HOUSE BILL NO. 193 "An Act relating to the joint administration of tobacco taxes by the state and a municipality." 4:09:50 PM Representative Costello MOVED to ADOPT the proposed committee substitute for HB 193, Work Draft 28-LS0714\U (Bullock, 4/5/13). Co-Chair Stoltze OBJECTED for discussion. REPRESENTATIVE LANCE PRUITT, SPONSOR, shared that the bill had come to him at the request of the municipality of Anchorage. He clarified that the bill did not increase taxes; it was about communication and potentially lowering property taxes. He stated that the legislation would allow communication between municipalities and the state regarding tax returns, audits, etc. He detailed that currently the state could share the information with the federal government, other states, and the Canadian government, but not with municipalities within the state. He noted that the City of Anchorage treasurer [Daniel Moore] was available via teleconference to discuss the issue. Representative Pruitt relayed that the second piece of the legislation allowed the Department of Revenue (DOR) to partner with cities to create a stamp tax on tobacco. He explained that currently the state received tobacco tax from wholesalers and cities received the tax from retailers. The bill would enable the city to partner with the state and the tax would be administered at the wholesale level, which would eliminate the potential for tax evasion at the retail level. The bill's language assured that the money would be provided by a municipality to cover the costs. He shared that if 5 percent of tax evasion could be recovered it would equal approximately $1 million for the City of Anchorage. 4:13:37 PM Co-Chair Stoltze WITHDREW his OBJECTION. There being NO further OBJECTION, Work Draft 28-LS0714\U was ADOPTED. Representative Wilson asked whether people could buy cigarettes online to avoid the tax. Representative Pruitt deferred the question to DOR. JOHANNA BALES, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, replied that the state currently had a cigarette tax stamp that was purchased by distributors. She detailed that individuals who purchased cigarettes online were required to pay tax to the department; individuals had the same tax liability as distributors. Co-Chair Stoltze noted that DOR had provided testimony related to the tracking of cigarette taxes in the past. He asked how the department tracked the tax and about measures it had used. Ms. Bales relayed that federal law required internet sellers to provide the department with information when individuals purchased cigarettes online. She stated that over 2,000 Alaskans had purchased cigarettes online; the department had sent the individuals tax bills that they were required to pay. Co-Chair Stoltze asked whether the process had been under an amnesty program. Ms. Bales replied that the department had waived all penalties and had generous payment plans. DANIEL MOORE, CITY TREASURER, MUNICIPALITY OF ANCHORAGE, spoke in support of the legislation. He relayed that the city's tobacco tax was currently collected without a tax stamp. He stated that in the future the city may want a tobacco tax stamp. The city was aware the state already had a tobacco stamp. The private tobacco distribution industry had strongly recommended that if Anchorage had a tobacco stamp that it should be a joint single combination stamp that would require the city to work through the state to distribute and sell the stamps to distributors. 4:18:43 PM Representative Munoz asked for an explanation about the meaning of stamp relating to cigarettes. Co-Chair Stoltze asked Representative Thompson to provide an example. Representative Thompson read a tax stamp on pack of cigarettes to the committee. Representative Thompson asked whether the bill would change the City of Anchorage's retail tax system to a wholesale level. Mr. Moore replied that currently the tax was done at a wholesale level; it was an excise tax applied to any volume of cigarette product that came into Anchorage for sale. He stated that the retailers were at the other end of the distribution chain; Anchorage did not directly tax retailers. The tobacco stamp would create a more identifiable trail showing that the tax had been paid; the stamp would eliminate situations where an entity bought a product in Anchorage, claimed it would be sold outside of the city, and then brought the product back into the city for sale to retailers. The goal was to discourage the potential for tax evasion. Representative Thompson had been concerned about the possibility of sales outside of Anchorage. He appreciated Mr. Moore's explanation. 4:21:15 PM Representative Kawasaki wondered about examples of similar tax collections that involved municipal and state tax collections. Ms. Bales answered that the department did not currently collect taxes for other localities. She explained that taxes were collected through revenue sharing. She pointed to fish tax as an example; a portion of the tax was shared with the location where the fish was caught. She stated that the form of taxation was utilized in other states, specifically for sales tax. Representative Kawasaki asked whether the bill would impact revenue sharing or caps on local tax or revenue. Ms. Bales replied that cigarette tax was not included in revenue sharing. The Municipality of Anchorage and seven other localities within the state had their own cigarette taxes. She did not believe the cigarette tax would work into the tax cap for Anchorage. She deferred the question to Mr. Moore for additional detail. Co-Chair Stoltze clarified that the bill related to the broader category of tobacco taxes and was not limited to cigarette taxes. He detailed that cigarette taxes provided $31.4 million in unrestricted general fund (UGF) revenue; whereas non-cigarette tobacco taxes provided $14.4 million. He noted that