Legislature(2009 - 2010)BARNES 124
04/12/2010 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB117 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 117 | TELECONFERENCED | |
SB 117-PRICE OF CIGARETTES
3:21:50 PM
CHAIR OLSON announced that the only order of business would be
CS FOR SENATE BILL NO. 117(L&C), "An Act requiring the
Department of Revenue to set the minimum price for cigarettes
for sale by wholesalers and retailers; and prohibiting a
wholesaler or retailer from selling at wholesale or retail
cigarettes at a lower price than the price set by the Department
of Revenue." [Before the committee was CSSB 117(L&C)].
3:21:56 PM
ESTHER CHA, Staff, Senator Lesil McGuire, Alaska State
Legislature, explained that SB 117 would close a loophole that
has allowed large, high volume cigarette sellers to price their
cigarettes at less than the minimum price set by law so long as
they can prove their actual cost of doing business is lower than
the mandated minimum price. This bill is limited only to
address the exemption. The original purpose of Article 7 in AS
43 was to prevent wholesalers and retailers from using predatory
pricing practices to sell cigarettes as a "loss leader." She
paraphrased from the sponsor statement, which read as follows
[original punctuation provided]:
Alaska, along with at least 23 other states, prohibits
wholesale cigarette distributors and retailers from
selling cigarettes below a state regulated minimum
price. This reflects a public policy which seeks to
prevent the use of cigarettes as a "loss leader" or a
bargain item. Furthermore, studies have shown that
pricing cigarettes below cost has been linked to youth
smoking.
However, current law contains a loophole which allows
large, high-volume cigarette sellers to price their
cigarettes at less than the minimum price set by law
if they can prove their actual cost of doing business
is lower than the mandated minimum price.
In order to qualify for the lower price, application
for each cigarette brand must be made. The Department
of Revenue must then review the financial data
provided to see if the submission is available for an
exception. This process of verifying the cost versus
price calculations by brand is both expensive and time
consuming for the agency. If the exception is granted,
it changes the state minimum prices for all
wholesalers and retailers. Consequently, cigarettes in
effect become somewhat of a "loss leader" because the
granted exemption price is at or below cost for some
retailers, thus defeating the original purpose of
setting a minimum price.
If CS SB 117 is passed, it requires the Department of
Revenue to set the same minimum cigarette price for
all vendors - regardless of size, volume, or
accounting practices. Thereby promoting fairness by
putting all cigarette sellers on the same playing
field with regard to the state mandated minimum
cigarette price. Furthermore, CS SB 117 would ensure
that it will no longer be permissible for anyone to
set a price any lower than that which the State
establishes.
The percentages in CS SB 117 are based on a compromise
between interested parties. As a result, major
cigarette brands will experience an increase in price.
In the end, if passed, CS SB 117 will increase the
price of cigarettes overall; will eliminate the labor
and expense for the Department of Revenue in
calculating exceptions to the minimum price; and it
will promote fair and reasonable competition in the
marketplace.
3:23:58 PM
MS. CHA explained that the statutory provision never really
worked the way it was intended to do so. This bill would repeal
AS 43.50.800 and replace it with AS 43.50.810, Section 6. The
changes made in the committee substitute were to the percentages
of mark-up allowed. She explained that changes to the
percentages contained in the committee substitute represent a
compromise reached between smaller retailers and wholesalers.
MS. CHA presented the details of the mark-up. The original bill
contained a 4.5 percent mark-up for wholesale and 6 percent
mark-up for retail. The committee substitute changes the
minimum mark-up to 2 percent for wholesale and 4 percent mark-up
for retail. The prices are higher than the current granted
exception. Thus, it is possible the price of cigarettes may go
up slightly, but not an exorbitant amount. The original
reasoning behind fixing a minimum price on cigarettes is based
on studies that demonstrated that increased prices provided a
financial incentive for smokers to quit and discourage new
smokers. She related that it is possible that "brands" for
which no application was made could experience a decrease if the
retailer decides to lower the price, but the sponsor does not
expect that to happen. Lastly, by removing a wholesaler or
retailer's ability to apply for an exemption would bring parity
and balance back to competition.
3:26:11 PM
REPRESENTATIVE BUCH related that the parties involved have been
contacted and all of the parties reached a compromise.
MS. CHA stated that the sponsor did not contact every wholesaler
and retailer in Alaska, but contacted the major ones, who are
supportive.
