SENATE BILL NO. 291 An Act extending the transition period for activities involving unstamped cigarettes; and providing for an effective date. SENATOR CON BUNDE explained that the bill addresses the unfair treatment of tobacco product retailers conducting legitimate business. The Legislature passed a tobacco tax and subsequently also required cigarettes to be stamped to track who was paying the tax, so that legitimate retailers would not be at a financial disadvantage to the black market. The original legislation gave the retailers a 90-day window to dispose of unstamped stock when the legislation passed. It appeared to be an adequate time period because manufacturers previously had a policy that any excess stock could be returned to the manufacturer. The manufacturers have since ended that practice, putting the burden on the Alaskan retailers. The bill would extend the deadline from March 31 to June 30, 2004 for holding unstamped cigarettes. It is an adequate time period for selling unstamped cigarettes. Senator Bunde said that if the bill does not pass, the retailers' unstamped stock would be confiscated. Representative Fate asked if the sponsor had studied the turnover rate of cigarette sales, and whether June 30, 2004 is an adequate time period for the depletion of the stock. Senator Bunde deferred to Ms. Bales. JOHANNA BALES, AUDITOR, TAX DIVISION, DEPARTMENT OF REVENUE, noted that she is also the Program Manager for the Cigarette and Tobacco Products Tax, and has worked in this tax type since 1997. She explained that the normal shelf life for cigarettes is 4-6 months, so given the additional 90 days in the bill; the retailers would have a full six-month period since the cigarette stamp legislation was enacted. She anticipated that some retailers would still have product on hand, but most retailers indicated that the additional 90- day period would be sufficient. Co-Chair Harris asked if this would allow for a $1 a pack tax increase on stamped cigarettes. Senator Bunde replied that he doubted it, considering the bill title. Representative Hawker questioned why the cigarette manufacturers' liberal return goods policy has changed. Ms. Bales replied that the Tobacco Master Settlement Agreement has driven the return goods policy. In the past, the manufacturers allowed distributors and retailers to return product for the retail price on the day it was returned, regardless of what they paid for it. One manufacturer told Ms. Bales that the return goods policy was felt to be "liberal to the point of stupidity." The return goods policy changed after SB 168 was signed into law, without notice that this would happen. Vice-Chair Meyer requested clarification that the tobacco companies' decision not to take product back is not related to the passage of the tobacco stamp and relates instead to the Master Settlement, and asked if it is happening in other states. Ms. Bales affirmed that it has been instituted nationwide. She explained that the Division tried to work with the manufacturers to allow a window to take product back after the stamp was enacted, but the manufacturers were concerned that it would set a precedent with other states. Vice-Chair Meyer asked how much inventory would need to be sold. Ms. Bales was unsure. She pointed out that the Division came to a compromise with the manufacturers who agreed to take product back temporarily, allowing the Division under statute to give a credit to the distributors but not to the retailers. The Division believed that the retailers would be given a full 90-day period, but the retailers have continued to get unstamped product from the distributors who used the initial 90-day period to sell off their unstamped product. The retailers haven't been given a 90-day period like the distributors. The Division has been given assurances by the distributors that all of their product will be stamped by the end of March 2004. Vice-Chair Meyer asked how it is known that 90 days is enough time for retailers to sell the product. Ms. Bales admitted that it would not be enough time for all of the retailers. The Division told the retailers that they could have "fire sales" and reduce their prices without violating the minimum pricing laws that were enacted at the same time. The retailers she had spoken with felt that 90 days would be adequate. Vice-Chair Meyer asked if Alaska Bush retailers would be adversely impacted by selling by July 1 if they had stockpiled product. Ms. Bales replied that she had received about 100 calls from across the state indicating that the 90-day extension would be an adequate amount of time. Senator Bunde clarified that the intent of the bill is to ensure that the tax laws are enforced, because an open-ended extension would allow some businesses to circumvent the tax laws, an unfair advantage. Vice-Chair Meyer agreed with collecting the tax as soon as possible, stating that it should be implemented immediately. He questioned the time period of the extension, and disagreed with allowing a "fire sale" because it would not discourage kids from smoking. Senator Bunde expressed that a "bonfire sale" might be good. He pointed out that the distributors have moved their unstamped product, so it involves a lower volume of cigarettes at the retailer level. Vice-Chair Meyer asked if the extent of the black market is known and how much product is bought off the Internet. Ms. Bales replied that the Division has some preliminary data on the number of stamps sold over the past few months, which would yield an increase in cigarette tax revenues if the current rate holds steady. She said that she has talked to retailers who have been buying product on the Internet and violating the tax laws for years, as well as not getting the stamp affixed. Representative Chenault commented that he knows a person who received a bill from the Department of Revenue a year after buying cigarettes over the Internet. He asked if retailers are required to turn in names of persons who buy cigarettes over the Internet. Ms. Bales affirmed. Representative Chenault voiced that he did not think Internet sales pose a major problem. Currently he could have cigarettes sent to him from out of state without paying any tax, and run the very small risk of prosecution for smuggling. The State wants to ensure that it gets every dollar for every pack of cigarettes sold in the state, which he implied is the real reason the state has chosen to stamp cigarettes. Senator Bunde clarified that the stamp simply allows enforcement of the current law. He agreed with Representative Chenault that the incentive behind raising the tax is to make smoking more expensive and less attractive. Vice-Chair Meyer commented that his concern prompting the question about the black market related to receiving an email message saying, "start smoking now and get cheap cigarettes." He asked if military bases are exempt. Ms. Bales affirmed. Vice-Chair Meyer asked how it works if a member of the military lives off base. Ms. Bales explained that federal law prohibits the State from taxing sales to the military, but there is a mandate to the military to sell cigarettes at no less than 90% of the surrounding market. She had been in stores on base and observed that the prices are not significantly different than retail prices. Ms. Bales said that the Department doesn't see a problem with the military. Vice-Chair Meyer asked if the stamp applies to chewing tobacco, snuff and pipe tobacco. Ms. Bales explained that the stamps are not affixed to other tobacco products because all cigarette packages are about the same size, while other products are of varied size. She was not aware of any other state requiring a stamp on tobacco products other than cigarettes. SB 291 was heard and HELD in Committee for further consideration.