SB 73-MARIJUANA: TAX/REGISTRATION; INCOME TAX  1:33:26 PM CHAIR BJORKMAN announced the consideration of SENATE BILL NO. 73 "An Act relating to the registration of marijuana establishments; relating to a tax exemption for qualified small businesses; relating to marijuana taxes; and providing for an effective date." 1:33:53 PM SENATOR MATT CLAMAN, District H, Alaska State Legislature, Juneau, Alaska, as sponsor, he explained SB 73 proposes a single wholesale tax on the marijuana industry to address concerns that the current tax structure is driving business towards the black market. He stated that the goal is to keep Alaska's legal marijuana industry strong and healthy. 1:35:31 PM CHAIR BJORKMAN opened public testimony on SB 73. 1:35:47 PM PAUL DSISDIER, Owner, The Fireweed Factory LLC, Juneau, Alaska, testified in support of SB 73 and shared concerns about the sustainability of the marijuana industry. He stated that at a recent Marijuana Control Board meeting, cultivators expressed difficulty operating under current conditions. Although his company is doing well, he feared that if smaller growers go out of business, those remaining will only produce enough to supply local stores. He emphasized this could lead to a collapse of the legal marijuana market and a shift back to the black market. He urged immediate support to prevent industry failure. 1:39:19 PM SAM HACHEY, Co-Owner, Tanana Herb Company, Fairbanks, Alaska, testified in support of SB 73. He stated as the industry has matured and as more people have come online there was originally 400 licensed cultivations and now there are about 200-210 active cultivations. He highlighted a 50 percent failure rate among cultivators due to high costs, including energy, labor, and transportation. He advocated for adjusting the cannabis tax to reflect market conditions, the other industries like oil, gas, and fishing have seen adjustments. He emphasized that reforming the tax would help the industry remain sustainable, support employment, and generate more revenue for Alaska. 1:42:01 PM LACY WILCOX, Owner, Top Hat Cannabis, Juneau, Alaska, gave the following testimony in support of SB 73: [Original punctuation provided.] At our healthiest, our company employed 12 Alaskans at a fair wage, offering retirement and health benefits. These were good jobs, jobs that meant something in our small city. But today, in part because of the oppressive $50-per- ounce excise tax, we've been forced to cut our workforce down to just five employees. Two of those are owners who hardly take a paycheck, and the benefits and perks we once offered are gone. In a community like ours, losing seven good-paying jobs is devastating. These jobs are like gold, and they're disappearing because of a tax structure that is simply unsustainable and an industry that is being squeezed from all sides. The challenges we face go far beyond taxes. The cost of growing indoors is incredibly high, and unlike other industries, we are denied access to traditional banking and financing due to cannabis being federally illegal. The 280E tax code prevents us from deducting standard business expenses, creating a double tax burden. On top of that, the extreme regulatory hurdles we navigate are exhausting and expensive. Costs have not gone down, but the price customers are willing to pay sure has. To make matters worse, we are competing with two unregulated markets that undermine everything we do. First, the fully illicit market, which I believe makes up around 60 percent of cannabis sales in Alaska. Second, the 2018 Farm Bill accidentally authorized the sale of intoxicating hemp products, creating a gray market that directly competes with my business. These products are sold online, delivered to your door, and available to anyoneregardless of age. They are cheap, potent, and often packaged in ways that appeal to children. Even if we could create competing products within our business model, our rules and regulations prevent us from matching their potency, price, or packaging appeal. And both of these competing markets operate with little to no oversight or regard for public safety, and certainly without any taxation. Tariffs on supplies already hurt us, and they're likely to increase. All of these factors work against us, and without immediate relief, businesses like mine will not survive. Next year will be too latewe will shut down. 1:44:24 PM MS. WILCOX continued with her testimony. I also serve as the Vice President of the Southeast Alaska Food Bank, and I am deeply aware of Alaska's fragile food network. In the case of a food security crisislike a barge not coming incannabis farms like ours have the ability to pivot to food production. This makes us a valuable community resource in times of need. But to fulfill that potential, we must first survive. Senate Bill 73 is a lifeline. Reducing the excise tax to $12 dollars per ounce will provide immediate relief, allowing us to reinvest in our operations, rehire employees, and hopefully restore the benefits that once made us a proud employer in this community. I also strongly support the language in SB 73 that reinstates the C-Corp tax exemption for qualified small businesses. This provision recognizes the unique challenges all small Alaskan businesses face and helps level the playing field. The cannabis industry has generated significant revenue for Alaska, growing from $1.7 million in 2017 to over $28 million in 2023. But the industry's growth has plateaued, and without meaningful tax reform, we risk losing these contributions entirely. SB 73 is a crucial first step toward creating a sustainable and competitive market. I urge you to pass this bill without delay. It's not just about supporting businesses like mineit's about protecting jobs, strengthening our economy, and ensuring the long-term viability of an industry that has already provided immense value to our state. 1:45:44 PM GARY EVANS, representing self, Fairbanks, Alaska, testified in support of SB 73 and echoed previous testimonies. He emphasized the struggles of the cannabis industry, particularly due to competition from the growing black and gray markets. He stated that marijuana is now widely available in the black market at low prices, and this is hurting legal businesses. He warned that if the state doesn't act, the industry could collapse, which would have significant consequences for the economy. 1:47:45 PM LLOYD STIASSNY, Owner, Egan Management Group, Anchorage, Alaska, testified in support of SB 73 and highlighted the marijuana industry's current struggles and its importance for local employment and economic diversification. He stated that the cannabis sector is described as a valuable industry for the state, with potential for growth and employment. He stressed the need for the small business exemption to be extended. He stated that the exemption is crucial for the survival of small businesses across Alaska. He urged for action to help these businesses thrive in a challenging economic environment. 