SB 82-ALCOHOLIC BEVERAGE TAX FOR WINE & OTHERS [Contains discussion of HB 225] CHAIR ANDERSON announced that the first order of business would be CS FOR SENATE BILL NO. 82(L&C)(title am), "An Act relating to the state alcoholic beverage tax for certain wine and other beverages on amounts sold in or consigned for shipment into the state that exceed 100 gallons a month, and to the treatment of two or more taxpayers who have a relationship for purposes of applying the tax for certain wine and other beverages." Number 0094 DOUG LETCH, Staff to Senator Gary Stevens, Alaska State Legislature, presented SB 82 on behalf of Senator Gary Stevens, sponsor of the bill. He stated: When the 22nd Alaska Legislature passed into law House Bill 225, breweries were allowed to keep the former tax rate of 35 cents per gallon on sales of the first 60,000 barrels of beer sold in the state, while wineries were not given similar consideration; as a result, the tax on wine rose from 85 cents per gallon to $2.50 per gallon. This statute which helps breweries, has, unfortunately, put Alaska's small, emerging wineries at a competitive disadvantage in the marketplace. SB 82 is legislation intended to reduce the tax burden for small Alaska wine producers, at which wine is currently taxed at the rate of $2.50 per gallon, at the time it is sold in the state or consigned to the state. Recognizing that a revision to current state statute to allow wineries an exemption similar to breweries would lead to a substantial revenue loss, SB 82 attempts to level the playing field for our small wineries by offering a tax exemption of 100 gallons per month, and this figure was derived after much consideration and consultation with winery operators and the Department of Revenue. The 100-gallon per month figure is also an attempt to [minimize] revenue lost from unintended beneficiaries, while keeping within the constrictions of interstate commerce law. The bill would decrease the impact on state revenues by around $18,000, but while there is a revenue decrease, it will help support continued development of small Alaskan wineries, which currently there are two on Kodiak Island, a third is in Haines, and a fourth is in Anchorage. This burgeoning Alaska industry does need our support to prosper and contribute to the state's changing economy, and SB 82 is one means of assisting them. While the state would loose some income under this bill, we may also see a loss of all incomes should these small businesses cease to exist because they can't remain profitable and competitive in a dynamic marketplace. CHAIR ANDERSON noted the arrival of Representative Guttenberg. Number 0275 REPRESENTATIVE ROKEBERG asked Mr. Letch to talk about the wineries in Alaska. MR. LETCH reported that on Kodiak Island there are two small wineries that use salmonberries to make wine and a variety of products. He said there is a You Brew Pub in Anchorage, and a winery in Haines. REPRESENTATIVE ROKEBERG asked if the bill is for all wines sold less than 100 gallons and those produced in the state. MR. LETCH replied that because of the federal interstate commerce laws, wineries from outside of the state cannot be excluded from taking advantage of this exemption. The 100- gallon figure was derived to minimize the impact from out of state wineries, he added. REPRESENTATIVE ROKEBERG asked if that is approximately 400 to 500 bottles a year. He wondered if a company from California could import that amount and be excluded from paying the tax. MR. LETCH replied that that is his understanding. REPRESENTATIVE ROKEBERG said he finds that troublesome. CHAIR ANDERSON noted the arrival of Representatives Lynn and Crawford. Number 0414 CHUCK HARLAMERT, Juneau Section Chief, Tax Division of Administrative Services, Department of Revenue, spoke about the problem regarding out of state importation, noting that the brewery exemption lowers the rate of tax for small brewers depending on the size of the brewer. It does allow a lot of leakage of the credit out of state. He pointed out that a bigger problem is that the taxpayers are the importers or distributors, "so we have to look through the taxpayers to the underlying brewer .... "This bill does not have the same problem as the brewery reduced rate because it applies to the taxpayer irrespective of the size of the winery. It helps small Alaska wineries because they are direct taxpayers and they get an exclusion of 100 gallons per month, he explained. A distributor who distributes a larger volume still gets only the 100-gallon exemption, he said. REPRESENTATIVE ROKEBERG asked if Mr. Harlamert is suggesting that a vintner from California cannot ship wine to Alaska without going to a distributor. MR. HARLAMERT said he believes that they have to be licensed in the state so they could, in theory, become a licensed distributor in the state and import wine, but can't just ship it in. They can't sell direct into Alaska, he added. REPRESENTATIVE ROKEBERG said he is confused how that works with the "three-tier system." Number 0683 MR. HARLAMERT related that the incidences of taxes on the brewing, shipping, or consignment in the state amounts to ten wine taxpayers now, and there are no wineries outside of Alaska that pay the tax. The tax is imposed at the distributor level, he said. CHAIR ANDERSON asked Representative Rokeberg to explain how it works. REPRESENTATIVE ROKEBERG implied that he is not sure he entirely understands how it works. This bill puts the tax on the manufacturer of the wine, if they're in state, where currently, the other wines are taxed at the distribution point. MR. HARLAMERT replied exactly. REPRESENTATIVE ROKEBERG asked if vintners from outside Alaska would have to apply to the Department of Revenue for a licensure under the Alcoholic Beverage Control Board (ABC Board). MR. HARLAMERT said his understanding of the rule is that if it is shipped into the state for resale it must be done by a licensed distributor. CHAIR ANDERSON stated that the bill is about getting parity for taxation so that people from other states can't find a loophole. REPRESENTATIVE ROKEBERG clarified that the real issue is that when the legislature raised alcohol taxes three or four years ago, Representative Rokeberg offered an amendment that was consistent with federal law, which allowed the exemption from the increase of tax of locally produced beer. But it was consistent with the "gallonage requirement" under the U.S. tax