Legislature(2003 - 2004)

03/26/2004 07:05 AM House W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         March 26, 2004                                                                                         
                           7:05 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Mike Hawker, Chair                                                                                               
Representative Bruce Weyhrauch, Vice Chair                                                                                      
Representative Vic Kohring                                                                                                      
Representative Dan Ogg                                                                                                          
Representative Norman Rokeberg                                                                                                  
Representative Ralph Samuels                                                                                                    
Representative Peggy Wilson                                                                                                     
Representative Max Gruenberg                                                                                                    
Representative Carl Moses                                                                                                       
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Paul Seaton                                                                                                      
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 538                                                                                                              
"An Act  relating to  taxes on  cigarettes and  tobacco products;                                                               
relating to tax  stamps on cigarettes; relating  to forfeiture of                                                               
cigarettes   and   of   property   used   in   the   manufacture,                                                               
transportation,  or sale  of  unstamped  cigarettes; relating  to                                                               
licenses  and   licensees  under  the  Cigarette   Tax  Act;  and                                                               
providing for an effective date."                                                                                               
     - HEARD AND HELD                                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 538                                                                                                                  
SHORT TITLE: TOBACCO TAX; LICENSING; PENALTIES                                                                                  
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                                                                    
03/18/04       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/18/04       (H)       W&M, L&C, FIN                                                                                          
03/24/04       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                       
03/24/04       (H)       Heard & Held                                                                                           
03/24/04       (H)       MINUTE(W&M)                                                                                            
03/26/04       (H)       W&M AT 7:00 AM HOUSE FINANCE 519                                                                       
WITNESS REGISTER                                                                                                              
JOHANNA BALES, Excise Audit Manager                                                                                             
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Explained aspects of HB 538 and answered                                                                   
MIKE ELERDING, Owner                                                                                                            
Northern Sales                                                                                                                  
Ketchikan, Alaska                                                                                                               
POSITION STATEMENT:  Testified during the discussion of HB 538.                                                                 
MICHAEL BARNHILL, Assistant Attorney General                                                                                    
Commercial/Fair Business Section                                                                                                
Civil Division                                                                                                                  
Department of Law (DOL)                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered legal questions pertaining to HB
MEGAN TACK, Member                                                                                                              
Teens Against Tobacco Use                                                                                                       
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Spoke in favor of HB 538.                                                                                  
JENNIFER APP, Advocacy Director                                                                                                 
American Heart Association                                                                                                      
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Testified in support of HB 538.                                                                             
DORIS ROBBINS, Member                                                                                                           
Juneau Clean Air                                                                                                                
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Testified in support of HB 538.                                                                            
VANESSA SALINAS, Coordinator                                                                                                    
Smoke Free Anchorage Coalition                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in support of HB 538.                                                                            
CHRISTIE GARBE, Chief Executive Officer                                                                                         
American Lung Association                                                                                                       
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified in support of HB 538.                                                                            
CHAD BURNETTE                                                                                                                   
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Spoke in favor of HB 538.                                                                                  
STEVEN PORTER, Deputy Commissioner                                                                                              
Office of the Commissioner                                                                                                      
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Clarified  aspects of  HB 538  and answered                                                               
ACTION NARRATIVE                                                                                                              
TAPE 04-17, SIDE A                                                                                                            
Number 0001                                                                                                                     
CHAIR MIKE HAWKER called the  House Special Committee on Ways and                                                             
Means  meeting to  order at  7:05 a.m.   Representatives  Hawker,                                                               
Samuels, Kohring,  Weyhrauch, Wilson,  Gruenberg, and  Moses were                                                               
present at the  call to order.  Representatives  Ogg and Rokeberg                                                               
arrived as the meeting was in progress.                                                                                         
HB 538-TOBACCO TAX; LICENSING; PENALTIES                                                                                      
[Contains discussion of SB 168]                                                                                                 
Number 0100                                                                                                                     
CHAIR HAWKER announced  that the only order of  business would be                                                               
HOUSE BILL NO.  538, "An Act relating to taxes  on cigarettes and                                                               
tobacco products; relating to tax  stamps on cigarettes; relating                                                               
to  forfeiture  of  cigarettes  and   of  property  used  in  the                                                               
manufacture,  transportation, or  sale  of unstamped  cigarettes;                                                               
relating to licenses  and licensees under the  Cigarette Tax Act;                                                               
and providing for an effective date.                                                                                            
Number 0125                                                                                                                     
JOHANNA BALES, Excise Audit Manager,  Tax Division, Department of                                                               
Revenue  (DOR), introduced  herself  as the  product manager  for                                                               
cigarette and tobacco products tax.                                                                                             
CHAIR HAWKER asked Ms. Bales  to explain the bonding requirements                                                               
in HB 538.                                                                                                                      
MS. BALES  explained that the  licensees who purchase  tax stamps                                                               
from DOR and don't  wish to pay at that time  are allowed to make                                                               
a  deferred payment.   For  example,  if a  person purchases  tax                                                               
stamps in January  the payment would not be due  until the end of                                                               
February.  In  order to do this  the licensee has to  post a bond                                                               
worth twice  the amount of purchase.   Ms. Bales gave  an example                                                               
of a person who wanted to  purchase $5,000 worth of tax stamps in                                                               
a given month.  He or she would  have to post a bond for $10,000,                                                               
which would allow  for a $5,000 purchase in January  and a $5,000                                                               
purchase in  February, and the  January payment would not  be due                                                               
until  the end  of February  and,  therefore, the  bond would  be                                                               
sufficient to  cover the  entire $10,000  in tax  stamps received                                                               
without paying  for them.   If a person does  not want to  post a                                                               
bond, he  or she can  pay for the  tax stamps upon  purchase, she                                                               
Number 0333                                                                                                                     
CHAIR HAWKER asked if bonding is a common procedure in Alaska.                                                                  
MS. BALES  replied that it is.   Bonds are required  in alcoholic                                                               
beverage, motor fuel, and fisheries excise taxes, she said.                                                                     
CHAIR  HAWKER  redirected his  question  to  ask if,  within  the                                                               
excise tobacco  tax, bonding  is a  common procedure  utilized by                                                               
commercial businesses.                                                                                                          
MS.  BALES responded  that  about 50  percent  of businesses  use                                                               
CHAIR HAWKER asked Ms. Bales  if she could characterize those who                                                               
do use the deferred bond procedure.                                                                                             
MS. BALES  characterized those who  do make  use of the  bonds as                                                               
the larger  taxpayers -  the smaller taxpayers  just pay  for the                                                               
Number 0436                                                                                                                     
REPRESENTATIVE WILSON  asked how  many people buy  cigarettes and                                                               
sell them.                                                                                                                      
MS.  BALES  answered  that  there   are  about  75  licensees,  a                                                               
combination of  cigarette licensees,  and other  tobacco products                                                               
(OTP).   She  noted that  only  the cigarette  tax licensees  are                                                               
required to have a bond for the tax stamp.                                                                                      
CHAIR HAWKER  asked Mike Elerding to  testify as a case  in point                                                               
as  to how  the bonding  process works,  and to  speak about  his                                                               
concerns regarding an increase in  tax and potential consequences                                                               
from it.                                                                                                                        
MIKE ELERDING,  Owner, Northern Sales, related  that his business                                                               
is  required to  post a  bond for  the payment  of the  cigarette                                                               
stamps  purchased from  the  state.   He  said  his  bond at  the                                                               
current tax  rate is $700,000, and  he has been working  with his                                                               
insurance agent to  secure a larger bond of $1,000,000  due to an                                                               
increase in  sales.  However,  it has been a  challenging process                                                               
to  obtain the  larger  amount,  and a  tax  rate increase  would                                                               
require a bond of $2,000,000, which  he predicts would be an even                                                               
greater challenge.   He said his other choice is  to pay cash for                                                               
the stamps,  and the money  is just not there.   He called  it an                                                               
unintended consequence of the bill.                                                                                             
MR. ELERDING pointed out that he  has been paying a cigarette tax                                                               
