management" (TAM) program, and he would like to see similar educational efforts made in the tobacco industry. Also of concern to him is the enforcement of the tax on other tobacco products. Currently there isn't any state-to-state reporting and it is very difficult to track Internet sales of cigars, for example, and so trying to collect the tax on such sales will also be very difficult, he concluded, and predicted that this gap in enforcement will leave the door wide open for most consumers to look out of state when purchasing their tobacco products, and could actually discourage people from doing business in Alaska. CHAIR McGUIRE next ascertained that a representative from the Department of Health and Social Services (DHSS), Tobacco Prevention and Control Unit, was available to answer questions. 1:41:14 PM DALE FOX, Executive Director, Alaska Cabaret Hotel Restaurant & Retailer's Association (Alaska CHARR), relayed that because of the bill's recent introduction, CHARR has not yet formally taken the issue up. Notwithstanding this, he offered: It's a mixed bag. We think there's some really good provisions in this bill, and some that probably would not be supported by our group. First let's talk about the positives. Obviously, as the folks who run the TAM program in the alcohol industry, we believe that strengthening the efforts to make sure that everyone ... who is trying to get tobacco [is carded] and that there's adequate education for the frontline employees is critically important. The "We Card" program, which is in the state now and [is] something we hope to expand, we think is a good step in the right direction. And so, yes, we should do everything that we can to prevent youth from getting access to tobacco prior to reaching the age [of 19]. The second provision we think is a very good pro- business stance is the bond cap. ... The tobacco companies [have] ... shown good faith with the Master Settlement Agreement, they're making their payments, and we think that anything that has the potential of putting somebody out of business is bad legislation, and so a bond cap provision that allows people to move forward through the courts equitably is a very positive effort. In terms of the taxes, accelerating the taxes on tobacco and on smokeless tobacco, in general the Alaska CHARR group has come out against singling out specific products in the marketplace for special taxes, and I would suspect that they would do that on this as well. ... Those are general comments that I think are reflective or our industry. Thank you very much. 1:44:05 PM PETE ROBERTS opined that the bond limitation being proposed in the bill is a good idea, but that the rest of the bill should be tossed. He elaborated: We just raised our taxes on tobacco products; [they] were to be phased in. We haven't even gotten through that period and here somebody wants to do good and raise them some more. I think that the idea of trying to keep teens from smoking is a good idea. On the other hand, I think that most of the tobacco is bought by adults, and this is punitive and it's social engineering. And I think it's bad state policy and not very consistent with the republican ideals, so I'm against it. Thanks. 1:45:21 PM JAMES N. GARDNER, Attorney at Law, Gardner & Gardner, P.C., said he would be speaking on behalf of Philip Morris USA (PA USA) regarding the bond provisions in HB 260. He characterized the MSA as being very important to Alaska because it delivers millions of dollars in revenues to the state annually; however, the continued receipt of these funds is threatened by the huge judgments that have been awarded against the tobacco companies that are funding the settlement. Although defendants in such cases almost always have the right to appeal, and although in many instances such appeals have been successful - either in reducing the judgment or in overturning the judgment entirely - in order to stay the execution of judgment on appeal, defendants must post a supersedeas bond. MR. GARDNER said that in the states that do not already have a limit on that type of bond, the amount of the bond usually equals the amount of the judgment itself, and if a company that is a defendant in such a case cannot afford to post a bond in the amount set by the court, the company may be forced to file for bankruptcy in order to stop the plaintiff from taking the companies assets during the appeal process. That kind of a stay could disrupt payments by the company to Alaska and all the other states that receive MSA payments. He used a Florida case as an example wherein if there hadn't been a supersedeas bond limit, the company - the defendant - would have gone bankrupt, adding that 33 states thus far have recognized the possibility of risk from large supersedeas bond requirements and that another 5 states do not require supersedeas bonds at all. He, too, offered his belief that passage of HB 260 would not affect either the substantive rights of the litigants or the ultimate right of recovery if the plaintiff prevails following the appeal. 