Legislature(2001 - 2002)
04/03/2002 03:30 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 429-TOBACCO TAXATION; LICENSING Number 1623 CHAIR MURKOWSKI announced the final matter before the committee, HOUSE BILL NO. 429, "An Act relating to certain licenses for the sale of tobacco products; relating to tobacco taxes and sales and 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 sales; relating to notification regarding a cigarette manufacturer's noncompliance with the tobacco product Master Settlement Agreement or related statutory provisions and to confiscation of the affected cigarettes; and providing for an effective date." Number 1601 NEIL SLOTNICK, Deputy Commissioner, Department of Revenue, testified before the committee. He said HB 429 was not a tobacco tax bill but a "tobacco tax stamp bill." Alaska has a tobacco tax - one of the highest in the nation - but it is one of only four states without the requirement of a stamp to be placed on [cigarettes] when the tax is paid. [Mr. Slotnick passed around a pack of cigarettes from California as an example of what a stamped pack of cigarettes looks like.] Number 1564 MR. SLOTNICK told the committee the reason to have a tax stamp is to ensure that state inspectors can determine whether a store has paid the tax on cigarettes in stock. He said there have been some successful enforcement measures regarding the tax since it was imposed four years prior, but they are incredibly time-consuming and difficult, and "require a little bit of luck." He said for the state to enforce the tax statute, the stamp is needed. He also mentioned that there are some federal benefits for the imposition of a tax stamp. MR. SLOTNICK posed the question, "Does Alaska have a smuggling problem?" He answered that there is smuggling, but the magnitude isn't known. He gave examples of how other states' tax stamps have increased their tobacco tax revenues, and he expressed the department's feeling that the stamp would do the same for Alaska's revenues. It would provide easy detection and a deterrent to untaxed tobacco in Alaska. Number 1391 MR. SLOTNICK addressed the fiscal note. The department is requesting two positions: an administrative position to sell the stamps, and an enforcement position to take appropriate action against entities that have violated the tax laws. If it is found that the department underestimated the level of smuggling, the department may request another position. MR. SLOTNICK referred to a charts in members' packets that outline the decline in taxable cigarette sales since the imposition of the tax increase. He pointed out a 22-percent decrease, part of which was the result of cessation [of tobacco use]. Number 1302 MR. SLOTNICK noted that there would be some costs associated with the stamp. A discount would give some money back to distributors to offset some of the costs they will be required to bear. He said the stamp would also partially benefit distributors, since smuggling and black-market sales would be discouraged. Mr. Slotnick pointed out that some states give distributors no discount, while others are more generous. He said smaller distributors would be given a 2-percent discount [under HB 429], and larger ones would receive a 1-percent discount. Number 1229 REPRESENTATIVE MEYER asked why the stamp is to be placed only on cigarettes and not all tobacco products. Number 1202 JOHANNA BALES, Auditor, Department of Revenue, testified via teleconference. She informed the committee that the stamps are much easier to apply to cigarette packages than to the packaging used for snuff, cigars, and leaf tobacco. She said she didn't know of other states that stamp other tobacco products. There has not been the same decline in the use of other tobacco products and, therefore, the department does not have the same compliance issues with them. REPRESENTATIVE MEYER asked how the dollar-per-pack tax applied to the other forms of tobacco. MS. BALES said the tax went from 25 percent of the wholesale cost to 75 percent of the wholesale cost. REPRESENTATIVE MEYER asked how [the stamp] works. He gave the example of the Anchorage city tax on tobacco. He asked if the stamp would show that the tax had been paid on the state tax, or would show that the state and city tax had been paid. MS. BALES answered that it would only indicate that the state tax had been paid. Number 1098 REPRESENTATIVE MEYER asked if tobacco could be purchased over the Internet. MS. BALES replied that the state law levies a tax on importation for resale and personal consumption of cigarettes only. Other tobacco products can be purchased through the mail, and as long as they are only for personal consumption, there is no tax. REPRESENTATIVE MEYER asked who would affix the stamp. MS. BALES replied that the distributor is the one required to attach the stamp. REPRESENTATIVE MEYER asked if the