for over  20 years,  and his  payment record  with the  state has                                                               
been above reproach as a  valuable partner helping to collect the                                                               
excise taxes.  He emphasized  that this legislation does not seem                                                               
to recognizes  the value  of his entity's  services as  a partner                                                               
for collecting the stamps.   He questioned who would provide this                                                               
service if distributors such as himself are out of the picture.                                                                 
Number 0909                                                                                                                     
CHAIR  HAWKER asked  Mr. Elerding  if  he agrees  with the  logic                                                               
applied by  DOR as  to how  a 200 percent  of monthly  sales bond                                                               
requirement is determined.                                                                                                      
MR.  ELERDING  replied  that  he  understands  it  and  does  not                                                               
disagree with  it.  He  mentioned talking to his  insurance agent                                                               
about  putting a  cap on  the  bond amount,  but said  he is  not                                                               
comfortable  with  that idea.    He  said  he  is looking  for  a                                                               
creative  way to  solve the  problem of  having to  come up  with                                                               
another $1,000,000  bond for his  company caused by  the doubling                                                               
of the bond amount.                                                                                                             
CHAIR  HAWKER  asked  that  Mr.  Elerding  think  about  offering                                                               
components  of  a  solution  to  that problem  later  on  in  the                                                               
Number 1059                                                                                                                     
REPRESENTATIVE  GRUENBERG asked  where in  the statutes  it talks                                                               
about bonding.                                                                                                                  
MS. BALES replied, AS 43.50.550.                                                                                                
CHAIR HAWKER  indicated that  copies of  that citation  have been                                                               
distributed [to the members of the committee].                                                                                  
REPRESENTATIVE GRUENBERG  inquired if there  is a way  of solving                                                               
the aforementioned bonding  issue.  He noted that a  few days ago                                                               
on the House  floor, there was an issue of  reclamation bonds for                                                               
mining, and  the Department of Natural  Resources (DNR) suggested                                                               
a  change  in the  wording  that  allowed  other forms,  such  as                                                               
letters  of  credit, for  security.    He  asked for  Ms.  Bale's                                                               
opinion of that concept.                                                                                                        
MS. BALES  replied that DOR is  not opposed to that  concept, and                                                               
it  is  allowed  for  other  types of  excise  tax  such  as  the                                                               
alcoholic beverage  excise tax where unencumbered  properties are                                                               
allowed to be posted to secure the tax owed.                                                                                    
Number 1238                                                                                                                     
REPRESENTATIVE GRUENBERG asked for a citation on that concept.                                                                  
MS. BALES said  she believes that is in  DOR's regulations, which                                                               
is 15 AAC, Chapter 60.                                                                                                          
REPRESENTATIVE  GRUENBERG  asked  if  there  is  a  statute  that                                                               
authorizes that regulation.                                                                                                     
MS. BALES replied  she would get back to the  committee with that                                                               
REPRESENTATIVE GRUENBERG asked if,  conceptually, [DOR] would not                                                               
be opposed to that concept.                                                                                                     
MS. BALES replied she does not  believe [DOR] would be opposed to                                                               
REPRESENTATIVE GRUENBERG asked  Mr. Elerding if he  has heard the                                                               
dialogue between Ms. Bales and himself.                                                                                         
MR. ELERDING replied that he has.                                                                                               
REPRESENTATIVE GRUENBERG  inquired if  it would be  an acceptable                                                               
Number 1338                                                                                                                     
MR.  ELERDING,  speaking  from   past  experience  as  a  banker,                                                               
replied,  "Partially."   He  related  that  he is  familiar  with                                                               
securities that  could be used, such  as a letter of  credit, but                                                               
he opined it would be equally  challenging.  He explained that he                                                               
already  has  had  to  boost  his  line  of  credit  to  pay  for                                                               
additional business  expenses, and financing costs  will increase                                                               
again when the  new tax is applied due to  carrying more valuable                                                               
REPRESENTATIVE WILSON referred to a  letter from Mr. Elerding and                                                               
asked about  the state charging no  excise tax for mail  order or                                                               
Internet companies  to ship  OTP to Alaska,  but charging  tax to                                                               
companies  in the  state.   She noted  that it  is a  problem and                                                               
asked Mr. Elerding to respond.                                                                                                  
MR.  ELERDING  explained  that  OTP are  cigars  and  other  non-                                                               
cigarette  products   more  adult  in  nature.     All  wholesale                                                               
businesses  in Alaska  are required  to pay  75 percent  OTP tax.                                                               
For example,  if a  product costs  $10, the excise  tax on  it is                                                               
$7.50  so  the  total  cost  of the  product  without  markup  or                                                               
anything else  would be $17.50.   If  a mail order  business from                                                               
another state  sells OTP to  a consumer  in Alaska, they  are not                                                               
required to  pay the 75 percent  excise tax, and the  cost of the                                                               
same product  is only  $10.   The consequence  is that  the state                                                               
does  not collect  a  lot  of OTP  tax  from Alaska  distributors                                                               
because they cannot afford to  sell those products.  Mr. Elerding                                                               
said this  looks like  a loophole  that needs to  be closed.   He                                                               
suggested not increasing  the OTP tax to 100  percent, but rather                                                               
collecting the tax from out-of-state mail order companies.                                                                      
CHAIR HAWKER asked Ms. Bales to comment.                                                                                        
Number 1914                                                                                                                     
MS. BALES corrected a few  statements made by Mr. Elerding saying                                                               
that any out-of-state distributor who  holds an Alaska license to                                                               
sell cigarettes  into the state is  required to pay the  OTP tax.                                                               
She explained  that the  loophole for OTP  is when  an individual                                                               
buys from  an out-of-state retailer  on-line and  the distributor                                                               
is not  licensed in Alaska,  then the individual is  not required                                                               
to  remit  the  OTP  tax   like  they  would  if  they  purchased                                                               
cigarettes  from  an  unlicensed   distributor.    She  said  the                                                               
loophole is smaller, but still a legitimate concern.                                                                            
CHAIR HAWKER asked if the state  has the authority to require all                                                               
out-of-state sellers to register with the state.                                                                                
MS. BALES  said no.   She referred to  a U.S. Supreme  Court case                                                               
called [Quill  Corporation vs. North  Dakota], a sales  tax case,                                                             
that states  "if an  out-of-state entity  does not  have physical                                                               
presence or nexus in your state,  the state cannot be required to                                                               
have those  companies collect  excise or use  tax for  the state.                                                               
That's  why,  in  the  cigarette   tax  arena,  we  look  to  the                                                               
individual who imported the product to pay the tax," she said.                                                                  
REPRESENTATIVE WILSON  asked if  there is any  way this  could be                                                               
dealt with.                                                                                                                     
MS. BALES  answered that [the  legislature] could pass  a statute                                                               
that requires  the individual who  imports OTP into the  state to                                                               
remit the tax, similar to retail distributors, on that product.                                                                 
REPRESENTATIVE WILSON  asked if there  already is a law  in place                                                               
for people who resell tobacco products.                                                                                         
MS.  BALES replied  yes, and  that a  new statute  would have  to                                                               
address  paying  a  tax  for  bringing OTP  into  the  state  for                                                               
personal consumption, which is already in place for cigarettes.                                                                 
REPRESENTATIVE  GRUENBERG requested  that Mr.  Barnhill join  Ms.                                                               
Bales to  testify.   He noted that  [Quill Corporation  vs. North                                                             
Dakota]  and the  issue of  nexus are  major issues  dealing with                                                             
sales  and excise  taxes.    He summarized  [the  Quill case]  by                                                             
saying "to  levy a tax on  an out-of-state merchant, you  have to                                                               
show  that there  is  a physical  presence of  some  kind in  the                                                               
state."  He asked Mr. Barnhill for further clarification.                                                                       
Number 2430                                                                                                                     
MICHAEL  BARNHILL,  Assistant Attorney  General,  Commercial/Fair                                                               
Business  Section,  Civil  Division,  Department  of  Law  (DOL),                                                               
explained that the Quill case was  a case that involved the Quill                                                             
pen  company, a  mail order  company selling  pens and  having no                                                               
physical presence  in North  Dakota.   North Dakota  attempted to                                                               
get the Quill  Corporation to collect a use tax  on the pens, the                                                               
company appealed it, and it went  all the way to the U.S. Supreme                                                               
Court.  He explained:                                                                                                           
     In  a  decision that  has  been  harshly criticized  by                                                                    
     academic  commentators,  the  Supreme  Court  concluded                                                                    
     that  North Dakota  did  have  jurisdiction over  Quill                                                                    
     under  the due  process clause,  because ...  Quill had                                                                    
     minimum contacts  with the state.   However,  under the                                                                    
     commerce  clause, the  U.  S.  Supreme Court  concluded                                                                    
     that  physical presence  was required.   And  it's that                                                                    
     aspect of  the decision that's been  very controversial                                                                    
     and there's  been discussion amongst the  states - that                                                                    
     case came  out in  1992 -  but there's  been discussion                                                                    
     recently about finding  a test case to take  it back up                                                                    