3:26:47 PM
REPRESENTATIVE T. WILSON asked for the number of exemptions.
MS. CHA thought the Department of Revenue would respond to the
question, but she ventured that the percentage of wholesalers
with exemptions is over 90 percent.
3:27:07 PM
REPRESENTATIVE T. WILSON did not see the loophole in the statute
since the retailer must still prove something.
MS. CHA agreed. She explained the loophole comes into existence
when one wholesaler can show the price is lower, it authorizes
everyone else to price the cigarettes at the lower prices, which
could result in cigarettes being a "loss leader" for some
wholesalers who cannot demonstrate the lower price. She related
a scenario in which a company shows its cost is $6.50, but the
cost for others is $7.00 due to volume of sales or accounting
practices. The minimum price would be set by formula in statute
at $7. A wholesaler whose cost is $6.50 can set their price at
$6.50. However, everyone else is "given" that price.
Therefore, all wholesalers will follow suit by setting their
price at $6.50 in order to be competitive in the marketplace.
It creates the situation in which some wholesalers may be
selling cigarettes as a "loss leader."
3:28:41 PM
REPRESENTATIVE T. WILSON asked if any studies show reductions in
smoking occurs based on price.
MS. CHA deferred to the Department of Revenue. She offered that
the committee substitute was based on a compromise, but she
understood the original 4.5 percent and 6 percent were based on
studies.
3:29:27 PM
REPRESENTATIVE CHENAULT asked whether cigarettes are the only
commodity in which prices are set.
MS. CHA stated she did not know.
REPRESENTATIVE CHENAULT said he certainly does not want to
encourage kids to smoke. He related that the cost of cigarettes
may increase "a little bit" and he was not sure if that would be
$.03 or $1.00. He agreed the higher cost of cigarettes can act
to deter smoking, but he thought the same thing could happen if
prices were changed for other products such as alcohol. He
asked whether alcohol currently has a set price. He understood
alcohol is taxed. He suggested that if we are concerned about
people's health, perhaps the legislature should also set prices
on cheeseburgers and french fries. He thought other commodities
may cause as much or more mayhem in our society. He expressed
concern that cigarettes are targeted.
3:31:38 PM
MS. CHA understood his concern. She pointed out that the
minimum price for cigarettes is already set in statute.
REPRESENTATIVE CHENAULT related a scenario in which a
manufacturer makes a widget for $6, but it costs "Joe down the
street" $7 to produce the same widget. He pondered whether the
manufacturers who can produce the widget for $6.50 would
benefit.
3:33:34 PM
REPRESENTATIVE T. WILSON asked whether any other state regulates
the price of cigarettes.
MS. CHA answered yes, that 23 states regulate cigarette prices.
She offered to provide the list to the committee. In further
response to Representative T. Wilson, she said she did not know
whether other states set prices on alcohol.
3:34:13 PM
REPRESENTATIVE T. WILSON made a motion to adopt Amendment 1,
labeled 26-LS0386\S.1, Bullock, 4/9/10, which read:
Page 3, following line 4:
Insert a new bill section to read:
"* Sec. 5. AS 43.50.740(c) is amended to read:
(c) A manufacturer whose product is sold in the
state directly or through an intermediary shall
provide the department with a current price list for
all brands of cigarettes of the manufacturer and shall
notify the department at least three [10] days before
a price change [INCREASE] takes effect."
Renumber the following bill sections accordingly.
CHAIR OLSON objected.
3:34:48 PM
MS. CHA explained that once the manufacturer establishes a
minimum price, it would provide notice to the department at
least 3 days prior to changing the price on its brands instead
of the current requirement for 10 days notice. This bill would
shorten the timeframe so retailer or wholesaler could sell the
cigarettes at the new price.
3:35:26 PM
CHAIR OLSON asked whether the price might ever drop or if it
only would increase.
MS. CHA said she was unsure.
REPRESENTATIVE CHENAULT related that Amendment 1 would reduce
the prior notice timeframe from 10 days to 3 days that
manufacturers are required to report to the state in order to
increase the price of the cigarettes.
REPRESENTATIVE HOLMES agreed with Representative Chenault's
understanding of the bill. She offered her belief that the
manufacturers must notify the Department of Revenue when
cigarette prices increase or decrease in price. Previously, the
notice requirement applied only to increases in cigarette
prices.
MS. CHA assumed that it is at the manufacturer's discretion as
to whether the price would increase or decrease.