1:48:57 PM MR. GARDNER, in response to questions, said that he is not aware of any cases in Alaska in which a required bond has threatened to put a company out of business; opined that either paying a huge judgment outright or putting up the same amount for a supersedeas bond would be impossible, from a financial standpoint, and therefore the company would be forced to file bankruptcy, which would in turn impede the flow of MSA funds to the states; and offered his belief that although the trial court in Alaska does have some degree of discretion regarding what amount an appeal bond should be set at, as a practical matter, that kind of discretion simply can't cope with the massive reduction that would be necessary to avoid disruption of MSA payments should a "mega verdict" ever be awarded in Alaska. REPRESENTATIVE GARA asked Mr. Gardner whether he would be amenable to a provision that would make it a class C felony to dissipate assets in order to avoid a judgment. MR. GARDNER said he wouldn't agree to such a provision. He noted, though, that Section 12, subsection (b), of HB 260 contains language which says that if an appellee proves by a preponderance of the evidence that an appellant is dissipating assets to avoid the payment of a judgment, a court may require the appellant to post a bond in an amount up to the full amount of the judgment. He opined that such language addresses Representative Gara's concern. REPRESENTATIVE GARA pointed out, however, that that language is merely saying that if a company dissipates assets in order to avoid payment of the judgment, the company then really does have to post the bond, the bond that's automatically required up front in all other cases. His suggestion, he reiterated, is to make it a crime, a class C felony, to dissipate assets in order to avoid paying a judgment; he characterized this as an appropriate penalty particularly if the proposed bond limit is adopted. MR. GARDNER reiterated his belief that the language in subsection (b) of Section 12, specifically the language requiring that a preponderance of the evidence be shown, offers full protection to an appellee. 1:54:01 PM JOHANNA BALES, Excise Audit Manager, Central office, Tax Division, Department of Revenue (DOR), after relaying that she is also the program manager of the division's Tobacco Tax Program, noted that retailers support the proposed taxes on "other tobacco products" that are being purchased through the mail by individuals for personal consumption. With regard to a comment made by Mr. Patterson, she explained that currently there are state-to-state reporting requirements in place, but acknowledged that currently no tax is levied when products are imported by individuals for personal consumption; so although the division is able to identify some such individuals, enforcement of Internet purchases is somewhat problematic. MS. BALES offered her belief that if this provision is adopted, most people will comply with the law, and that its adoption will help protect instate retailers; this is particularly important for the DOR and instate retailers given that an increase in taxes might entice people to buy their tobacco products through the Internet. She concluded by saying that both the DOR and the governor's office supports HB 260. 1:56:56 PM DAVID PARISH, Lobbyist for the American Heart Association (AHA), mentioned that the AHA is an active member of the Alaska Tobacco Control Alliance (ATCA), which is a coalition working closely with the national Campaign For Tobacco-Free Kids. He said that the AHA is still looking at the individual sections of HB 260, especially the "criteria of what is the maximum public-health benefit particularly relative to reducing tobacco consumption among Alaska's youth," and that although the AHA currently has no official position on HB 260, in general the organizations he represents do not support the provision pertaining to a limit on supersedeas bonds, but they do support the provisions regarding the taxation of other tobacco products and the acceleration of the current cigarette tax. 2:00:02 PM REPRESENTATIVE KOTT surmised that everyone there has the children's best interest at heart and wants to ensure that tobacco does not fall into their hands. He asked whether enough time has elapsed to allow an evaluation of whether either of the most recent cigarette tax increases have decreased usage by those who are underage. MR. PARISH said that most of the data that the AHA has only reflects what has occurred since 1997, adding that he would be willing to research the issue further and get that information to the committee. In response to another question, he provided the committee with a copy of the Campaign For Tobacco-Free Kids' position statement. CHAIR McGUIRE, after ascertaining that no one else wished to testify, closed public testimony on HB 260. 