     and challenge that decision.                                                                                               
MR. BARNHILL mentioned that Senator  Ben Stevens' sales tax bill,                                                               
recently  introduced in  the  Senate, has  a  provision called  a                                                               
"Quill  provision,  which  extends the  state's  jurisdiction  to                                                             
collect  taxes  under  that  bill  to the  folks  in  the  U.  S.                                                               
Constitution."   He  added, "If  that  tax is  enacted the  state                                                               
could take a Quill test case back up."                                                                                        
Number 2613                                                                                                                     
REPRESENTATIVE GRUENBERG requested that  Mr. Barnhill provide the                                                               
location of that particular clause,  and asked for his opinion if                                                               
an amendment addressing that issue were to be added to [HB 538].                                                                
MR. BARNHILL replied  that in the context of  cigarette sales for                                                               
most   out-of-state   sales,   including   Indian   reservations,                                                               
collectability is  an issue.   He opined  it is probably  not the                                                               
best context in which to do a Quill test case.                                                                                
REPRESENTATIVE GRUENBERG suggested that if  DOL were to take on a                                                               
test case, it should be an off-reservation distribution.                                                                        
MR. BARNHILL  said that type  of distributor might be  paying the                                                               
tax  already.   He  mentioned  that several  states  were in  the                                                               
process of testing Quill.                                                                                                     
REPRESENTATIVE  GRUENBERG  asked  if  there  are  other  ways  of                                                               
meeting the  Quill criteria.   He  said there  is a  provision in                                                             
Alaska  law that  provides for  a non-state  resident driving  in                                                               
Alaska  to authorize  a governmental  agency to  be an  agent for                                                               
service  of process  if the  person is  sued.   Those cases  have                                                               
survived  a  court challenge.    He  inquired if  a  distribution                                                               
business with minimum  contacts in the state  could authorize DOR                                                               
to be its nexus for the purpose of collecting taxes.                                                                            
MR. BARNHILL replied that is  almost identical to the Quill facts                                                             
except  an agent  is being  deemed for  service of  process.   He                                                               
opined, "It would not  get you any further."  [A  case] has to go                                                               
back before the U.S. Supreme Court  to be tested because 1992 was                                                               
pre-Internet,  the market  place has  changed radically,  and the                                                               
law has to catch up, he concluded.                                                                                              
REPRESENTATIVE GRUENBERG asked  if any other states  have come up                                                               
with creative ways to [deal with this problem].                                                                                 
MR. BARNHILL  said he did not  know, but believed that  way to do                                                               
it is  to take  the same  fundamental question  back to  the U.S.                                                               
Supreme Court.                                                                                                                  
CHAIR HAWKER opened public testimony.                                                                                           
Number 3030                                                                                                                     
MEGAN TACK, Member,  Teens Against Tobacco Use,  related that her                                                               
organization lets youth know about  all of the harmful effects of                                                               
tobacco  and tries  to  prevent its  use.   She  said that  money                                                               
motivates  people and  if the  price of  cigarettes is  raised it                                                               
could  motivate people  to stop  smoking or  not to  start.   She                                                               
explained that a pack of cigarettes  costs $5, and by not smoking                                                               
for four  years during  high school  she could  afford to  take a                                                               
trip around the  world, to pay for her first  year in college, or                                                               
to buy  a small car.   She said that  [HB 538] will  help prevent                                                               
smoking by teens.                                                                                                               
CHAIR HAWKER asked Ms. Tack if she attends school in Juneau.                                                                    
MS. TACK replied she does.                                                                                                      
CHAIR  HAWKER  asked  if  smoking amongst  her  peers  is  fairly                                                               
MS. TACK  said it is.   She related her experience  attending the                                                               
Gold Medal Tournament  dance where she saw  many under-aged teens                                                               
smoking.  She  shared that her parents both  use tobacco products                                                               
and it bothers her.                                                                                                             
Number 3317                                                                                                                     
REPRESENTATIVE SAMUELS  asked Ms.  Tack how  her friends  get the                                                               
cigarettes and whether they get older friends to buy them.                                                                      
MS. TACK replied  that she doesn't have many  friends that smoke,                                                               
but acquaintances  have older friends  that buy  [cigarettes] for                                                               
REPRESENTATIVE WEYHRAUCH asked  if Ms. Tack is  familiar with the                                                               
smoking court for youth who smoke.                                                                                              
MS. TACK said she is somewhat  familiar with that.  She mentioned                                                               
she  is on  the Juneau  Youth  Court which  has recently  started                                                               
taking tobacco cases.                                                                                                           
REPRESENTATIVE WEYHRAUCH asked if it  has had any effect to deter                                                               
MS. TACK replied that she is not sure.                                                                                          
CHAIR HAWKER  stated his support  for youth courts  and mentioned                                                               
the commitment by the legislature  in the social services part of                                                               
the budget  to put extra money  in for youth courts.   He thanked                                                               
Ms. Tack for her part in the Juneau Youth Court.                                                                                
Number 3444                                                                                                                     
REPRESENTATIVE OGG thanked  her for her testimony  and then asked                                                               
her  how much  she  thought  students would  pay  for  a pack  of                                                               
MS. TACK  said her  mom pays around  $5 to $6  for a  pack, which                                                               
makes  her mad  because the  money could  be going  toward buying                                                               
REPRESENTATIVE  OGG  wondered  what   students  were  paying  for                                                               
cigarettes when their older friends were buying them.                                                                           
MS. TACK replied that she did not know.                                                                                         
REPRESENTATIVE WILSON thanked Ms. Tack for her testimony.                                                                       
Number 3608                                                                                                                     
JENNIFER  APP,  Advocacy  Director, American  Heart  Association,                                                               
stated  that  this is  a  health  issue  because smoking  is  the                                                               
leading  cause   of  cardiovascular  death  in   Alaska,  and  is                                                               
responsible for  one out  of every  five deaths.   She  said that                                                               
this  legislation will  decrease that  number, generate  revenue,                                                               
and save money.  She noted  that 67 percent of Alaskans like this                                                               
bill.  She  spoke about the "red-herring", the  concern that this                                                               
bill would increase  the tax evasion problem,  mentioned by Emily                                                               
Nenon in  the last hearing.   Every state that  has significantly                                                               
increased  its tax  rate, has  received substantially  more state                                                               
revenue   than  it   would   have   otherwise  received   despite                                                               
consumption  declines  or  any   increase  in  smuggling  or  tax                                                               
avoidance, she pointed out.                                                                                                     
MS.  APP, referring  to the  discussion during  the last  hearing                                                               
about the problems New York  has encountered with smuggling, said                                                               
she looked for  a state that might be more  similar to Alaska for                                                               
comparison.   She  explained that  Hawaii in  2001 established  a                                                               
stamp tax requirement  like Alaska did [in 2003]  and also raised                                                               
the  tax.   They generated  $75 million  last year,  up from  $61                                                               
million  before the  increase in  tax.   She opined  that Alaska,                                                               
with the  stamp tax  and the  proposed tax  increase, as  well as                                                               
with  the  enforcement  programs,  has  the  tools  in  place  to                                                               
effectively increase the tax like Hawaii did.                                                                                   
MS.  APP  noted  that  only   4  percent  of  smokers  buy  their                                                               
cigarettes on-line  or through  mail order.   She said  that that                                                               
number  is not  expected to  change  because over  80 percent  of                                                               
smokers  are  trying to  quit,  which  means that  their  smoking                                                               
purchasing habits  tend to be  to buy one pack  at a time.   That                                                               
population is not seeking out Internet  sales to buy in bulk, she                                                               
concluded.  She stated her strong support for the bill.                                                                         
Number 4021                                                                                                                     
REPRESENTATIVE OGG asked  what the decrease of  youth smoking was                                                               
in Hawaii.                                                                                                                      
MS. APP said she could get that information for the committee.                                                                  
REPRESENTATIVE OGG  asked what the  impact of advertising  has on                                                               
youth smoking.                                                                                                                  
MS.  APP replied  that from  1995  to 2003  there has  been a  50                                                               
percent  decrease  in  Alaska of  high  school  student  smoking.                                                               
During that  time the tobacco  tax increased up  to $1 a  pack in                                                               
1997,  and at  the  same  time, the  money  for  the 1998  Master                                                               
Settlement   Agreement   started   being  put   towards   tobacco                                                               
prevention and  control, a  counter-marketing campaign.   Because                                                               
of  the  overlap  of  those  two factors,  it  is  very  hard  to                                                               
determine what  was responsible  for the decline.   For  every 10                                                               
percent decrease in  the price of cigarettes, there is  about a 7                                                               
percent decrease  in youth  smoking, she  related.   Other states                                                               
that  have not  increased the  tobacco  tax, but  have started  a                                                               
prevention  campaign with  the money  from the  Master Settlement                                                               
Agreement, have also seen a decrease.                                                                                           
Number 4300                                                                                                                     
REPRESENTATIVE  OGG, referring  to the  increase in  tax and  the                                                               