distributor would be given a discount to attach the stamps. MS. BALES answered in the affirmative. REPRESENTATIVE MEYER asked why a discount should be given. He reasoned that if it is the law, [distributors] should automatically do it. Number 1048 MS. BALES told Representative Meyer that it would be up to the legislature to decide that matter. She said the department has proposed the discount because most states do. The average discount is 3 percent. REPRESENTATIVE MEYER said he just wanted to zero out the fiscal note, perhaps by passing the charges on to someone else. Number 0994 CHAIR MURKOWSKI asked Mr. Slotnick why the stamp was not proposed in 1997 when the tobacco-tax increase was passed. MR. SLOTNICK responded that he believed it was considered and that he didn't know why the stamp was not adopted. He offered that the tax was controversial enough that [legislators] didn't want to impede it with the stamp. CHAIR MURKOWSKI asked, in reference to Internet sales, what constitutes personal consumption. She used an example of five pallets of cigarettes in her garage for "personal use." Number 0894 MR. SLOTNICK told the committee that under the bill, being in possession of unstamped cigarettes is not allowed. MS. BALES pointed out the distinction that is made is between cigarettes brought into the state and other tobacco products. No determination must be made regarding cigarettes for personal use or resale, because any cigarettes imported into the state must be taxed according to the law. CHAIR MURKOWSKI asked how it would be known whether the cigarettes were imported. MS. BALES said federal law would be called into play. She referred to the Jenkins Act, which requires distributors to report the sale of cigarettes to state departments of revenue when shipping them across state lines. She then referred to the Cigarette Contraband Tax Act, which says it is illegal to ship via interstate commerce more than 60,000 cigarettes to someone unlicensed. The law only applies in states that require a tax stamp. She said the Jenkins Act carries a misdemeanor penalty for violation, and the Cigarette Contraband Tax Act carries a felony penalty. Number 0724 CHAIR MURKOWSKI mentioned that the distributors would be responsible for applying the stamps. She asked how many distributors are in Alaska. MS. BALES estimated 55 to 60 distributors. CHAIR MURKOWSKI asked if small distributors would be able to contract the stamping out to some other entity to save on costs. Number 0665 MS. BALES replied that smaller distributors would be able to contract that work out. There are different license types in the state: distributors and direct-buying retailers. Of the 55 distributors, 15 to 20 are in-state businesses; 4 of those are large distributors, and the rest are direct-buying retailers. Most of those companies buy their products from distributors in the Lower 48 that are equipped to stamp in all the other states. Ms. Bales said the large distributors she'd talked to had told her they could stamp for the smaller smoke shops in Alaska. Number 0548 MS. BALES, in reply to a question from Chair Murkowski, explained that the product would have to be stamped as soon as the shipping containers were opened. Sealed shipping containers could remain unstamped. She characterized the system as similar to the one in existence. Under the bill, the stamps would have to be purchased upfront so they would be available when the product was unpacked. Number 0450 CHAIR MURKOWSKI raised a scenario involving Costco, with the stamping taking place outside of Alaska. She asked what would happen if the stamped cigarettes were not selling in Alaska and the product became stale on the shelf. What could the store do, since the stamped cigarettes could not be shipped to another state because of the Alaska stamp? MS. BALES answered that the bill would provide for a credit. The product could be sold out of state if the other state's stamp were placed on the product. She said the current law does not allow the credit for selling out of state. Ms. Bales said Costco had told her it wasn't sure if it would stamp within the state or elsewhere. Number 0300 CHAIR MURKOWSKI referred to page 7 and its mention of sale of the stamps. She inquired about the imagined result behind allowing the department to enter into agreements with financial institutions to permit the sale of stamps. Chair Murkowski said she thought this was to be run throughout the Department of Revenue. Number 0268 MS. BALES responded that some states contract with financial institutions that sell all of their stamps. The department has made a provision to do that if, at some time, it is a more cost- effective approach. CHAIR MURKOWSKI invited Ms. Bales to deliver her prepared testimony. Number 0188 MS. BALES pointed out that the state has seen a 22-percent decrease in taxable cigarettes [since the