Legislature(2003 - 2004)
05/05/2003 09:02 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 168(L&C)
"An Act relating to issuance and revocation of licenses for
the importation, sale, distribution, or manufacture of
cigarettes and tobacco products; relating to a tax refund or
credit for unsaleable, returned, or destroyed tobacco
products; relating to restrictions on and penalties for
shipping or transporting cigarettes; relating to records
concerning the sale of cigarettes; amending and adding
definitions relating to cigarette taxes; relating to the
payment of cigarette taxes; relating to penalties applicable
to cigarette taxes; relating to the definition of the
wholesale price of tobacco products; relating to payment of
cigarette taxes through the use of cigarette tax stamps;
relating to provisions making certain cigarettes contraband
and subject to seizure and forfeiture; relating to certain
crimes, penalties, and interest concerning tobacco taxes and
stamps; relating to cigarette sales; and providing for an
effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-chair Wilken explained that this legislation addresses cigarette
sales and distribution by mandating that a tax stamp be applied to
each pack of cigarettes sold in the State thereby signifying that
the tobacco tax has been paid.
Senator Bunde, the bill's sponsor, expressed that "this is a
tobacco distributor-friendly bill" as it would impede "the gray or
black" marketing of cigarettes in the State that is negatively
impacting legitimate businesses that pay the one dollar a pack
State tax. He noted that requiring the State stamp to be affixed to
each pack of cigarettes would assure that the State tax would be
paid. He informed that this legislation was prompted by a radio
advertisement he heard for an out-of-state tobacco distributor who
claimed that, by purchasing cigarettes from him, the purchaser
would avoid paying the State tax. Upon hearing that advertisement,
Senator Bunde checked with the Department of Revenue and learned
that numerous out-of-state purchases are being made and are
circumventing the current dollar-a-pack tax.
Senator Bunde informed that the State must establish a State stamp
program in order to qualify for a federal law that specifies that
it would be illegal for an entity to sell cigarettes without the
affixed stamp were a State stamp required. He stated that this
would address the out-of-State distributor issue. He communicated
that Alaskan distributors support this legislation as it is
intended to address those entities that receive an unfair tax
advantage by not paying the State tax.
Furthermore, Senator Bunde explained that this legislation provides
a minimum price provision for wholesalers and retailers based on
the wholesale list price provided by the tobacco manufacturers.
This minimum price, he attested, would create a level playing field
for competition in the State. He noted that higher cigarette prices
might also deter young people from smoking.
SFC 03 # 75, Side B 09:50 AM
Senator Bunde stated that while the Department of Revenue estimates
that the stamp tax could increase State revenue by approximately
$500,000, the exact amount of money that this legislation might
raise is speculative. He pointed out that Hawaii vigorously
enforces its tax stamp program and has increased its cigarette tax
revenue by fifty percent. In contract, he noted that Michigan has
not vigorously enforced its program and has increased its revenue
approximately ten percent.
Senator Olson asked whether the industry has indicated that
compliance with this legislation would present a hardship.
Senator Bunde stated that industry representatives would be
presenting testimony.
Co-Chair Wilken stated that the tobacco tax currently generates
approximately $40 million annually. He calculated that were the
State to collect an additional ten percent of that amount, it would
generate four million dollars for the general fund and the tobacco
tax school fund.
Senator Bunde explained that the tobacco tax revenue could be
dedicated toward the school fund because these appropriations were
"grandfathered in" as existing policy.
Co-chair Wilken expressed that 70 percent of the revenue would be
dedicated to the school fund with 24 percent dedicated to the
general fund. He stated that this would be significant money.
JENNIFER APP, Alaska Advocacy Director, American Heart Association,
testified via teleconference from Anchorage in support of the bill
on behalf of Alaska's tobacco-free kids. She stated that this
legislation would decrease "the ability of people and businesses to
illegally avoid the tax," and it would assist in keeping tobacco
"out of the hands of youth." She attested that non-face-to-face
sales such as websites and mail orders account for approximately
14-percent of all sales to youth. Furthermore, she asserted that
these sales are detrimental to efforts to reduce youth smoking as
no proof of age is required in these transactions and the ability
to avoid paying the State tobacco tax allows purchase to be less
expensive. She attested that this legislation would prohibit
Internet and mail order distributors from avoiding the State tax.
She stated that the proof of age issue is also addressed in this
bill, as it requires that all shipments must be delivered to a
person licensed under Sec. 43.50.105 or to other identified
entities specified in Section 9 of the bill.
Co-chair Wilken asked whether the American Heart Association
supports this legislation.