CHAIR OLSON agreed, noting the bill would provide flexibility in
the event of "cigarette wars."
3:37:09 PM
REPRESENTATIVE T. WILSON asked for the benefits of adopting
Amendment 1.
BOB EVANS, Lobbyist, ALTRIA Corporation, stated that Alaska is
the only state that requires a ten-day notice. Thus,
manufacturers must provide the Department of Revenue a ten-day
notice in advance for any price increases, but wholesalers and
retailers cannot obtain the product until after the ten-day
notice period. He stated that this interferes with shipping and
commerce. This bill will remedy the timing so the retailer and
wholesaler can obtain the product more efficiently.
3:39:06 PM
REPRESENTATIVE BUCH asked for the reason that Amendment 1 reads
"change" instead of "increase."
MR. EVANS said he thought that the actual cost of cigarettes was
reduced in the past year. He related that Amendment 1 would
allow for decreases in prices, although it may rarely happen.
3:40:26 PM
REPRESENTATIVE T. WILSON asked for the process to change the
price in cigarettes.
MR. EVANS responded that the Department of Revenue (DOR) and
most wholesalers want to know in advance of any increases. He
understood the wholesalers agree with proposed Amendment 1. He
related that Ms. Bales indicated that DOR needs several days
notice to provide notice for the price change. This is the only
state in the nation that has this provision. The problem for
the manufacturer is that they must wait ten days prior to
shipping. He stated that he cannot think of any reason for the
initial ten-day notice requirement.
3:42:24 PM
REPRESENTATIVE NEUMAN referred to the campaign for "Tobacco Free
Kids" brochure in members packets titled "Raising Cigarette
Taxes Reduces Smoking, Especially Among Kids (And the Cigarette
Companies Know It)" He related that that the cost of cigarettes
skyrocketed between 2000-2007. He asked for the reason for the
increased cost and if it is more expensive or the government has
increased the "sin" taxes.
MS. CHA said she was not quite sure. She thought the DOR could
answer the question, but she speculated it may be due to taxes.
3:43:46 PM
REPRESENTATIVE NEUMAN asked whether other communities tax
cigarettes as a means of increasing their revenues.
MS. CHA responded that states and municipality can currently
increase the taxes.
REPRESENTATIVE NEUMAN recalled some local governments have
imposed smoke-free restaurants or bars.
MS. CHA agreed, but clarified that this bill does not address
that issue.
REPRESENTATIVE NEUMAN offered his belief that government has
stepped in on this industry since it is "politically correct."
He asked where the government intervention and intrusion stops.
Farmers grow legal crops of tobacco, he stated.
3:46:20 PM
JOHANNA BALES, Excise Audit Manager, Anchorage Office, Tax
Division, Department of Revenue (DOR), introduced herself.
REPRESENTATIVE HOLMES asked whether the DOR has any issue or
problem with Amendment 1.
MS. BALES stated that the DOR does not have any problem with
Amendment 1. The department is required to perform a
calculation but three days is enough lead time to do so.
CHAIR OLSON removed his objection.
There being no further objection, Amendment 1 was adopted.
3:48:13 PM
REPRESENTATIVE BUCH asked whether any price controls are in
effect on any other commodity.
MS. BALES responded that the state sets prices on cigarettes but
not on any other commodity. She provided a brief history on the
minimum pricing statutes for cigarettes. In 2000, a bill passed
the legislature that required a cigarette tax stamp and extra
responsibilities for distributors to stamp products. The
requirements for stamping resulted in a "hefty sum of money" for
in state distributors. The requirement for stamping did not
tend to cause problems for out-of-state distributors since their
operations were larger and the companies had invested in
stamping machines. The in state distributors wanted to have
assurances that their prices would not be undercut. Thus, the
in state distributors and retailers requested minimum prices be
set. Additionally, the legislature did not want cigarettes to
become the "loss leader" for big box stores. She said she
thought it was important for the committee to understand that
the minimum pricing statute currently in place was at the
request of the in state cigarette distributors.
3:50:49 PM
REPRESENTATIVE CHENAULT asked for the minimum price for
cigarettes.
MS. BALES answered that it depends the brand but each
manufacturer has a different rate. In further response to
Representative Chenault, she offered that for "Camel Filters
Wides" the minimum price in Anchorage runs $70 per carton. In
further response to Representative Chenault, she indicated that
$54 is the cost for the areas outside Juneau, Anchorage
Fairbanks, Matanuska-Susitna Borough, Fairbanks, and Sitka since
the communities do not assess local taxes. Thus, they have
lower prices on cigarettes.