elevation of the tobacco tax]. The decrease as a result of cessation [of tobacco use] was projected to be about 13 percent. Ms. Bales referred to a study conducted by the Department of Health and Social Services Study - "The Impact of the 1997 Tobacco Tax Rate Increase in Alaska" - that found its data was inconclusive. She said there is no conclusive evidence that people have quit smoking as a result of the tax increase, but there is evidence of smuggling. She said the department had undertaken several investigations of smuggling; she gave some examples. TAPE 02-49, SIDE A Number 0001 CHAIR MURKOWSKI asked if Metlakatla - the only recognized reservation in the state - could ignore the tax stamp and become the "Mecca of cigarette sales." Number 0168 MS. BALES said the department did not perceive a problem with Metlakatla. Tobacco sellers in that community are not required to stamp. She said the community is allowed to purchase a certain number of untaxed cigarettes based on a formula that takes the community's population into account. Ms. Bales pointed out that the community has agreed to tax any cigarettes that exceed the annual allocation. Number 0215 REPRESENTATIVE MEYER asked how the tax applies to military bases. MS. BALES indicated all of the product on military bases must be sold at a price no less than 90 percent of the retail value of that product off the base. In further response, she said the bases are exempt from the tax. Number 0298 MIKE ELERDING, President, Northern Sales Company of Alaska ("Northern Sales"), testified via teleconference. He gave background information on his company. In 2001, Northern Sales collected and paid $3,669,000 for the excise tax. He said his warehouses are presently holding $1.3 million [of inventory], and the tax on that is $380,000 - 29 percent of the cost of goods. MR. ELERDING said Alaska has one of the highest state excise taxes in the nation, and it is only one of six with a tax of $10 a carton or greater. He said the stated reason for the tax increase was to discourage the habit of smoking cigarettes. In fiscal year 1997, the state collected $15 million in excise tax. In fiscal year 2001, Alaska collected $41 million in excise tax. He said the state has achieved its goal of decreasing the amount of cigarettes consumed in Alaska. Number 0465 MR. ELERDING said the rationale behind HB 429 is to discourage bootlegging of cigarettes in the state. However, it places the burden of tax collection and stamping on the distributors. Mr. Elerding said the logistics of supplying the company's geographic locations would require four separate tax-stamping operations; the costs generated by these redundancies would be greater than the proposed discount from the state. The company's profit margin is so small that it wouldn't be able to operate as a result of the bill. MR. ELERDING told members that if his company goes out of the cigarette business, large out-of-state companies will fill its niche. He warned that this will result in a loss of jobs for the state. He also said he believes the majority of bootlegging is the result of Internet sales of tobacco products to individuals. Tax stamping would not impact these sales. Number 0768 CHAIR MURKOWSKI noted that Mr. Elerding had raised an interesting dilemma. Large distributing companies will become more successful at amortizing the tax costs because of their large sales volume, while smaller Alaskan companies will find it harder and harder to do business. She raised the issue of giving additional discounts to Alaska-based operations. She asked Mr. Elerding if he had contemplated any solutions to those types of problems. Number 0858 MR. ELERDING agreed with Chair Murkowski's insight on the larger entities' being more competitive because of their economies of scale. He suggested the state could require stamping to take place within Alaska's borders, and require that all cigarette sales be made in cash, "on the spot," to help reduce risk exposure when collecting the state excise tax. Number 1102 MARK JOHNSON, Chief, Community Health & Emergency Medical Services, Division of Public Health, Department of Health & Social Services, testified before the committee. He said the department supports the intent of the bill; he noted that one of its goals is to reduce tobacco products. He said studies show youth to be more price-sensitive, so limiting access to nontaxed tobacco would help. Number 1163 CHAIR MURKOWSKI stated her intent to hold the bill over in order to further explore the issue with the Department of Revenue and try to address the concerns of local businesses. Number 1203 MS. BALES expressed concern that many of the smaller smoke shops' distributors exist outside of the state. She said Mr. Elerding's suggestion would hurt the smaller distributors. [HB 429 was held over.]
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