2:03:03 PM REPRESENTATIVE GARA made a motion to adopt Amendment 1, to delete Section 12 of the bill, the section that proposes to set a limit of $100 million on supersedeas bonds pertaining to tobacco litigation. REPRESENTATIVE ANDERSON objected. REPRESENTATIVE GARA predicted that the moment that tobacco companies get a special bond amount, [ExxonMobil Corporation] will want a special bond amount. He opined that there is no need to remove the bond amount, particularly given that there has never been a case in Alaska where "the bond amount has been abused by a court" and given that the court has the discretion to lower the bond amount if the amount originally set threatens to put a company out of business or force it to declare bankruptcy. He concluded his argument in favor of Amendment 1 by stating that he did not think the proposed bond limit is needed. REPRESENTATIVE ANDERSON disagreed, and urged members to keep Section 12 in the bill. REPRESENTATIVE KOTT noted other sections of the bill would be affected by the adoption of Amendment 1. 2:06:55 PM REPRESENTATIVE GARA withdrew Amendment 1 for the purpose of restating it. REPRESENTATIVE GARA made a motion to adopt Conceptual Amendment 1, "to delete all provisions that change any of the bond laws or bond rules, either in statutes or in court rules; so delete Section 12 and then all related sections." CHAIR McGUIRE added, "And including in the title." REPRESENTATIVE GARA said, "Yep." 2:07:25 PM A roll call vote was taken. Representatives Kott, Dahlstrom, and Gara voted in favor of Conceptual Amendment 1. Representatives McGuire, Anderson, Coghill, and Gruenberg voted against it. Therefore, Conceptual Amendment 1 failed by a vote of 3-4. 2:07:58 PM REPRESENTATIVE GARA, referring to page 4 [lines 16-18], made a motion to adopt Conceptual Amendment 2, to make it a class C felony to intentionally dissipate assets to avoid payment of a judgment. REPRESENTATIVE ANDERSON objected. REPRESENTATIVE GARA offered his belief that any attempt by a tobacco company to dissipate assets to avoid payment of a judgment should be considered fraud and such a company should therefore be charged with a class C felony, especially if the proposed bond limit is adopted. REPRESENTATIVE GRUENBERG suggested that Conceptual Amendment 2 merely needs to add language specifying that violation of "this subsection" is also a class C felony. REPRESENTATIVE GARA noted that the amendment is conceptual, and said that as long as the drafters specify that the conduct has to be intentional, he will be satisfied with whatever language the drafters choose. 2:10:33 PM A roll call vote was taken. Representatives Dahlstrom, Gruenberg, and Gara voted in favor of Conceptual Amendment 2. Representatives McGuire, Anderson, Coghill, and Kott voted against it. Therefore, Conceptual Amendment 2 failed by a vote of 3-4. REPRESENTATIVE GRUENBERG asked members to look at an e-mail sent by Mike Elerding - President, Northern Sales Company of Alaska, Inc. - specifically at the language referring to statutory language signed into law in 2003: Section 43.50.510 of [Senate Bill 168] stipulated that "for purposes of this section, a stamp is considered affixed only if more than 80 [percent] of the stamp is attached to the individual package" ... "in accordance" with regulations adopted by the Department of Revenue. Subsequent to the passage of this measure it has been demonstrated that the current state of tax stamping technology has not been able to produce an 80 [percent] affixment standard. Based on our actual experience the best estimate for the performance standard of affixing a tobacco stamp on each pack of cigarettes is somewhere in the 55 [percent] range. Only through the collaborative efforts of the state Department of Revenue and industry have we avoided an unmitigated disaster regarding the enforcement of the 80 [percent] performance requirement. Section 43.50.510 needs to be amended to reduce the affixment standard from 80 [percent] down to 55 [percent]. MIKE ELERDING, President, Northern Sales Company of Alaska, Inc., confirmed that his letter referenced statutory language currently in effect. CHRISTOPHER C. POAG, Assistant Attorney General, Commercial/Fair Business Section, Civil Division (Juneau), Department of Law (DOL), relayed that the regulations referred to in AS 43.50.510(d) have not yet been adopted. REPRESENTATIVE GRUENBERG said he would be willing to offer an amendment to reduce the affixment standard currently stipulated in AS 43.50.510(d) down to 55 percent. MS. BALES said that Mr. Elerding is correct in that the cigarette tax stamping machines are incapable of affixing 80 percent of the stamp 100 percent of the time. Because of this, the DOR has drafted an amendment that would lower the affixment standard to 55 percent while also requiring that either four of the letters of the state name or three of the serial numbers be legible. She offered her belief that this amendment would address the problems encountered by the "stampers" and protect state revenues. She mentioned that this amendment has been given to sponsor. REPRESENTATIVE GRUENBERG made a motion to adopt the DOR's suggested amendment as Conceptual Amendment 3, which read [original punctuation provided]: * Section ?. AS 43.50.510(d) is amended to read: (d) For purposes of this section, a stamp is considered affixed only if more than 55  percent of the stamp is attached to the individual package in accordance with (c) of this section and regulations adopted by the department, and (1) four of the letters of the state name printed on the stamp are legible; or (2) three of the serial numbers printed on the stamp are legible. REPRESENTATIVE MEYER said that although he'd intended to offer that amendment in the House Finance Committee, it would be acceptable to him to adopt it in the House Judiciary Standing Committee instead. CHAIR McGUIRE asked whether there were any objections to Conceptual Amendment 3. There being none, Conceptual Amendment 3 was adopted. 