the taxes brought in more UGF revenue than the commercial fishing industry. Mr. Moore relayed that tobacco tax fell under the tax cap in Anchorage. He stated that any type of additional revenue received as a result of tightening enforcement would be a dollar for dollar tradeoff with property taxes; a dollar more in tobacco tax would mean a dollar less in property tax. Representative Holmes asked for clarification on the fiscal note from DOR. She pointed to the total cost of $135,100 coming from statutory designated funds. She observed that because the state could be reimbursed by municipalities the total cost to the state would be $0.00. She asked for verification that the funds would be reimbursed to the state. Representative Pruitt replied that the CS would have a new fiscal note showing program receipts. Representative Holmes asked for confirmation that there would be no fiscal impact to the state. Ms. Bales replied that the forthcoming fiscal note would show that revenue would come from program receipts. The fiscal note would show an increase related to the creation of one new position, but the total state expenditure would be zero; the additional fees would be collected from participating municipalities. 4:27:35 PM Co-Chair Austerman asked whether the $135,000 would cover all municipalities with a cigarette sales tax that wanted to participate. Ms. Bales answered that the state would continue to issue same number of cigarette tax stamps as it did currently; there would be additional fees and new designs if all municipalities chose to participate. She furthered that most of the costs would be associated with a position tasked with tracking all of the cigarette tax stamps. The goal was to have a limit of one tax stamp per pack of cigarettes to prevent additional costs incurred by distributors. The department expected that the total cost would not exceed $135,000. Co-Chair Austerman asked for verification that there would be one state/municipal stamp given to each of the participating communities. Ms. Bales replied in the affirmative. Co-Chair Austerman asked for confirmation that DOR would collect the fees and distribute them back to municipalities. Ms. Bales answered in the affirmative. She elaborated that revenue was collected when stamps were sold to distributors; there would be different inventories of stamps for sale and DOR would track which portion of the sale was for either state or municipal revenue. Co-Chair Austerman looked at page 2 of the CS and observed that the bill indicated that the department "may" collect funds from municipalities; there was nothing in the bill that required the department to collect funds. He assumed the intent was for DOR to collect the funds. Representative Pruitt replied that he had worked with the department on the bill language and it was the intent for the state to have no financial burden. Co-Chair Austerman asked whether the sponsor would object if the word "may" was changed to "shall." Representative Pruitt was agreeable to the change if no unintended consequences were identified by DOR. Co-Chair Stoltze did not see a problem with the current language. He furthered that participation would be initiated by municipalities and it would be in their best interest to work with the state. He wondered if changing the language to "shall" would create a burden. He was more comfortable with the word "may." 4:31:58 PM Representative Pruitt asked the department to weigh in on the issue. Ms. Bales replied that the department would have no problem with the change to shall and saw no unintended consequences that would result from the change. The department would ensure that costs to municipalities would be predicated on the number of stamps sold in the area. Co-Chair Stoltze asked whether the change would force a municipality into a relationship with the state. Co-Chair Austerman looked at line 4 on page 2 of the bill, which included language related to the agreement between DOR and a municipality. He was more concerned about line 12 related to reimbursement. He did not have a problem with "may" in line 4. Representative Pruitt confirmed that the intent was to ensure that a municipality willingly and knowingly took on the cost burden. Co-Chair Stoltze communicated that the amendment would be offered at a later portion of the meeting. Representative Kawasaki referred to testimony from the city and municipality [of Anchorage] about lost revenue due to tax evasion. He asked about the department's record related to tax collection. Ms. Bales answered that the state did not have a tax stamp until 2004. She shared that there had been a 24 percent increase in cigarette tax revenue in the first full year after the stamp's enactment. She referred to discussions with the Municipality of Anchorage related to dealing with tax evasion; following the trail of cigarette tax sales through invoices had been unsuccessful. She relayed that the tax stamp had allowed for successful enforcement. 4:35:01 PM Representative Wilson asked what would happen if Anchorage was the only municipality interested in participating. Ms. Bales replied that the department would continue to issue a state-only cigarette tax stamp for cigarettes sold outside of the municipality and would have a joint stamp for cigarettes sold within the municipality. She added that there would be no problem if a municipality did or did not want to have the tax stamp. Representative Wilson wanted to make sure the state would not need to hire a position if only one community decided to participate. Co-Chair Stoltze asked Mr. Moore about conversations with other jurisdictions. He noted that Mat-Su had a cigarette/tobacco tax. Mr. Moore replied that he had not had recent conversations with other jurisdictions on the subject; conversations had been primarily with private sector wholesalers. He surmised that