HB 102 - CIGARETTE SALES: AGREEMENT/ESCROW CHAIRMAN KOTT announced the next order of business is HB 102, "An Act imposing certain requirements relating to cigarette sales in this state by tobacco product manufacturers, including requirements for escrow, payment, and reporting of money from cigarette sales in this state; providing penalties for noncompliance with those requirements; and providing for an effective date." CHAIRMAN KOTT called on Bruce M. Botelho from the Department of Law to discuss the bill. Number 0230 BRUCE M. BOTELHO, Attorney General, Department of Law, stated the purpose of the bill is simply to accomplish one aspect of the settlement reached last November between the attorneys general and the tobacco industry. It calls for the enactment of a model statute whose purpose is to deal with the non-participating manufacturers. The purpose is to make sure that those companies do not take advantage of the ability to undersell their products and gain market share in any state in the union. The state is not required, under the terms of the Master Settlement Agreement, to pass this type of legislation nor is it a condition precept for the state to receive monies from the settlement. However, there is a major penalty in the sense that if there is an increase in a market share that increase is shared disproportionately with those states that have not enacted the model legislation. The material that has been provided shows a hypothetical example of this kind of adverse fiscal impact on the state. At this stage, more than 99 percent of the total are participating. The legislation provides the option of signing on or establishing an escrow account reflecting a manufacturer's percentage of its share of the market and cost that it would otherwise bear under the terms of the agreement. Number 0448 CHAIRMAN KOTT asked Attorney General Botelho whether the bill applies only to cigarettes or is there a broader application to cover cigars or smokeless tobacco products. ATTORNEY GENERAL BOTELHO replied it is targeted at all cigarettes. There is a separate settlement regarding chewing or smokeless tobacco. Number 0490 REPRESENTATIVE GREEN asked Attorney General Botelho whether there are any sales of tobacco products that are not made in the U.S. ATTORNEY GENERAL BOTELHO replied he doesn't know. Number 0520 REPRESENTATIVE GREEN asked Attorney General Botelho whether the bill would have any affect on alien tobacco manufacturers. ATTORNEY GENERAL BOTELHO replied it would require any company or person attempting to sell in the state of Alaska to sign on to the agreement or pay money into an escrow account. The incidence is really the sale of tobacco in the state. Number 0549 REPRESENTATIVE MURKOWSKI asked Attorney General Botelho whether there have been any legal challenges to the model legislation. ATTORNEY GENERAL BOTELHO replied, to his knowledge, there hasn't been any challenge to the model legislation. There have been challenges in several states to the underlying settlement itself. Most notably are California, New York, New Jersey and Pennsylvania. In each instance, except for New York, they have challenged the overall efficacy of the settlement. New York's battle has been over the allocation of monies between the local government and the state. In addition, a separate class action has been filed in Oklahoma for the overall settlement to be declared unconstitutional. Number 0632 REPRESENTATIVE MURKOWSKI asked Attorney General Botelho whether this legislation would be thrown out, if everything is thrown out. ATTORNEY GENERAL BOTELHO replied correct. Number 0650 REPRESENTATIVE GREEN referred to Section 45.53.020 of the bill and stated the schedule of increase is an unusual mill. He wondered whether it is an estimate of a cost of living increase, for example. ATTORNEY GENERAL BOTELHO replied the numbers were negotiated at great length between the industry and the leading states in the settlement. He cannot answer why they are at the 1/10,000 point. Number 0711 CHAIRMAN KOTT stated this doesn't prevent any new revenue to the state. It prevents cherry picking. ATTORNEY GENERAL BOTELHO said correct. The bill is not a revenue source. It is simply an escrow account by which the public may draw on monies in the event that the non-participating manufacturer chooses to sell. Number 0736 REPRESENTATIVE ROKEBERG asked Attorney General Botelho to comment on the steps it would take to sell cigarettes in the state. ATTORNEY GENERAL BOTELHO