2:17:51 PM REPRESENTATIVE GRUENBERG asked whether the issue of training and licensing, perhaps via a program similar to the TAM program, has been addressed. REPRESENTATIVE MEYER indicated a preference for addressing that issue via a separate bill. REPRESENTATIVE KOTT made a motion to adopt [Conceptual] Amendment 4, to delete Section 2; to delete the proposed language change in Section 3, page 2, line 17; and to delete Section 14. He offered his belief that adoption of Conceptual Amendment 4 "essentially takes us back to the bill that was passed by the house last year," and went on to say: "It seems to me, to have this particular issue before us is somewhat disingenuous, since a group of members came to me and asked me to work out a compromise with industry; the compromise that we worked out was in fact the one that passed the House." He offered his belief that adopting the language that Conceptual Amendment 4 proposes to delete would be premature. CHAIR McGUIRE, in response to a question, offered her understanding that Conceptual Amendment 4 would delete the language that deals with acceleration of the tax rate. 2:20:46 PM REPRESENTATIVE MEYER said that the bill seeks a balance, since in order to garner enough votes to pass a supersedeas bond limit, the other provisions were necessary. REPRESENTATIVE KOTT, in response to a question, offered his belief that Conceptual Amendment 4 also addresses the issue of smokeless tobacco. REPRESENTATIVE GARA said he agrees with Representative Kott regarding the compromise reached last year. He asked whether members would be amenable to amending Conceptual Amendment 4, "to add the bond part," thereby also deleting the proposed bond limit. 2:24:04 PM REPRESENTATIVE ANDERSON indicated that he supports the bond limit. REPRESENTATIVE MEYER opined that the provisions being deleted by Conceptual Amendment 4 ought to remain in the bill. REPRESENTATIVE GARA objected to [Conceptual] Amendment 4. CHAIR McGUIRE said she understands Representative Kott's position, but mentioned that she'd already made a commitment to try to keep all of the provisions in the bill. 2:26:14 PM A roll call vote was taken. Representatives Anderson, Coghill, Kott, and Dahlstrom voted in favor of Conceptual Amendment 4. Representatives McGuire, Gruenberg, and Gara voted against it. Therefore, Conceptual Amendment 4 was adopted by a vote of 4-3. CHAIR McGUIRE made a motion to adopt Amendment 5, which read [original punctuation provided]: Page 2, line 2: Following "facility": Insert "," Following "assisting": Insert "an agent or employee of the Department of Health and Social Services under AS 44.29.092 or" Page 2, line 3: Delete "this section" Insert "AS 11.76.100, 11.76.106, or 11.76.107" SUZANNE CUNNINGHAM, Staff to Representative Kevin Meyer, House Finance Committee, Alaska State Legislature, relayed that Amendment 5, which she characterized as a technical clarification amendment, was brought to the sponsor's attention by the DOL. Amendment 5 addresses the issue of minors who participate with law enforcement or the DHSS in "sting" operations. REPRESENTATIVE GRUENBERG objected for the purpose of discussion. He asked why Amendment 5 proposes to delete the words, "this section" from AS 11.76.105. MR. POAG explained that "this section" refers to the possession statute, and the DOL is not trying to enforce that statute via sting operations; it makes more sense to simply list the provisions of law that are being enforced through sting operations, those provisions pertaining to youth access. REPRESENTATIVE GRUENBERG suggested that perhaps the specific sections listed in Amendment 5 should simply be added to proposed AS 11.76.105 rather than using them in place of the words, "this section". MR. POAG suggested that the Department of Health and Social Services could better address that issue, but added that he did not think that the possession provision of current statute needed the exemption pertaining to those involved in sting operations. REPRESENTATIVE GRUENBERG made a motion to amend Amendment 5, to strike the words, "Delete 'this section'". There being no objection, Amendment 5 was amended. CHAIR McGUIRE asked whether there were any objections to Amendment 5, as amended. There being none, Amendment 5, as amended, was adopted. 2:31:36 PM REPRESENTATIVE ANDERSON moved to report HB 260, as amended, out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE GARA objected. 2:31:48 PM A roll call vote was taken. Representatives McGuire, Anderson, Coghill, Kott, Dahlstrom, and Gruenberg voted in favor of reporting HB 260, as amended, from committee. Representative Gara voted against it. Therefore, CSHB 260(JUD) was reported from the House Judiciary Standing Committee by a vote of 6-1.