Legislature(2009 - 2010)BARNES 124

04/12/2010 03:15 PM House LABOR & COMMERCE

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03:21:36 PM Start
03:21:43 PM SB117
04:02:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved HCS CSSB 117(L&C) Out of Committee
                   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                                                                    
     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                                                                    
     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                                                                    
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
MS. BALES  offered that several  in state small  distributors and                                                               
privately owned  distributors.   She said  she could  not provide                                                               
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