potential  increase in  bootlegging, inquired  if the  people who                                                               
are dealing  in black-market cigarettes  are making a  profit off                                                               
of youth.                                                                                                                       
MS. APP  deferred to Ms.  Bales for the  answer.  She  noted that                                                               
because of  the continued  decrease in  youth smoking  it doesn't                                                               
seem to  be true  that youth are  taking advantage  of bootlegged                                                               
cigarettes.  She  pointed out that in the years  that the tax was                                                               
increased,  1997  to  present,  there has  been  an  increase  in                                                               
revenue  generated by  the tax,  about  $47 million  a year,  and                                                               
there has  not been a  dip or  drop that would  suggest effective                                                               
REPRESENTATIVE OGG  said the  present tax seems  to be  doing the                                                               
job of decreasing smoking.                                                                                                      
MS. APP  agreed but said  that there  are still some  pretty high                                                               
smoking statistics:   44  percent of  Alaska Native  youth smoke,                                                               
26-27 percent  of adults smoke,  which is more than  most states.                                                               
She mentioned  that other states  are increasing the  tobacco tax                                                               
to keep up with inflation so that it has an impact.                                                                             
Number 4646                                                                                                                     
DORIS  ROBBINS,   Member,  Juneau   Clean  Air,  said   she  also                                                               
volunteers for the Alaska for Tobacco Free Kids.                                                                                
TAPE 04-17, SIDE B                                                                                                            
MS.  ROBBINS continued  to say  that she  supports Teens  Against                                                               
Tobacco, also.   Preventing kids  and adults from smoking  is the                                                               
most important goal of  this bill.  She said in  1998 the cost to                                                               
Medicaid  from tobacco  caused illnesses  was $60  million.   She                                                               
suggested that increasing the tobacco  tax will help recover some                                                               
of  those costs,  and she  called it  a pre-insurance  charge for                                                               
when  smokers have  exhausted  their  own funds  and  must go  on                                                               
Medicaid.   She cited  an example  of a friend  who died  about a                                                               
year ago who was in this situation.                                                                                             
CHAIR HAWKER  requested that  Ms. Robbins provide  a copy  of her                                                               
written testimony for the members of the committee.                                                                             
MS.  ROBBINS continued  saying that  protection  from smokers  in                                                               
U.S.  Department  of  Housing and  Urban  Development  (HUD)  and                                                               
Alaska Housing needs  to be considered in this  bill.  Secondhand                                                               
smoke is  a problem for  the elderly, she explained,  saying that                                                               
she,  herself,  has  had chronic  illness  caused  by  secondhand                                                               
smoke.   She  concluded  by  saying that  tobacco  must begin  to                                                               
accept responsibility for  its costs and she  asked the committee                                                               
to consider all that she has said and raise the tobacco tax.                                                                    
Number 3905                                                                                                                     
VANESSA  SALINAS, Coordinator,  Smoke  Free Anchorage  Coalition,                                                               
related  that  she  works  with youth  groups  in  Anchorage  who                                                               
educate their peers on the  dangers of tobacco use and secondhand                                                               
smoke.  She said the youth  in her group are aware of advertising                                                               
tactics  used  to  make  smoking   attractive,  as  well  as  the                                                               
consequences of smoking.   The kids are telling her  that the use                                                               
of chew is  on the rise in  Anchorage.  She pointed  out that the                                                               
more cigarettes  cost, the less likely  kids are to buy  them and                                                               
get addicted.  Raising taxes will saves lives, she concluded.                                                                   
CHAIR  HAWKER  noted  that  Representatives  Ogg,  Rokeberg,  and                                                               
Seaton were in attendance.                                                                                                      
Number 3630                                                                                                                     
CHRISTIE   GARBE,   Chief   Executive  Officer,   American   Lung                                                               
Association, spoke  in support  of [HB 538].   She  remarked that                                                               
the tobacco tax  increase is one strategy along  with the counter                                                               
marketing  pieces,   youth  activism,  community   activism,  and                                                               
enforcement  all  working  together  to  create  the  50  percent                                                               
reduction in youth smoking.   She advocated for keeping the price                                                               
of cigarettes high,  because an estimated 12,000  lives have been                                                               
saved because  of the reduction in  youth smoking.  It  costs the                                                               
state and  citizens of Alaska  over $6.38 per pack  in healthcare                                                               
costs  and lost  productivity, so  even at  $2.00 per  pack, this                                                               
activity is  still being subsidized,  she noted.  She  stated the                                                               
importance  of  keeping the  price  of  cigarettes high  and  her                                                               
appreciation for the committee's work.                                                                                          
REPRESENTATIVE ROKEBERG  asked Ms. Garbe to  describe the history                                                               
of  the  use  of  the  funds from  the  [1998  Master  Settlement                                                               
Agreement] for  tobacco prevention and control  programs, and the                                                               
status of the current budget.                                                                                                   
MS. GARBE responded that Alaska  brings in about $25 million each                                                               
year  from the  Master  Settlement Agreement  and  80 percent  is                                                               
being used  for capital projects,  and 20 percent, $4  million to                                                               
$5 million  per year,  could be used  for tobacco  prevention and                                                               
control programs.  The Center  for Disease Control and Prevention                                                               
recommend  a minimum  of $8  million a  year for  those programs;                                                               
however, since FY  99 only $1.4 million, a small  portion of that                                                               
$20 million, has been used for  that purpose.  She explained that                                                               
the tobacco control community works each  year to get more of the                                                               
$20 million left for tobacco prevention and control programs.                                                                   
REPRESENTATIVE  ROKEBERG asked  about the  latest budget  figures                                                               
related to Medicaid and tobacco cessation programs.                                                                             
MS. GARBE said  it is her understanding that  $1,000,000 has been                                                               
put  into  a budget  amendment  to  be  returned to  the  tobacco                                                               
prevention  and control  programs, but  the other  $500,000 still                                                               
needs to  returned so that the  full 20 percent is  available for                                                               
use.   Only in FY 03  was the full 20  percent actually available                                                               
to be used, she said.                                                                                                           
REPRESENTATIVE ROKEBERG  asked if  there is a  connection between                                                               
those programs and this legislation.                                                                                            
Number 3141                                                                                                                     
MS. GARBE replied absolutely not  and emphasized, "We are only in                                                               
favor  of  the  tax  because  its health  benefits.    We're  not                                                               
interested,  nor  do we  expect  any  of  the revenue  for  these                                                               
programs."   She maintained  that the moral  fiber of  the Master                                                               
Settlement Agreement funds should be  the funds that are used for                                                               
these tobacco prevention and control programs.                                                                                  
REPRESENTATIVE ROKEBERG  said he  wanted to make  a point  to the                                                               
committee that this  has been an on-going battle for  a number of                                                               
years.   He said, "All of  this should be weaved  together in the                                                               
web of our  lawmaking in terms of public policy  and where we are                                                               
going.   You  folks should  be aware  that the  Master Settlement                                                               
Agreement  money  comes from  a  45  cent  tax  per pack  to  the                                                               
smoker."   One of the portions  of the agreement is  to put money                                                               
into  tobacco  prevention  and   cessation  programs,  which,  he                                                               
opined,  has  failed to  be  adequately  done.    He said  he  is                                                               
concerned  about  going  forward  and  increasing  taxes  on  the                                                               
smoking public, but not funding  the programs that they have paid                                                               
for.  He  stated his concern about not having  control over where                                                               
the money collected by the tax is going.                                                                                        
Number 3000                                                                                                                     
CHAD  BURNETTE shared  personal insights  about growing  up in  a                                                               
smoking family.   He surmised that  if it had cost  more to smoke                                                               
it is possible that members of  his family might have quit or not                                                               
smoked as much.   He mentioned the cost to  taxpayers in terms of                                                               
money and loss  of income from tobacco-related illness.   He said                                                               
he  isn't sure  a tax  could  be created  that is  big enough  to                                                               
offset those  costs.  He  posed the question, "What's  costing us                                                               
more,  doing nothing  about it,  or perhaps,  implementing a  tax                                                               
that could save lives and money."                                                                                               
Number 2715                                                                                                                     
MR. ELERDING  related that  even though the  tobacco tax  of 1997                                                               
was successful in cutting the  numbers of people who smoke, every                                                               
tax has  unintended consequences.   He  urged the  legislature to                                                               
exercise caution and  use laws already on the books  to deal with                                                               
underage  smoking,  and not  "trample  the  rights of  legitimate                                                               
Alaska  business  interests  and  of Alaska's  adult  smokers  by                                                               
raising the tax  to fix the problem because,  invariably, it will                                                               
create unintended consequences."                                                                                                
CHAIR HAWKER thanked Mr. Elerding  for pointing out the technical                                                               
aspects that  would affect  his business.   He related  that [the                                                               
committee] would  be working  its way  through [those  issues] in                                                               
the bill.                                                                                                                       
REPRESENTATIVE  ROKEBERG asked  Mr.  Elerding if  he is  involved                                                               