replied any company that wishes to sell in the state is required through its wholesaler to register and pay a tax right now. The bill would require a non-signatory manufacturer of the settlement to establish a separate escrow account. Number 0784 REPRESENTATIVE ROKEBERG asked Attorney General Botelho how much would it deposit. ATTORNEY GENERAL BOTELHO replied it would be based on estimated sales according to a schedule. REPRESENTATIVE ROKEBERG asked Attorney General Botelho whether there is a stipulated schedule in the settlement. ATTORNEY GENERAL BOTELHO replied there is a schedule in terms of a per pack. Each manufacturer has given a different estimate of the cost of the settlement to that manufacturer. He reiterated this would be primarily based on a representation of estimated sales; it would be trued for actual sales. Number 0835 REPRESENTATIVE ROKEBERG asked Attorney General Botelho whether the bill gives any guidance to a manufacturer. ATTORNEY GENERAL BOTELHO replied it is triggered in Section 45.53.020(a)(2) of the bill. The bill also provides additional authority to adopt regulations to implement the terms of the agreement. Number 0878 REPRESENTATIVE ROKEBERG asked Attorney General Botelho whether the "units sold" is an individual cigarette. ATTORNEY GENERAL BOTELHO replied yes. REPRESENTATIVE ROKEBERG asked Attorney General Botelho whether the formula is suppose to be close to the 45 cent tax surcharge put in place in December of 1998. ATTORNEY GENERAL BOTELHO replied yes, in general. The 45 cents is an estimate that varies from company to company. Some companies have chosen to overstate their overall fiscal impact per pack. REPRESENTATIVE ROKEBERG called the 45 cents an imprecise variable. ATTORNEY GENERAL BOTELHO stated correct. Number 0925 REPRESENTATIVE CROFT asked Attorney General Botelho what other states have adopted something like this. ATTORNEY GENERAL BOTELHO replied he doesn't have the current list, but will provide one as quickly as possible. All states this year are considering it during their legislative session. He is not aware of any state that has already enacted it. CHAIRMAN KOTT indicated Alaska could be the first. Number 0958 REPRESENTATIVE CROFT asked Attorney General Botelho whether there are other bills to cover cigars and chewing tobacco. ATTORNEY GENERAL BOTELHO replied cigars are not covered in this bill. He reiterated there is a separate agreement with smokeless tobacco, but there isn't separate legislation. Number 1014 REPRESENTATIVE CROFT asked Attorney General Botelho whether the attorneys general negotiated with the companies covered by the settlement, not the companies that opted out. ATTORNEY GENERAL BOTELHO replied the states negotiated with the five largest manufacturers in the United States. The terms of the settlement itself provides an opportunity for other companies to opt in, and for the most part they have. He reiterated, at this stage, those who are not included constitute less than .5 percent of the overall market. There really are only 5 major players in the country, 20 minor players, and a slew of mom and pops that Alaska will probably never see. Number 1084 REPRESENTATIVE CROFT stated his question was directed at drafting HB 102 and negotiating the numbers to the one-ten thousandth of a cent. ATTORNEY GENERAL BOTELHO stated the numbers in the bill were the result of negotiations specifically with the big five companies. Number 1106 REPRESENTATIVE MURKOWSKI asked Attorney General Botelho, for clarification, whether the bill would not apply to cigars. ATTORNEY GENERAL BOTELHO replied that is his understanding. REPRESENTATIVE MURKOWSKI referred to the "Definitions" section of the bill and asked what a cigar is rolled in. REPRESENTATIVE CROFT read, "(i) any roll of tobacco wrapped in paper or in any substance not containing tobacco;", and stated tobacco wrapped in tobacco wouldn't be covered. REPRESENTATIVE GREEN noted a cigar is wrapped in a leaf. Number 1158 REPRESENTATIVE ROKEBERG complimented Attorney General Botelho for placing the financial burden of cigarette smoking on the manufacturers and not the state of Alaska. CHAIRMAN KOTT closed the meeting to public testimony and called for a motion to move the bill out of committee. Number 1199 REPRESENTATIVE JAMES made a motion to move HB 102 from the committee with individual recommendations and the attached zero fiscal note(s). There being no objection, HB 102 was so moved from the House Judiciary Standing Committee.