REPRESENTATIVE T. WILSON related that the Fairbanks North Star
Borough (FNSB) also taxes cigarettes.
MS. BALES, in response to Representative T. Wilson, agreed that
manufacturers are still required to "stamp" cigarettes. In
further response to Representative T. Wilson, she replied that
the cost of "stamping" depends on the type of machine that is
used. She pointed out that some machines have features that
open the cases, the cartons, and will re-glue them. She offered
her belief that the cost of the machines range from $10,000 to
$20,000.
REPRESENTATIVE T. WILSON remarked that sends a weird message
that cigarettes are isolated in their own category, separate
from other products with health risks.
MS. BALES explained the problem with cigarettes is that this
product is so highly regulated by federal and state government
ranging from the taxes assessed and the ingredients.
Additionally, fire safe cigarettes are regulated. She said, "I
guess the question is, "Where do you stop? But, really for
cigarettes, this particular regulation on cigarettes is actually
pretty innocuous compared to the rest of it."
REPRESENTATIVE T. WILSON referred to the other part of this
which is to prevent youth from smoking. She commented that our
youth tend to have more discretionary money than adults. She
asked whether the regulations could be deleted and the state
simply increase additional taxes on cigarettes.
MS. BALES restated that the purpose of minimum pricing is a
result of concern expressed by in state distributors. She
explained that many smaller stores are struggling to compete
with larger stores. Stamping was embraced by those who wanted
youth to stop smoking and they did not want cigarettes to be
used by stores as "loss leaders". Thus, the minimum pricing
served two purposes, but the main purpose was to address the
concern of in state distributors.
3:55:27 PM
REPRESENTATIVE T. WILSON asked whether the reasons still exist.
MS. BALES answered yes. A large number of youth start smoking.
In further response to Representative T. Wilson, she replied
that smaller distributors are actually helped by the bill.
REPRESENTATIVE T. WILSON asked for examples of small
distributors.
MS. BALES offered that several in state small distributors and
privately owned distributors. She said she could not provide
names.
3:57:18 PM
CHAIR OLSON asked whether the Department of Revenue (DOR)
supports the bill.
MS. BALES answered yes. She explained that SB 117 removes the
current requirement to audit anyone who wants to demonstrate the
cost of doing business is less than the mandated minimum. She
explained the DOR spends a substantial amount of time ranging
between two to three months to conduct these audits. She
offered her belief that this bill would be helpful
administratively for the DOR and the companies.
3:58:54 PM
MIKE ELERDING stated that he is a small wholesale distributor
who worked with the DOR to originally pass the bill to end
predatory pricing practices. He offered that he is in very much
in favor of SB 117.
ROGER HAMES, Hames Corporation, stated that he is a third
generation retailer that owns four stores in Southeast Alaska.
He testified in support of the bill as it brings parity.
CLIFF CRAMER, Vice-President of Sales & Marketing, stated that
Northern Sales is a diverse distributor in Alaska that sells
candy, beverages, and tobacco products. He said that he
strongly supports SB 117.
4:00:28 PM
CHAIR OLSON, after first determining no one else wished to
testify, closed public testimony on SB 117.
REPRESENTATIVE NEUMAN moved to report SB 117, as amended out of
committee with individual recommendations and the accompanying
fiscal notes.
4:00:54 PM
REPRESENTATIVE T. WILSON objected.
4:01:02 PM
A roll call vote was taken. Representatives Buch, Chenault,
Holmes, Lynn, Neuman, and Olson voted in favor of moving SB 117,
as amended from the House Labor & Commerce Committee.
Representative T. Wilson voted against it. Therefore,
HCSSB 117(L&C) was reported out of the House Labor and Commerce
Standing Committee by a vote of 6-1.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Apr 12 Packet Info.pdf |
HL&C 4/12/2010 3:15:00 PM |
|
| CSSB117(L&C) ver S.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Fiscal Note -REV-TAX-02-05-10.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Letter Costco.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Sectional Analysis.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Sponsor Statement.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Summary of Changes.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Letter Elerding.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Elerding Attachment.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| Draft Amendment S.1.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| Legal Services Memo re amendment.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |
| CSSB117 Letter Adrian Zimmer.pdf |
HL&C 4/12/2010 3:15:00 PM |
SB 117 |