with vending machines in his business.                                                                                          
MR. ELERDING replied that he has one vending machine in Kodiak.                                                                 
REPRESENTATIVE  ROKEBERG  said it  has  been  suggested that  the                                                               
licensing fee for vending machines  be increased from $25 to $50.                                                               
He asked  Mr. Elerding for his  opinion on the impact  this would                                                               
Number 2254                                                                                                                     
MR. ELERDING  opined that most  people who have  vending machines                                                               
are  operating  in  a  bar  environment  where  there  are  adult                                                               
consumers, and an increase would not be a large burden to them.                                                                 
CHAIR HAWKER  clarified that the  amount is $50 per  license, not                                                               
per machine.                                                                                                                    
REPRESENTATIVE  ROKEBERG  wondered  what amount  other  municipal                                                               
governments are charging for tobacco tax.                                                                                       
CHAIR  HAWKER  closed public  testimony.    He noted,  with  some                                                               
consternation,  that  public   testimony  had  been  specifically                                                               
extended at  the request  of the  [tobacco] industry  who elected                                                               
not to testify today.                                                                                                           
Number 2103                                                                                                                     
MS.  BALES, in  response  to  Representative Rokeberg's  question                                                               
about  municipal excise  taxes, related  that Anchorage,  Juneau,                                                               
and Fairbanks levy  such taxes.  Anchorage and Juneau  levy a tax                                                               
on  cigarettes of  30 cents  per  pack, and  Fairbanks charges  a                                                               
straight 8 percent excise or sales tax.                                                                                         
REPRESENTATIVE  ROKEBERG   asked  if  the   local  municipalities                                                               
collect the  tax similar to the  way DOR collects it,  and if DOR                                                               
works with them in any way.                                                                                                     
MS. BALES  replied that  DOR does  not collect  the tax  on their                                                               
behalf.  She said it is  her understanding that the taxpayer base                                                               
is very similar to DOR's.                                                                                                       
REPRESENTATIVE ROKEBERG  asked if any  city could levy a  tax for                                                               
tobacco products.                                                                                                               
MS. BALES said she believes so.                                                                                                 
REPRESENTATIVE SAMUELS  inquired what  the penalty is  for giving                                                               
tobacco products to minors.                                                                                                     
MS. BALES deferred to Mr. Barnhill.                                                                                             
MR. BARNHILL  replied it is a  criminal law question and  he does                                                               
not know.                                                                                                                       
REPRESENTATIVE SAMUELS responded that he can find out.                                                                          
Number 1842                                                                                                                     
REPRESENTATIVE  OGG  related  a conversation  with  Steve  Porter                                                               
[Deputy  Commissioner, Office  of  the Commissioner,  DOR], of  a                                                               
discussion  of  page  2  [of   the  bill].    Representative  Ogg                                                               
requested clarification  of whether  the provision applies  to an                                                               
individual who  imports [cigarettes] or  just to a  business that                                                               
MR. BARNHILL explained the aspects  of the bill beginning on page                                                               
4.   Under  the Alaska  State Constitution  an innocent  owner is                                                               
protected from  by a due process  right and all statutes  [in the                                                               
bill]  have  been  drafted  to   protect  that  right,  he  said.                                                               
Equipment and material used in  the manufacturing, sale, offering                                                               
for  sale,  or  possession  for  sale,  barter,  or  exchange  of                                                               
cigarettes  can  be  seized  during  criminal  activity  such  as                                                               
selling unstamped cigarettes, he  explained.  Aircraft, vehicles,                                                               
or vessels  used to transport, as  well as money, can  be seized.                                                               
The seizure process involves going to  court to get a court order                                                               
and showing  probable cause, he said.   There is a  provision for                                                               
seizing property without getting a court  order, but it has to be                                                               
incident  to  a  valid  arrest  or search,  subject  to  a  prior                                                               
judgment, or  if there is probable  cause, he noted.   The courts                                                               
are always involved  and notice in various forms has  to be given                                                               
to owners  after the seizure  has taken place.   Next is  a court                                                               
hearing to decide what happens to the property, he said.                                                                        
MR. BARNHILL referred to page 6,  subsections (e) and (f), as the                                                               
provisions  that protect  innocent owners.   Subsections  (h) and                                                               
(i) [on  page 7]  state where the  property is going  to go.   He                                                               
termed subsection  (j), [page 7],  as a unique section  that goes                                                               
beyond what  Alaska constitutional law  requires.  If  the vessel                                                               
or  vehicle   is  in  a  village   and  is  the  sole   means  of                                                               
transportation for a  family residing in the  village, then there                                                               
is an  option for the  court to give  that property back.   Great                                                               
lengths  have  been  taken  to protect  the  rights  of  innocent                                                               
owners, he  concluded.  He  said this  does not apply  to persons                                                               
ordering   cigarettes   through   the   Internet   for   personal                                                               
consumption,  only businesses  that  are in  violation of  Alaska                                                               
MR.  BARNHILL, referring  to  questions  from Representative  Ogg                                                               
about  bootlegging  in Alaska,  said  he  does  not know  of  any                                                               
studies; however, he  said he does have  information on smuggling                                                               
in other states and countries.                                                                                                  
Number 1236                                                                                                                     
STEVEN PORTER,  Deputy Commissioner, Office of  the Commissioner,                                                               
Department  of Revenue,  in response  to an  earlier question  by                                                               
Representative Ogg, clarified that the  language in the bill does                                                               
not apply to individuals.  He  cited the language on page 5, line                                                               
4, "manufactured, sold, offered for  sale, possessed for sale" as                                                               
evidence  that  applies  only  to   businesses  and  not  private                                                               
REPRESENTATIVE OGG  offered two  examples of where  an individual                                                               
may be liable for forfeiture  consequences.  The first example is                                                               
if someone  in a  village goes  to the airport  in their  car and                                                               
picks up a  package of cigarettes they ordered  through the mail.                                                               
Then, they  barter cigarettes with  a kid  for salmon.   He noted                                                               
that that  person would  fit under the  stipulations on  [page 5,                                                               
lines 3-6].   He also pointed out that on  page 2, [lines 10-16],                                                               
an individual who imports cigarettes  is required to pay the tax.                                                               
He said he  doesn't see the difference between  an individual and                                                               
a  business, as  far as  forfeiture is  concerned, as  Mr. Porter                                                               
tried  to point  out.    He voiced  a  concern  about creating  a                                                               
criminal class of people who are just addicted to cigarettes.                                                                   
MR.  PORTER replied  that [page  2, lines  10-16] applies  to the                                                               
liability for the tax itself.   A person who imports is liable to                                                               
pay the  tax, and that  clause only applies to  those responsible                                                               
for paying  the tax, he  explained.  The forfeiture  provision is                                                               
the  penalty side  of  the tax,  and only  those  people who  are                                                               
liable to  pay the  tax, those who  manufacture, sell,  or resell                                                               
cigarettes, are subject  to forfeiture, he said.   In response to                                                               
Representative   Ogg's    first   example,   Mr.    Porter   said                                                               
Representative Ogg  is probably  correct [in assuming  the person                                                               
would be liable  for forfeiture] because that  person has entered                                                               
the next stage, which is to barter or sell.                                                                                     
Number 0737                                                                                                                     
REPRESENTATIVE  OGG restated  his  concern  about the  forfeiture                                                               
part of  the bill when the  price of the cigarette  tax is raised                                                               
above other states and a  criminal element is potentially created                                                               
in Alaska.   "Why should we put ourselves at  that height so that                                                               
we  have  to adopt  these  kind  of  penalties?"  he asked.    He                                                               
predicted the penalties will have an impact on villages.                                                                        
MR. PORTER asked  Representative Ogg if he is  concerned with the                                                               
commercial businesses or just the private parties.                                                                              
REPRESENTATIVE  OGG  replied  that  he  is  more  concerned  with                                                               
individual citizens  because the  tax will  be aimed  at addicted                                                               
adult smokers creating a prohibition status on cigarettes.                                                                      
MR. PORTER  responded that he  feels page  5, [lines 3-6]  are of                                                               
the  most  concern  to  Representative   Ogg,  and  he  suggested                                                               
deleting  six or  seven words  out  of that  section after  first                                                               
talking  to Legislative  Legal and  Research  Services about  the                                                               
legal implications of doing so.                                                                                                 
Number 0358                                                                                                                     
REPRESENTATIVE  ROKEBERG  asked  at  what  point  the  regulatory                                                               
enforcements take place.                                                                                                        
MS. BALES replied that last year  SB 168, the cigarette Stamp Tax                                                               
Act became  effective on January  1, 2004.  One  provision states                                                               
that an  individual can bring  five packs of cigarettes  into the                                                               
state each month without paying tax.                                                                                            
REPRESENTATIVE  ROKEBERG  replied  that  five  packs  is  half  a                                                               
carton, so  anyone who  brings back a  carton of  cigarettes from                                                               
Seattle is  a criminal.   He  said that  is awful.   He  asked if                                                               