code, he noted. That's why the there is a reference in the bill to 26 U.S.C. 267(b), he pointed out. He asked Mr. Harlamert to say more about the problem he spoke about. Number 0922 MR. HARLAMERT related that the problem he was referring to is: When you base an exemption off of the activities or status of the producer, but the exemption needs to be effectuated at the taxpayer level, you create a difficult administrative process. The brewery exemption does that. It's rather cumbersome to deal with when a qualified brewer ... may sell through more than one taxpayer and we need to keep track of that. There's a cap on the amount of beer that they can sell at the lower rate, and if you were to extend the same reference to federal law for wineries, I think that the administrative complications of taking that approach would be that much worse. MR. HARLAMERT continued to say that the feds have a credit mechanism that gives an advantage to small wineries. It's 90 cents a gallon, and it is phased out for between 150,000 and 250,000 gallons produced a year. He explained that it is relatively simple to administer when dealing directly with the producer and the taxpayer. REPRESENTATIVE CRAWFORD asked if it is 500 bottles per month and 6,000 bottles per year. MR. HARLAMERT replied that he thinks it is between 400-500 bottles of wine. REPRESENTATIVE CRAWFORD asked if specialty wines would be exempt. MR. HARLAMERT answered that it doesn't exclude them directly. He said, "It does via the taxpayer because they come through a distributor. The exemption is not a function of the size of the winery or its source. It's simply, each taxpayer gets the first 100 gallons of wine tax free." REPRESENTATIVE CRAWFORD said, "What you're saying is, the Fiddlehead can't buy from Columbia Crest Winery directly." MR. HARLAMERT said that is his understanding. REPRESENTATIVE ROKEBERG said, "But they may be able to buy from another smaller vintner, is what I'm concerned about." He asked if Mr. Harlamert is suggesting that they would have to buy from a wholesale distributor and then resell it. MR. HARLAMERT said that this is not his area of expertise and he is hesitant to answer. CHAIR ANDERSON asked if this issue could be worked out and the committee could meet again on the bill. Number 1178 REPRESENTATIVE ROKEBERG suggested that the fiscal note be looked at. He noted a loss of $18,000 and asked the reason why that is. MR. HARLAMERT said, "We estimate that the total revenue decrease will be $18.4 thousand; approximately 20 percent of that will be realized by in-state wineries." REPRESENTATIVE ROKEBERG asked what the volume of the two Kodiak wineries is. MR. LETCH replied that one of the wineries produces roughly 1,200 gallons per year with the bulk of that coming in the fall. They would be producing about 300-400 gallons per month, for four months, he said. He assumed that the other winery was similar in production. REPRESENTATIVE ROKEBERG asked how much tax they would be paying. MR. HARLAMERT estimated that local wineries would be paying 20 percent of $18,000. REPRESENTATIVE ROKEBERG asked, "Someone's got to tell me why we're going to give up four times the tax that we'd be abating to do this deal." CHAIR ANDERSON suggested that someone from the Department of Revenue might be able to answer that question at the next hearing of the bill. REPRESENTATIVE ROKEBERG said he has concerns about where the tax fits. Mr. Harlamert's analysis seems to indicate a ratio of 4- to-1 cost-to-benefit analysis, he pointed out. Number 1359 REPRESENTATIVE GUTTENBERG suggested that a synopsis of the developing wine industry should be made available at the next hearing of the bill. He said he is interested in hearing if it is a sustainable industry. REPRESENTATIVE DAHLSTROM, directing her comments to Mr. Letch, asked if this bill is at the request of one winery in particular. MR. LETCH said when the bill was introduced in the House, the makers of the bill worked primarily with Mr. Steve Thompson from Alaska Wild Wine. "We have also heard from the other wine owners, John and Judy Lucas, and also from the Menakers who own the winery in Haines." There has been no contact with the You Brew Pub in Anchorage, he noted. REPRESENTATIVE DAHLSTROM asked if Steve Thompson is the mayor. MR. LETCH said no, he is a local resident of Kodiak. Number 1485 REPRESENTATIVE CRAWFORD suggested that there should be more information obtained on whether this bill opens up a loophole for other wines to be imported. MR. HARLAMERT offered to ask Joanna Bales who is in charge of the alcohol [tax] program to attend the next hearing of the bill. He said that he contacted her prior to today's meeting and it is their understanding of the law that there is no problem with a loophole. The incidence of tax is to "bring into the state for sale, to distribute, or to brew," so an outside seller needs to be licensed to do that, he explained. REPRESENTATIVE ROKEBERG pointed out that the basis for the brewery exemption was to keep the brewery tax at its current level, and it only applied to the incident of a tax increase. He asked Mr. Harlamert if that is his recollection. MR. HARLAMERT said yes. REPRESENTATIVE ROKEBERG added, "Those people who are locally brewing and are not paying no tax." He asked if that would be similar in this bill. MR. HARLAMERT replied yes and no. He said: It depends on their volume and I think the best way to summarize it is, we looked at the model used for the brewery exemption and because of two issues, one, the administrative burden involved with it and, two, the fact that if you do exempt it based upon the size of the venture, then you do open up a very large number of potential beneficiaries, all of them out of the state, so in our dealing with the Senator's office, we've tried to come up with the best exemption we could come up with the least leakage. CHAIR ANDERSON announced that SB 82 would be held until Wednesday. Number 1637 REPRESENTATIVE GATTO asked if the Kodiak winery sold "all they can make." MR. LETCH said he didn't know. REPRESENTATIVE GATTO suggested that increasing the tax could increase sales by pushing other importers out. He wondered if the focus should be on increased production, which is going to be better for the local economy, the workers, and the state, as opposed to just increasing market share. REPRESENTATIVE ROKEBERG said it might be hard to get empirical evidence of market elasticity. [SB 82 was held over.]