Ms. App responded in the affirmative.
Senator Bunde acknowledged the work conducted by the Department of
Revenue in this endeavor.
JOHANNA BALES, Revenue Auditor and Program Manager, Cigarette &
Tobacco Products Excise Tax, Department of Revenue informed the
Committee that the Department is in favor of this tax stamp as she
expressed that tax enforcement efforts are currently hampered by
the absence of a stamp. Moreover, she attested that "it is
virtually impossible" to determine whether the tax has been paid on
any given pack of cigarettes as tracking via retailer invoice is
impossible as no pack is distinguishable from another. She
explained to the Committee that prior to the one-dollar-a-pack tax
legislation, approximately 53 million packs of cigarettes were sold
annually; however, she noted that the annual amount has decreased
to approximately 42 million packs. She stated that the Department,
in its attempts to enforce the tax, uncovered approximately 1,000
individuals who are purchasing cigarettes via the Internet. She
stated that these individuals attest that were a stamp program in
place, they would have known whether the tax was or was not paid by
the vendor. She stated that the Department calculates that
approximately $600,000 was not collected due to Internet,
distributor, or mail order activities over a 13-month period.
Ms. Bales stated that once the State enacts a State stamp tax
program, the federal Contraband Cigarette Trafficking Act would
assist in the enforcement of tax. She affirmed that 46 states have
tax stamp programs, including the program recently enacted in
Hawaii, which has a "very aggressive" eleven-member enforcement
team.
Co-Chair Green asked whether language in the bill addresses a
situation wherein a person, while traveling out of state, purchases
tobacco for his or her own personal consumption and transports it
back to the State.
Ms. Bales clarified that this legislation proposes to change
existing tobacco law by implementing a stamp tax. Furthermore, she
stated that because no exemption for the transport of tobacco for
personal consumption currently exists, the individual should
currently be paying the State tax. However, she stated that while
this scenario "is impossible to enforce," the Department does not
consider it to be a "huge problem."
Co-Chair Wilken stated therefore that "the trip wire" would be when
an individual distributes the cigarettes for profit or for some
manner other than personal use.
Ms. Bales responded that current statute specifies that persons
transporting cigarettes into the State should be licensed to
transport the cigarette, should pay the cigarette tax, and should
file a monthly report. She stated that the statute does not
differentiate between personal and non-personal consumption. She
stated that individuals who have been detected of transporting
goods into the State for personal use have been treated "very
leniently."
Co-Chair Green asked whether the transport of cigarettes is viewed
with "the same sort of standard" as the transport of liquor.
Ms. Bales responded that "there is a very big difference" as the
tax on alcohol is applicable at the point of purchase. Therefore,
she informed that because the tax is paid at point of purchase, the
alcohol could be legally transported, with the exception being that
federal law prohibits the mailing of alcohol. Therefore she
concluded that the alcohol tax "is not as problematic" as the
cigarette tax.
Co-Chair Wilken asked for further information regarding the sale of
cigarettes bought via the Internet.
Senator Bunde noted that the Internet seller does not require the
purchaser to prove that they are of legal purchasing age.
Co-chair Wilken asked how this legislation would enforce the tax in
this case.
Ms. Bales responded that this legislation would require a purchaser
to apply to the Department of Revenue for a license, and upon
receipt of the license, they could make a purchase. Furthermore,
she explained that shipping cigarettes through the mail to an
unlicensed individual is prohibited. In addition, she relayed that
fines would be levied upon the common carrier shipping the
cigarettes were the receiver of the cigarettes unlicensed. In
conclusion, she stated that the intent of the bill is to curtail
all shipment of cigarettes via interstate commerce unless it would
be shipped to someone who is licensed and who is paying the tax.
Co-Chair Wilken surmised therefore that rather than placing the
onus on the seller, the State would require the individual "sitting
at home" making the purchase to be licensed. However, he attested,
this would be difficult to enforce because the State would be
required to become aware of the action.
Ms. Bales expounded that the federal Jenkins Act requires that
anyone conducting interstate commerce by shipping cigarettes to
someone who is not a licensed distributor must notify the state's
Department of Commerce of that shipment. She stated that a
violation of this Act would result in a misdemeanor charge. She
continued that were this law violated under the federal Contraband
Cigarette Act it would result in a felony charge. However, she
reiterated that the Contraband Cigarette Act would not be
applicable until the State incorporates a stamp tax.
Co-Chair Wilken asked whether the Internet seller would ask a
purchaser for his or her license number.
Ms. Bales responded that this information would be required were
the stamp tax legislation enacted.