those persons would be subject to an "enforcement net."                                                                         
MR. PORTER said there are many  statutes on the books that people                                                               
violate  every day  and that  law enforcement  looks at  the more                                                               
egregious elements.  He compared  it to child support enforcement                                                               
where  the worst-case  violations  are pursued  because there  is                                                               
limited number of personnel in enforcement.                                                                                     
Number 0045                                                                                                                     
CHAIR HAWKER  offered a personal  observation about  the interest                                                               
of small  businesses being protected from  predatory pricing from                                                               
out-of-state vendors by adding strict sidebars.                                                                                 
REPRESENTATIVE ROKEBERG  said that  this bill would  put Alaskans                                                               
in violation of the law.  He asked, "Where do we draw the line?"                                                                
TAPE 04-18, SIDE A                                                                                                            
MR. PORTER  replied that  no one  is in violation  of the  law by                                                               
bringing cigarettes into the state;  they are in violation of the                                                               
law by avoiding paying the tax.                                                                                                 
REPRESENTATIVE  ROKEBERG asked  if that  individual needs  to pay                                                               
tax on cigarettes bought in Washington.                                                                                         
MR. PORTER replied yes.                                                                                                         
REPRESENTATIVE WILSON replied, "The law's  the law.  If you break                                                               
the law, you pay the penalty."                                                                                                  
REPRESENTATIVE  ROKEBERG suggested  not  enacting  bad laws  with                                                               
unintended consequences.                                                                                                        
Number 0125                                                                                                                     
REPRESENTATIVE  OGG   pointed  out   that  there  already   is  a                                                               
forfeiture  law  in place  in  Alaska  where the  cigarettes  are                                                               
confiscated.    He  said,  in  the  new  bill,  other  forfeiture                                                               
provisions  for  vehicles, boats,  and  bank  accounts have  been                                                               
added, with due process.  In  Washington, as a result of the tax,                                                               
there  were increased  seizures  and penalties,  $650,000 from  a                                                               
penalty of $10  per pack, or $250, [upon  seizure of cigarettes].                                                               
For  the  year  1999,  there   were  four  purchaser  enforcement                                                               
operations conducted and the agents  issued 17 criminal citations                                                               
seizing 100  cartons and six  packs of  cigarettes.  He  stated a                                                               
concern  that  the  forfeiture provision  is  aimed  at  addicted                                                               
REPRESENTATIVE WILSON  replied that perhaps the  amount should be                                                               
changed, but  that people who  are going  to break this  law know                                                               
exactly what the limit is.                                                                                                      
MR.  PORTER clarified  again that  the addicted  person does  not                                                               
come under  the forfeiture  statute unless he  or she  engages in                                                               
the resale of cigarettes.                                                                                                       
Number 0435                                                                                                                     
REPRESENTATIVE  SAMUELS agreed.   "You're  after the  guy who  is                                                               
going to  get a van  load of  cigarettes at a  reservation, drive                                                               
them to Alaska, fly them to  a village, and make a whole boatload                                                               
of  money on  them."   He  opined that  such  a person's  vehicle                                                               
should be confiscated,  and that is the point  [of the forfeiture                                                               
REPRESENTATIVE  GRUENBERG  voiced  new concerns.    He  suggested                                                               
making Amendment 3.                                                                                                             
REPRESENTATIVE OGG  replied that public testimony  is being taken                                                               
and the amendment part of the meeting is yet to come.                                                                           
REPRESENTATIVE GRUENBERG referred to Section  13, on page 4, line                                                               
24,  and said  it looks  like the  bill adds  a provision  to the                                                               
forfeiture  section, but  that is  not the  case.   All that  the                                                               
section does  is move an  existing section of law,  AS 43.50.620,                                                               
which  currently has  the exact  same language,  and changes  the                                                               
numbering  to  subsection  (b)  of  the  preceding  Section  610.                                                               
Section 620 becomes  the new law with a change  of the numbering.                                                               
He asked Mr. Barnhill if that is correct.                                                                                       
MR. BARNHILL replied yes.                                                                                                       
REPRESENTATIVE   GRUENBERG  continued   to  say,   even  if   the                                                               
forfeiture provisions were  taken out of this  bill, the language                                                               
would remain in  current law.  He asked the  committee to look at                                                               
page 7,  line 12-20, where  it shows  what happens if  someone is                                                               
convicted  of misconduct  involving unstamped  cigarettes in  the                                                               
first  or  second  degree,  which   is  cigarette  smuggling,  in                                                               
addition to other  penalties for conviction.  He  said that right                                                               
now first degree is a Class C  felony, second degree is a Class A                                                               
misdemeanor, and  the only  difference is the  amount.   He asked                                                               
Mr. Barnhill if that is correct.                                                                                                
MR. BARNHILL replied, "Under or over 1000 cigarettes."                                                                          
REPRESENTATIVE GRUENBERG said even if  a person is convicted of a                                                               
misdemeanor, their  aircraft, vessel,  or vehicle are  subject to                                                               
forfeiture.   He opined  it is  a very large  penalty for  a very                                                               
small infraction.   Looking  at lines 17-20  he said  vehicles or                                                               
vessels must be  forfeited in cases that have nothing  to do with                                                               
smuggling cigarettes.   For example,  if there is a  prior felony                                                               
conviction or probation,  the vehicle is forfeited, he  said.  He                                                               
asked why those provisions were included in the bill.                                                                           
MR.  BARNHILL replied  that the  provisions  were put  in at  the                                                               
recommendations of  the criminal division  of DOL.   He explained                                                               
that  the  person  would  have  to be  convicted  of  felony  tax                                                               
evasion.     "These  are   bad  guys  and   I  would   just  echo                                                               
Representative  Samuels  comments  earlier  -  we  need  to  have                                                               
effective  enforcement  tools  in order  to  interdict  cigarette                                                               
smuggling and deter  crime," he said.  He said  [DOL] believes it                                                               
is  appropriate to  have [that  provision in  the bill].   It  is                                                               
subject to  the constitutional right to  protect innocent owners,                                                               
and to subsection (j) for a vehicle  or a vessel in a village, he                                                               
Number 1108                                                                                                                     
REPRESENTATIVE GRUENBERG  asked if  it were  true that  a village                                                               
situation  would  be subject  to  forfeiture  because of  a  past                                                               
felony conviction.   He asked Mr.  Barnhill if he believes  it is                                                               
fair to  seize a vehicle or  vessel for smuggling a  small amount                                                               
of  cigarettes when  there is  a prior  felony conviction  at any                                                               
MR.  BARNHILL said  he  would  accept Representative  Gruenberg's                                                               
correction, and he  thinks it is an  appropriate enforcement tool                                                               
because  tough  enforcement provisions  are  needed  in order  to                                                               
deter crime.                                                                                                                    
REPRESENTATIVE GRUENBERG said that the  bill does not go to House                                                               
Judiciary  Standing Committee  and  there  may be  constitutional                                                               
problems.    He  asked  if the  forfeiture  provision  "increases                                                               
stress on the bill."                                                                                                            
MR. BARNHILL replied  that in 1981 the Alaska  Supreme Court took                                                               
up  and   validated  the  issue   of  the   constitutionality  of                                                               
forfeiture  provisions.   He opined  that there  is "no  question                                                               
that  this  provision  is  constitutional."     The  question  of                                                               
fairness is  a policy  issue for the  legislature, he  added, but                                                               
the administration's  perspective is that in  order to adequately                                                               
enforce the cigarette stamp tax  and bootlegging laws there needs                                                               
to be adequate tools.                                                                                                           
Number 1342                                                                                                                     
REPRESENTATIVE WILSON said  it is important to  realize that when                                                               
other states increased cigarette  tax, some people took advantage                                                               
of  the situation  in  order  to make  money.    She opined  that                                                               
[felons] are more inclined to commit  this sort of crime, and the                                                               
bill must  have "teeth in  it" in order  to prevent this  kind of                                                               
activity.  It  will keep everyone on his or  her toes because the                                                               
law is  not being changed,  bootlegging is illegal now,  and just                                                               
the tax  is being raised,  she opined.  She  said it is  worth it                                                               
because lives will be saved.                                                                                                    
MR. BARNHILL read  the conclusion of the World  Bank Study called                                                               
"How  big is  the  worldwide cigarette-smuggling  problem?"   The                                                               
study hoped to answer the question  about how much of an obstacle                                                               
smuggling  is  to higher  cigarette  taxes,  he related.    After                                                               
analyzing all the data, the report concluded:                                                                                   
     Countries  need  not  make   a  choice  between  higher                                                                    
     cigarette    tax   revenues    and   lower    cigarette                                                                    
     consumption.    Higher  tax   rates  can  achieve  both                                                                    
     objectives.   Cigarette  tax revenues  can be  enhanced                                                                    
     still   further   by   effective  methods   to   reduce                                                                    
     corruption  that will  result  in diminished  cigarette                                                                    
     smuggling  and  increased  tax  collections.    Lastly,                                                                    
     cooperative multilateral efforts  to increase cigarette                                                                    