if Anchorage was the only entity in the state pursuing a joint tobacco tax stamp it would receive a disproportionate share of the costs. He furthered that the municipality would work with the state to determine whether a full-time or part-time person would be needed. He continued that there would be a joint agreement between the state and the municipality to determine the terms. He elaborated that the state was in the driver's seat and would tell the jurisdiction what the cost would be; the municipality would then decide whether it agreed to the terms. The municipality would look at the cost and potential revenue that would be generated from the stamps prior to a decision. Co-Chair Stoltze commented that Anchorage should hope that other cities would choose to participate because DOR would hire a person if authorized by the legislature. Representative Thompson discussed that Fairbanks had a former similar tax; there had been no tax charged on cigarettes shipped out of the city. He wondered if a municipal stamp would be required on the packets sold in stores such as Costco. He thought the issue could become confusing. Mr. Moore answered that the municipality had asked major tobacco distributors including Sam's Club, Costco, Northern Sales, and others about how the change would impact the stores. The entities had responded that a joint stamp would be necessary. He furthered that some of the member wholesalers (e.g. Costco) would need to have two separately managed secured inventories for the state-only stamp and the joint state/city stamp. 4:39:20 PM Representative Kawasaki stated that there were currently six municipalities that taxed tobacco. He wondered if the bill would encourage other municipalities to tax tobacco, given that the state would take on the most expensive aspect of administering the tax. Representative Pruitt replied that some municipalities may make the decision to begin taxing tobacco. He noted that in Anchorage there was currently substantial revenue set in place that was not obtained, which meant others throughout the city had to pick up the costs through property tax or other methods. He acknowledged that the bill may make it easier for other municipalities to tax tobacco and recognized that many people would benefit in communities currently levying tobacco tax as well. Representative Thompson could see where the change would work for Anchorage, but he did not know if it would work in Fairbanks. He explained that the Fairbanks North Star Borough had a cigarette tax, within city limits there was a separate sales tax, and there was also a state tax. Ms. Bales commented on the concerns. She stated that there was nothing currently that would preclude a municipality from enacting a cigarette tax or from having a cigarette tax stamp. She pointed to the concern that without a cooperative agreement with the state every municipality could enact its own stamp, which would put a requirement on distributors. The bill would provide a mechanism to make it easier (particularly for distributors) if more municipalities decided to tax tobacco. 4:42:20 PM Co-Chair Stoltze CLOSED the public testimony. Co-Chair Austerman MOVED to ADOPT a conceptual amendment on page 2, line 12 that would change the word "may" to "shall." There being NO OBJECTION, it was so ordered. Representative Costello requested to amend the replacement fiscal note. She discussed that page 2 of the DOR fiscal note specified that $50,000 would be used annually to purchase cigarette stamps. She pointed to a services line of $54,700 and believed that $50,000 of the amount should be moved to the commodities section of the note. Co-Chair Stoltze clarified that general fund program receipts should be changed to statutory designated receipts. Representative Costello responded that the updated note did reflect the change to statutory program receipts. She discussed the zero note from the Department of Commerce, Community and Economic Development and the Department of Revenue replacement note [FN3], which showed $135,100 for FY 14 through FY 19 in statutorily designated funds. Representative Costello MOVED to REPORT CSHB 193(FIN) as amended out of committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CSHB 193(FIN) was REPORTED out of committee with a "do pass" recommendation and with one new fiscal impact note from Department of Revenue and one previously published zero note: FN1 (CED). 4:46:25 PM AT EASE 5:03:54 PM RECONVENED HOUSE BILL NO. 193 "An Act relating to the joint administration of tobacco taxes by the state and a municipality." 5:43:10 PM Co-Chair Stoltze brought previously reported out CSHB 193(FIN) back before the committee upon advice from legal counsel related to an amendment. Representative Costello MOVED that the committee RESCIND its action to report CSHB 193(FIN) out of committee. There being NO OBJECTION, it was so ordered. Co-Chair Austerman MOVED to RECIND action on amending CSHB 193(FIN). There being NO OBJECTION, it was so ordered. Co-Chair Austerman pointed to page 2, line 12, and MOVED Amendment 2 that would replace the word "may" with "must." Co-Chair Stoltze OBJECTED for discussion. Co-Chair Austerman explained that Legislative Legal Services had communicated that the proper replacement of the word "may" was "must" (instead of "shall") in order to accomplish the amendment's intent. Co-Chair Stoltze WITHDREW his OBJECTION. There being NO further OBJECTION, Amendment 2 was ADOPTED. Representative Costello MOVED to REPORT CSHB 193(FIN) out of committee with individual recommendations and the accompanying fiscal notes. CSHB 193(FIN) was REPORTED out of committee with a "do pass" recommendation and with one new zero impact note from Department of Commerce, Community and Economic Development and one new fiscal impact note from Department of Revenue. 5:45:51 PM AT EASE 5:46:30 PM RECONVENED