Ms. Bales continued that, in addition, private carriers, such as
Federal Express, who might ship cigarettes would be required to
verify that the person receiving the package be of legal age and be
licensed.
Senator Bunde pointed out that rather than the State being
responsible for the enforcement, charges at the federal level could
be levied. He stated that cigarette suppliers in the "sovereign
nations, the Indians [indiscernible] are potentially going to
ignore it."
Co-Chair Green asked whether a person, with cigarettes and doing
interstate travel, would be required to follow these same licensing
regulations.
Ms. Bales stated that it depends on the individual state's law;
however, she continued, were that a state's law similar to this
legislation, the person should pay the state's tax. She noted that
some states allow a person to transport a specified number of
cigarettes for personal consumption without penalty.
Co-Chair Wilken exampled a scenario wherein a business might order
cigarettes via the Internet, and upon receipt of the cigarettes,
would sell them at the going market value and "pocket the tax." He
asked whether this type of activity occurs.
Ms. Bales declared that this does happen. She further exampled the
difficulty of enforcing the current State cigarette tax by sharing
that a licensed distributor could present the State examiner with a
legitimate invoice on which the State tax is reflected as being
paid. However, she continued that without a stamp being affixed to
each packet of cigarettes, the examiner has no method by which to
identify the packs of cigarettes on which a tax has been or has not
been paid.
Co-Chair Wilken asked who is authorized to apply the stamp to the
pack.
Ms. Bales clarified that generally the distributor would affix the
stamp to the pack; however, the retailer could purchase the
equipment and the stamp from the Department and affix the stamp.
Senator Taylor asked for the amount of the total current State tax
on cigarettes.
Ms. Bales explained that the State tobacco tax is currently five
cents per cigarette or one dollar per pack of twenty cigarettes.
Senator Taylor asked whether, according to State statute, he would
be required to remit to the State of Alaska 97-cents were he to
purchase a pack of cigarettes, for example in Kentucky which
charges a three-cent per pack cigarette tax.
Ms. Bales clarified that the State of Alaska would not credit a
purchaser for the amount of tax they paid in another state;
therefore, she stated that the State tax of one dollar per pack of
cigarettes should be remitted to the State. However, she stated
that Kentucky would issue a credit to an Alaskan distributor for
the Kentucky tax, were the cigarettes purchased in Kentucky for
resale in Alaska. Additionally she noted that Kentucky would not
require the Kentucky stamp to be affixed to packs being shipped to
Alaska for consumption.
Co-Chair Wilken referred the Committee to the "State Tax Guide"
comparison chart, dated January 1, 2003 [copy on file] that was
supplied by Senator Bunde. He noted that Kentucky, with a cigarette
tax of three cents per pack, has the lowest tax while
Massachusetts, with the highest state tax, charges $1.50 tax per
pack.
MIKE ELERDING, Owner, Northern Sales Company, testified via
teleconference from Ketchikan, and stated that his company and
other Alaska-based wholesale tobacco distributors support this
legislation. He avowed that the stamp tax would enable the State to
collect a ten-dollar per carton cigarette excise tax on every
carton of cigarettes imported into the State. In addition, he
attested that the legislation would provide Alaskan-based
distributors with the ability "to compete on a level playing" with
out-of-state distributors. He urged the Committee to support this
legislation.
Senator Olson asked whether there are concerns regarding stamp
counterfeiting.
Ms. Bales confirmed that counterfeit stamps are a nationwide
problem. She continued that stamp manufacturers are diligently
addressing this issue and are producing stamps that are difficult
to counterfeit. She announced that, as specified in the
Department's fiscal note, the State is proposing "to purchase the
most expensive stamps which have the most up-to-date counterfeit
measures" including special inks.
Co-Chair Wilken commented that the Members' backup material
addresses the counterfeit issue and includes information about
Meyercord, a stamp manufacturer.
Co-chair Wilken asked the distributor to explain the process
whereby the State stamp is affixed to each pack of cigarettes.
Mr. Elerding explained that wholesale distributors, who order
cigarettes directly from manufacturers, would be required to have
stamping equipment in their facility and would affix the stamp on
each pack at that location. He stated that his company would be
required to centralize the stamping operation at a single location
rather than conducting it at each of its five distribution centers.
Co-Chair Wilken asked for clarification that each pack, rather than
each carton, would require a stamp.