     tax  rates on  a regional  basis  are likely  to be  an                                                                    
     effective way to combat smuggling.                                                                                         
MR. BARNHILL  submitted the  previous data as  an example  of the                                                               
notion  that increasing  taxes deters  the incidence  of smoking,                                                               
and he said  that with effective enforcement  tools smuggling can                                                               
be combated.                                                                                                                    
CHAIR HAWKER  requested that Mr.  Barnhill provide the  study for                                                               
distribution to committee members.                                                                                              
MR. PORTER  remarked about  the importance of  the fact  that the                                                               
legislature  itself chooses  the level  of enforcement  under any                                                               
piece  of legislation.   He  said that  the Public  Safety fiscal                                                               
note   contains  "a   couple   hundred   thousand  dollars"   for                                                               
enforcement.   If more  cases were to  be pursued,  a substantial                                                               
amount would have to be added to the fiscal note, he added.                                                                     
Number 1740                                                                                                                     
CHAIR HAWKER  moved to adopt Amendment  1, labeled 23-GH2116\A.1,                                                               
Kurtz, 3/23/04, which read:                                                                                                     
     Page 1, following line 5:                                                                                                  
     Insert a new bill sections to read:                                                                                        
        "* Section 1.  AS 43.50.030(a) is amended to read:                                                                  
          (a)  For each license issued to a manufacturer,                                                                       
     and for each renewal, the fee is $50 [$5].                                                                             
        * Sec. 2.  AS 43.50.030(c) is amended to read:                                                                        
          (c)  For each license issued to a vending machine                                                                     
     operator, and for each renewal, the fee is $50 [$25]."                                                                 
     Page 1, line 6:                                                                                                            
          Delete "Section 1"                                                                                                  
          Insert "Sec. 3"                                                                                                     
     Renumber the following bill sections accordingly.                                                                          
Number 1820                                                                                                                     
REPRESENTATIVE ROKEBERG objected for discussion purposes.                                                                       
CHAIR  HAWKER   explained  that   the  amendment   addresses  the                                                               
disparity  between  licensing  fees in  different  categories  of                                                               
commercial tobacco  dealers.  The  bill raised one  category from                                                               
$25 to $50 and left manufacturers  at $5 and vending operators at                                                               
$25.  This  amendment makes the commercial  tobacco activities in                                                               
Alaska subject  to a consistent $50-a-year  annual license, which                                                               
is consistent with OTP sellers, he said.                                                                                        
REPRESENTATIVE  GRUENBERG noted  that currently  under the  bill,                                                               
subsection  (d)  is  increased.    He  asked  if  under  proposed                                                               
Amendment 1,  subsections (b)  and (c) are  increased and  (d) is                                                               
already increased.                                                                                                              
CHAIR HAWKER  said that  is correct.   He noted  that there  is a                                                               
fifth category, the  buyer category - a  personal use consumption                                                               
license - which is left at $25.                                                                                                 
REPRESENTATIVE GRUENBERG stated his support of Amendment 1.                                                                     
REPRESENTATIVE    ROKEBERG   asked    for    a   definition    of                                                               
Number 2045                                                                                                                     
REPRESENTATIVE GRUENBERG said the  definition is in AS 43.50.170,                                                               
[paragraph]  (6),   "manufacturer  means  a  person   who  makes,                                                               
fashions,  or produces  cigarettes  for sale  to distributors  or                                                               
other persons."                                                                                                                 
REPRESENTATIVE ROKEBERG  wondered if it includes  large companies                                                               
or  just local  manufacturers.   He said  he is  looking for  the                                                               
rationale behind  the $5 [tax  for manufacturers], but  would not                                                               
oppose the amendment.                                                                                                           
REPRESENTATIVE  GRUENBERG  replied  that  it  does  not  seem  to                                                               
exclude the big companies.                                                                                                      
CHAIR HAWKER said  that there are no  commercial manufacturers in                                                               
the state  and his  intent is  to make  it consistent  across the                                                               
board.   He asked Representative  Rokeberg if he has  removed his                                                               
REPRESENTATIVE ROKEBERG removed his objection to Amendment 1.                                                                   
REPRESENTATIVE GRUENBERG also removed his objection.                                                                            
CHAIR  HAWKER asked  if there  was any  further objection  to the                                                               
motion to adopt Amendment 1.  Hearing none, it was so ordered.                                                                  
Number 2222                                                                                                                     
CHAIR HAWKER  moved to adopt Amendment  2, labeled 23-GH2116\A.2,                                                               
Kurtz, 3/23/04, which read:                                                                                                     
     Page 8, line 23, following "report":                                                                                       
          Insert "not later than the last day of the month                                                                      
     in which this Act takes effect"                                                                                            
     Page 8, line 25:                                                                                                           
          Delete "no later than 30 days after the effective                                                                     
     date of this Act."                                                                                                         
      Insert "in six sequential monthly installments.  The                                                                      
       first installment shall be paid not later than the                                                                       
     last day of the month in which this Act takes effect."                                                                     
REPRESENTATIVE WILSON objected for discussion purposes.                                                                         
CHAIR HAWKER  explained that proposed  Amendment 2  addresses the                                                               
concern about  the floor tax  concept raised by Mr.  Elerding and                                                               
wholesale  businesses.   The  bill,  as  currently drafted  would                                                               
impose a floor  tax immediately and in its  entirety.  [Amendment                                                               
2] allows the tax to be  assessed immediately, but payable in six                                                               
sequential monthly installments.                                                                                                
REPRESENTATIVE WILSON  asked for clarification about  how the tax                                                               
would work if there is an overlapping of inventory.                                                                             
CHAIR HAWKER  replied that the tax  would be on the  inventory on                                                               
hand on  the date that the  tax changes.  [The  business] can pay                                                               
that assessment  over six months  and all new purchases  would be                                                               
subject to the tax from that point forward, he explained.                                                                       
Number 2354                                                                                                                     
REPRESENTATIVE  SAMUELS asked  if Chair  Hawker had  checked with                                                               
distributors to see if six months is a good rotation time.                                                                      
CHAIR HAWKER  said he is not  sure rotation time enters  into it.                                                               
Mr. Elerding indicated  he believes six months  is an appropriate                                                               
period of time [to make the  payments].  He asked Mr. Elerding to                                                               
speak to the matter.                                                                                                            
MR. ELERDING  replied that six  months is a big  improvement over                                                               
having  to  pay  the  whole  tax immediately.    He  said  he  is                                                               
concerned that  he would have  had an excess amount  of inventory                                                               
on  hand the  day before  the legislation  passes to  accommodate                                                               
consumer  demand, but  then  the  day after,  due  to the  higher                                                               
price,  it  would  have  been difficult  to  sell  the  remaining                                                               
amount.  The  six-month time period helps solve  this problem, he                                                               
REPRESENTATIVE   WILSON   asked   if  this   amendment   prevents                                                               
businesses from  stockpiling cigarettes before the  tax is levied                                                               
and then charging a higher  price for cigarettes on which they've                                                               
paid no tax.                                                                                                                    
CHAIR HAWKER said that is correct.                                                                                              
REPRESENTATIVE  WILSON removed  her  objection to  the motion  to                                                               
adopt Amendment 2.                                                                                                              
CHAIR HAWKER  asked whether  there was  any further  objection to                                                               
Amendment 2.  There being no objection, it was so ordered.                                                                      
Number 2743                                                                                                                     
REPRESENTATIVE  OGG  moved  to  adopt  Amendment  3,  which  read                                                               
[original punctuation provided]:                                                                                                
     Page 4, line 24 through                                                                                                    
     Page 8, line 9:                                                                                                            
     Renumber the following bill sections accordingly.                                                                          
CHAIR HAWKER objected for discussion purposes.                                                                                  
REPRESENTATIVE OGG  explained that  Amendment 3 keeps  the status                                                               
quo,  whereas  [HB 538]  adds  a  new  forfeiture section.    The                                                               
amendment would delete Sections 13 and 14 from the bill.                                                                        
REPRESENTATIVE  GRUENBERG  stated  his support  for  Amendment  3                                                               
because he has concerns about lines  12-20 on page 7, which state                                                               
there  may  be  additional  penalties for  persons  convicted  of                                                               
previous felonies.   Though he said  he is in favor  of the bill,                                                               
he  stated that  he will  request a  referral to  House Judiciary                                                               
Standing Committee  if the amendment  fails.  He opined  that the                                                               
issue of forfeiture should be a  separate bill and that there may                                                               
be constitutional  problems with it.   He received an  opinion by                                                               
DOL  that a  "Quill amendment"  similar  to the  one Senator  Ben                                                               
Stevens  put into  the sales  tax bill  would put  stress on  the                                                               
bill;  however, he  said he  believes  it would  put very  little                                                               