1:50:48 PM CHAIR BJORKMAN closed public testimony for SB 73. 1:51:22 PM DAN STICKEL, Chief Economist, Tax Division, Department of Revenue, Juneau, Alaska, Discussed and answered questions on the fiscal note for SB 73. He stated that the fiscal note outlines two main revenue impacts: the reintroduction of a small business exemption under the corporate income tax and changes to the marijuana excise tax. He stated that the marijuana tax change is estimated to have a net impact of over $11 million annually, while the small business exemption is expected to impact revenue by about $2.5 million per year. These two factors combined represent the total revenue impacted. 1:53:07 PM SENATOR DUNBAR discussed two parts of the bill; the cannabis part, where many cultivators are struggling due to policy and a broader corporate tax exemption part, that expired two years ago. He stated that reinstating this exemption is expected to cost around $2.65 million. He stated that the sponsor defined small businesses as those with up to $50 million gross asset. He asked where the $50 million amount comes from and what business growth is expected if the exemption returns. 1:54:45 PM BRANDON SPANOS, Deputy Director, Tax Division, Department of Revenue, Anchorage, Alaska, Answered questions regarding the fiscal note for SB 73. He stated that the small corporate exemption in SB 73 resurrects language from the Internal Revenue Code (IRC) code 1202(e) that expired in 2023. This code defines a small corporation, with a $50 million gross income threshold, as a qualifying entity for Alaska's small business exemption. The impact of the exemption was based on past revenue reductions observed in prior years. He said there hasn't been a detailed analysis conducted on the economic impact of the exemption. The original intent of the exemption was to bring new business growth, but instead, the exemption primarily benefited existing businesses, with no clear increase in new revenue for the state. 1:56:34 PM SENATOR DUNBAR said the tax policy should drive economic benefits, not just reduce revenue. He questioned if the $50 million threshold required by federal law fits Alaska's needs and suggested $2025 million might better stimulate business. He asked whether the $50 million figure is required or just convenient and if the tax division would consider a lower threshold to balance growth with budget impact. 1:58:06 PM MR. SPANOS clarified his role is a tax administrator not a policy maker. He corrected his earlier testimony stating over a five year period the marijuana industry constituted about 75 percent of credit claims, which was all new business. He explained that with the IRC 1202(e) excluding farming, cultivators may not qualify for the exemption, but the language can be changed. He stated that the $50 million threshold isn't required by federal law; the threshold was simply a convenient reference and can be adjusted. SENATOR DUNBAR asked for clarification on the comment that 75 percent of the tax exemption claims taken are by cannabis businesses. He asked if the exemption applied to all C-Corps, whether the organizational structure of some businesses makes them ineligible for the exemption, and why the cannabis industry receives such a large portion of the tax break. MR. SPANOS answered that the tax credit applies only to C-Corp entities, as these are the only businesses that pay corporate income tax in Alaska. Other business types, such as S Corps, partnerships, and LLCs, are not eligible unless they specifically choose to be taxed as a C-Corp. He stated that certain industries, like farming and healthcare, are excluded from this credit under federal definition, although businesses with a small portion of healthcare operations might still qualify. The marijuana industry makes up most of the claims for this credit because, as a new industry, many cannabis businesses are structured as C-Corps and meet the qualifications. 2:02:06 PM CHAIR BJORKMAN asked to what extent the division considered the impact on tax revenue if marijuana cultivators go out of business due to lack of changes to the current tax structure. 2:03:04 PM MR. STICKEL answered that the revenue impact is based on the analysis of the Fall 2024 revenue forecast, assuming steady consumption with population growth and possible cannabis industry consolidation. He said a 1 percent drop in retail price would lead to a demand increase of 1 percent. While elasticity varies, lowering taxes would likely boost legal market activity. 2:04:59 PM CHAIR BJORKMAN asked whether the fiscal note assumptions account for cultivators going out of business if no action is taken and assumed reducing the wholesale tax would increase activity. 2:05:38 PM MR. STICKEL answered that the analysis does not explicitly forecast the closure of any specific businesses. The baseline assumption is that the marijuana industry will maintain a stable level of activity. CHAIR BJORKMAN asked if out-of-state growers and producers who sell hemp products in Alaska and compete with our local market pay a tax if they come into Alaska from out of state. 2:06:31 PM MR. SPANOS answered that there are 25 tax types, so the out of state businesses might be subject to other taxes but they wouldn't pay the marijuana tax. CHAIR BJORKMAN said the State of Alaska is adding high taxes on those businesses complying with state law but the state isn't collecting taxes from the people importing legal or non-legal products. He asked if Alaska is missing revenue from the imported products. 2:07:13 PM MR. SPANOS responded that is correct. He said black market marijuana sales aren't taxed along with legal hemp sales. He stated that he isn't fully familiar with all hemp regulations and uses the word legal loosely. 2:07:33 PM SENATOR DUNBAR stated that last year's bill included a retail sales tax to offset the tax cut. He asked whether the state could tax toxic hemp products at gas stations like cigarettes and does the state know how much toxic hemp is on the market. 2:08:16 PM MR. SPANOS answered that almost any product that is sold at retail can be taxed either excise tax or sales tax. He stated that with imported products, a retail tax would be easier to track and administer. The Department of Revenue would need more data to come up with an estimated potential revenue. 2:09:27 PM CHAIR BJORKMAN solicited the will of the committee. 2:09:30 PM SENATOR MERRICK moved to report SB 73, work order 34-LS0324\G, from committee with individual recommendations and attached fiscal note(s). 2:09:48 PM CHAIR BJORKMAN found no objection and SB 73 was reported from the Senate Labor and Commerce Standing Committee.