Mr. Elerding verified that while the stamp must be affixed to each
pack, the automated stamping equipment would provide an efficient
stamping process. He communicated that the legislation provides for
a State "reimbursement to the distributors that is close to
covering the cost of the stamp operation." Nonetheless, he
communicated that the process would be an expense and that small
distributors could not amortize the expense as well as larger
distributors. He noted however, that the Unfair Cigarette Sales
Measure, defined in Article 6 of Section 17 of the bill, would
assist distributors in offsetting the additional expense associated
with the stamping process.
Co-Chair Wilken asked whether a uniform State stamp or an
individual distributor stamp would be used.
Mr. Elerding clarified that the State stamp would be the only stamp
allowed.
Co-chair Wilken asked the amount the distributor anticipates
spending on this project.
Mr. Elerding stated that, in addition to the cost of the equipment,
the company would be required to locate adequate space in which to
conduct the stamping procedure and must provide the necessary
labor. He estimated the total expense to be approximately $75,000 a
year, with $50,000 of that being reimbursed by the State by means
of a discount on the purchase of the stamps.
Senator Taylor understood that Canada has experienced "huge
problems" with bootlegging, hijacking, and counterfeiting since the
nation increased its cigarette taxes. He asked whether the State of
Alaska has experienced an increase in bootlegging or black-
marketing since the cigarette tax was raised to one dollar a pack.
Ms. Bales responded that the State has experienced an increase in
these activities; particularly, in "gray market" activities where
cigarettes manufactured for other countries are finding their way
to the United States. She noted that while the State might be aware
of this situation, there are no current provisions in Alaska law
that would allow these cigarettes to be seized. She asserted that
enacting a stamp tax would address this situation.
Senator Olson asked the projected costs associated with the
enforcement of this legislation.
Ms. Bales responded that while the Department of Law has a zero
fiscal note attached to this legislation, the Department of
Revenue's $251,700 fiscal note would provide for three positions to
handle the purchase, sale, administration, and enforcement of the
new tax stamp program and cigarette shipping restrictions.
Senator Olson asked whether this tax stamp legislation would
encompass all types of tobacco.
Ms. Bales responded that the tax would be limited to cigarettes as
it would be impossible to automate a stamp process for the various
packaging or variety of product sizes.
Senator Olson asked whether the intent of this legislation is to
penalize transporters of cigarettes.
Ms. Bales responded yes, that private carriers would be penalized
were they to knowingly deliver cigarettes to an underage and
unlicensed individual.
Senator Olson voiced concern that transporters would be responsible
for enforcing this legislation.
Senator Bunde voiced the importance of noting that the key element
regarding the responsibility of transporters is the term
"knowingly."
Senator Olson furthered that "the last thing" on a small rural
transporting company's mind would be to monitor each pack of
cigarettes. He continued to voice concern regarding the
transporting issue.
Amendment #1: This amendment inserts a new subsection into Section
43.50.849 Definitions. of the bill on page 21, line 28 as follows.
(12) "trade discount" means a price reduction that is offered
by a cigarette manufacturer on the date of sale, is reflected
on the invoice as a deduction from the manufacturer's list
price and is fully earned and determininable on the date of
sale.
Senator Bunde moved for the adoption of Amendment #1.
Co-Chair Wilken objected for explanation.
Senator Bunde stated that, at the request of distributors, this
amendment would define the term "trade discount" which is a price
reduction offered by a cigarette manufacturer on the date of sale.
He explained that the discount would be reflected on the invoice
and would be a factor in the "minimum markup" determination of the
retail price of the cigarettes. He stated that the Department of
Revenue does not object to the amendment.
Ms. Bales clarified that the intent of the amendment is to assure
that cigarettes could not be sold below "cost" which is defined as
the price paid less the discount.
Co-chair Wilken surmised that this amendment, rather than address
concerns regarding the tax stamp, addresses industry trade
concerns.
Senator Bunde voiced that it addresses minimum price concerns.
Co-chair Wilken removed his objection.
There being no further objection, Amendment #1 was adopted.
Senator Taylor moved to report the bill from Committee with
individual recommendations and accompanying fiscal notes.
Senator Taylor then objected to his motion. He voiced his
continuing objection to taxation legislation; specifically tax
legislation that would result in expenses and enforcement
difficulties to the State. He reminded Members of testimony
indicating that the cigarette tax has resulted in bootlegging and
other illegal activities, and he worried that this legislation
would further those activities. He voiced that while Alaskan
retailers and wholesalers have legitimate concerns, the expense
associated with this legislation is "far greater" than its
projected benefit.
Senator Taylor removed his objection.
There being no further objection, CS SB 168 (FIN) was REPORTED from
Committee with fiscal note #1 in the amount of $251,700 from the
Department of Revenue and zero fiscal note #2 from the Department
of Law.
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