stress on the bill and he plans to offer one like it.                                                                           
Number 3109                                                                                                                     
REPRESENTATIVE   SAMUELS,   in   response   to   the   forfeiture                                                               
discussion, opined  that smuggling  and its penalties  are linked                                                               
to the bill and should not  be separate legislation.  He referred                                                               
to page  5, line 1, and  said he has no  problem with eliminating                                                               
the  words "barter,  or exchange",  and  he said  he agrees  with                                                               
Representative Gruenberg  that page  7, subsection (i),  on prior                                                               
felonies  and  forfeiture may  be  too  severe and  he  suggested                                                               
adding a  sidebar such as "within  the last 10 years  for a crime                                                               
against  a person".   He  disagreed with  taking away  the entire                                                               
tool because  it would  hamper law  enforcement, and  he referred                                                               
back to his  example of a person who is  smuggling cigarettes for                                                               
a  living.   He stated  his  opposition to  [Amendment 3],  which                                                               
would delete the entire section.                                                                                                
Number 3226                                                                                                                     
REPRESENTATIVE  WILSON related  her opposition  to [Amendment  3]                                                               
because she  said she  couldn't imagine anyone  being upset  if a                                                               
criminal who is on parole has to forfeit a vehicle or vessel.                                                                   
REPRESENTATIVE ROKEBERG stated that  while Representative Ogg has                                                               
a  good point,  he agrees  with Representative  Samuel's position                                                               
that  there has  to  be  some enforcement,  but  as  the bill  is                                                               
written, it goes too far.                                                                                                       
REPRESENTATIVE OGG  said that  the existing  statutes seem  to be                                                               
working and  he is  attempting to  make it simple.   He  voiced a                                                               
concern about  the bill  as whole being  a revenue  device, which                                                               
may encourage prohibition because of  addictions.  He opined that                                                               
[HB 538]  goes a  step too  far and  that the  current provision,                                                               
which provides  for forfeiture of tobacco  products themselves is                                                               
CHAIR   HAWKER   related   that  his   only   disagreement   with                                                               
Representative Ogg  is whether  or not  this provision  will make                                                               
criminals out  of people  who are  addicted to  tobacco products.                                                               
He said he  agrees with Representative Samuels when  he said that                                                               
this  does not  penalize  the  addict who  may  seek  his or  her                                                               
product  from  an  illicit source;  this  provision  pursues  the                                                               
illicit source.                                                                                                                 
REPRESENTATIVE WILSON  said she hears what  Representative Ogg is                                                               
saying, but her conclusions are  different than his.  Raising the                                                               
sales tax  by a $1  may encourage illegal activity,  however, the                                                               
very  fact  that   there  are  high  consequences   serves  as  a                                                               
Number 3713                                                                                                                     
REPRESENTATIVE  ROKEBERG  responded  that he  agrees  with  Chair                                                               
Hawker's interpretation of  the bill that the  provision would be                                                               
a force  against [illegal] commercial activity,  but he suggested                                                               
that  the testimony  from  DOL  stated the  contrary.   The  poor                                                               
enforcement  of  the  "five-pack  rule" shows  that  there  is  a                                                               
problem with too much discretion on the  part of DOL.  He said it                                                               
brought out "the  remote but illegal opportunity  for mischief to                                                               
be done here  to individuals."  He opined  that is Representative                                                               
Ogg's point and it concerns him.                                                                                                
Number 3807                                                                                                                     
REPRESENTATIVE  SAMUELS replied  that the  five-pack rule  is the                                                               
law of the  land and would not  be changing in this  bill, and he                                                               
agrees that it may need to  be addressed, but the forfeitures, if                                                               
the bartering and exchanging are  eliminated, apply to people who                                                               
are selling cigarettes.   He said if [Amendment 1]  fails he will                                                               
offer   an  amendment   to  address   Representative  Gruenberg's                                                               
concerns,  which would  fix the  problem  but leave  the tool  in                                                               
place for the smuggler.                                                                                                         
CHAIR  HAWKER endorsed  Representative  Samuels' approach  should                                                               
the amendment  fail.  He  said the bill  will be held  to address                                                               
this  issue  as well  as  the  bonding considerations  previously                                                               
discussed today.                                                                                                                
REPRESENTATIVE GRUENBERG  said he thought  the bill was  going to                                                               
be passed out today.                                                                                                            
CHAIR HAWKER said it will not be moved out today.                                                                               
REPRESENTATIVE  GRUENBERG requested  that  the criminal  division                                                               
testify  at the  next meeting  and said  he would  not offer  the                                                               
Quill amendment today.                                                                                                          
CHAIR HAWKER asked  if there was any further  debate on Amendment                                                               
REPRESENTATIVE GRUENBERG  asked if there could  be an adjournment                                                               
before having  to finish dealing  with the current  amendment and                                                               
take it up again at the next meeting.                                                                                           
CHAIR  HAWKER  asked  Representative  Ogg if  he  is  willing  to                                                               
withdraw Amendment 3.                                                                                                           
Number 4150                                                                                                                     
REPRESENTATIVE OGG withdrew Amendment 3.                                                                                        
REPRESENTATIVE ROKEBERG  explained several  conceptual amendments                                                               
he will reserve  for the next meeting.  One  concerns getting rid                                                               
of the  "two times bonding  requirement" and going to  a singular                                                               
requirement,  and the  other  is to  get  the methodologies  into                                                               
regulation  to  allow  the  different  types  of  securities  for                                                               
CHAIR HAWKER explained  that the "double-up" bonding  is from the                                                               
time selling is commenced to the  time payment is remitted and it                                                               
is   actually   a   two-month  window.      He   concurred   with                                                               
Representative Rokeberg's observations.                                                                                         
REPRESENTATIVE ROKEBERG said Mr.  Elerding's testimony is correct                                                               
in terms of  insurance history, availability of  the bonding, and                                                               
high costs being a problem.                                                                                                     
CHAIR  HAWKER   said  he  would  be   receptive  to  demonstrated                                                               
financial responsibility being placed in  statute.  He said it is                                                               
a discussion he would like to continue.                                                                                         
Number 4426                                                                                                                     
REPRESENTATIVE GRUENBERG  pointed out  that the  statute referred                                                               
to  earlier by  Ms. Bales  is  under "alcohol"  and the  language                                                               
state that the  department, in its discretion,  may issue permits                                                               
in place of bonds to certain  people.  He suggested using that as                                                               
a model for this bill.                                                                                                          
REPRESENTATIVE ROKEBERG said he will  be offering an amendment to                                                               
repeal  the   five-pack  provision  and  one   about  "incidental                                                               
possession   resulting  from   interstate  travel   for  personal                                                               
consumption only of like three  cartons or 30 packs of cigarettes                                                               
shall not be  subject to the forfeiture or other  penalties."  He                                                               
said there needs to be a  policy statement by the legislature not                                                               
to make criminals  out of innocent citizens.  He  related that he                                                               
plans  to  offer an  amendment  that  reserves all  taxation  for                                                               
tobacco  products to  the State  of  Alaska, except  for a  broad                                                               
sales tax on the part  of municipalities.  Those communities that                                                               
have existing tax  would be grandfathered in.  He  noted that one                                                               
of the problems of the "sin  tax syndrome" is that there could be                                                               
multi-layers of taxation.                                                                                                       
TAPE 04-18, SIDE B                                                                                                            
Number 4640                                                                                                                     
REPRESENTATIVE ROKEBERG  opined that  currently there is  a "flat                                                               
line" with  increasing taxes  mostly at  the municipal  level and                                                               
there is not  any major decrease in consumption.   He stated that                                                               
it is  a concern  of his that  the more tax  is raised  the fewer                                                               
people  smoke, as  the  pool  gets smaller.    He requested  more                                                               
discussion  about the  level  of tax  saying that  the  $1 is  an                                                               
arbitrary amount.                                                                                                               
Number 4424                                                                                                                     
CHAIR HAWKER observed that there  has been extensive testimony on                                                               
the elasticity  of the  market, and the  inhibiting value  of the                                                               
tax.  He  offered to arrange for the presentation  material to be                                                               
made available to Representative Rokeberg.                                                                                      
REPRESENTATIVE  ROKEBERG  stated  his   skepticism  of  the  data                                                               
because he opined it has not been in place long enough.                                                                         
REPRESENTATIVE GRUENBERG  remarked to  Mr. Barnhill that  he does                                                               
want to  pursue the  "Quill issue" for  the purpose  of asserting                                                               
the sovereignty of the state.                                                                                                   
[HB 538 was held over.]                                                                                                         
There being no  further business before the  committee, the House                                                               
Special  Committee on  Ways and  Means meeting  was adjourned  at                                                               
9:34 a.m.                                                                                                                       

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