HB 248-ELECTRONIC TAX RETURNS & ALCOHOL TAX  3:19:17 PM CHAIR OLSON announced that the first order of business would be HOUSE BILL NO. 248, "An Act requiring the electronic submission of a tax return or report with the Department of Revenue; relating to the excise tax on alcoholic beverages; and providing for an effective date." 3:20:26 PM BRANDON SPANOS, Deputy Director, Tax Division, Department of Revenue, provided a PowerPoint presentation entitled, "Alcoholic Beverage Tax HB 248," dated 2/10/16. He informed the committee HB 248 is an act requiring the electronic submission of a tax return or report with the Department of Revenue (DOR), relating to the excise tax on alcoholic beverages, and providing for an effective date [slide 2]. Mr. Spanos said the alcoholic beverage tax was first imposed in 1933, and the basic structure has remained unchanged since 1937. The tax is charged and collected monthly at the wholesale level. The tax rate has increased along with inflation and with the rates of other states; the last major change was in 2002, when the tax was raised to $0.10 per drink by legislation that also created the Alcohol and Other Drug Treatment & Prevention Authority fund which is funded by 50 percent of the tax collected. Currently, revenue is about $40 million per year and $20 million is deposited to the drug abuse treatment and prevention fund [slides 3 and 4]. For current tax rates, one drink portion is considered one ounce of distilled spirits, five ounces of wine, and twelve ounces of beer, which is taxed about $0.10 per drink, with the exception of small-rate breweries - by federal definition - which are taxed $0.35 cents per drink for their first 60,000 barrels [slide 5]. CHAIR OLSON asked how many breweries in Alaska produce over 60,000 barrels of beer. MR. SPANOS pointed out that the tax applies also to breweries importing into Alaska; however, none of the breweries in Alaska produce enough to meet the federal definition for the full tax, nor do many that import beer into the state [slide 5]. He further explained that small-brewery beer is taxed at $0.35 cents for the first 60,000 barrels, distilled spirits are taxed at $12.80, and the proposed bill would double the existing taxes. The bill also includes an electronic filing requirement, and a change to the minimum bond requirement [slide 6]. CHAIR OLSON asked whether DOR must take action on bonds occasionally. MR. SPANOS said he is not aware of action taken on a bond in recent history, but to get a license from the tax division, a bond is necessary. 3:25:37 PM REPRESENTATIVE LEDOUX asked what the bond protects against. MR. SPANOS responded that the bond is to protect the state in case there is a default on taxes due. He returned to the presentation, noting that Alaska's alcohol taxes are among the highest in the country, however, many states with lower tax rates on alcohol collect sales taxes, and others have state- owned stores with hidden taxes and fees, and unknown revenue to the state. The proposed bill would raise Alaska's tax to the highest for wine, spirits, and beer [slide 7]. In response to Representative LeDoux, he said spirits are hard liquor. The department estimates that doubling the tax rate would nearly double collections, and double the amount designated for the Alcohol and Other Drug Treatment & Prevention Authority fund. REPRESENTATIVE HUGHES has heard that raising taxes would reduce the consumption of alcohol, but pointed out that DOR is estimating that the same amount would be consumed. She asked whether the tax increase in 2002 affected consumption habits. MR. SPANOS said DOR has not done an analysis. He said, "It seems that in the past, we've seen a dip initially, over that first year, and it does eventually come back up. But again, we've not done an analysis of that." The estimates were based on the fall 2015 forecast, which did not account for changes in alcohol demand or potential stockpiling [slide 8]. 3:29:24 PM REPRESENTATIVE HUGHES asked whether the amount diverted to the Alcohol and Other Drug Treatment & Prevention Authority fund is a statutory designation. 3:29:44 PM MR. SPANOS confirmed that the 50 percent amount is established in statute for the special fund. In a manner similar to the other tax proposals from the administration, to implement HB 248, DOR must update its Tax Revenue Management System (TRMS) and its Revenue Online (ROL) component in order to manage the new tax rates, and update forms. These changes would be paid for by an implementation cost of $50,000, and there are no additional costs to administer the tax program [slide 9]. Mr. Spanos advised that the alcohol tax fits into the administration's plan to close the budget gap by providing $40,000 in new revenue [slides 10 and 11]. Impacts of HB 248 are that alcohol would be slightly more expensive, which could decrease consumption, and there could be stockpiling, although DOR does not anticipate much of an effect overall [slide 12]. REPRESENTATIVE LEDOUX questioned how the administration could forecast a decrease in consumption but at the same time forecast double the amount of revenue. 3:32:20 PM CHRIS HLADICK, Commissioner, Department of Commerce, Community & Economic Development, speaking from his experience as a city manager, said there may be a slight decrease initially, but the rate of consumption would return to normal levels. 3:32:59 PM MR. SPANOS directed attention to the sectional analysis for HB 248 [slides 13 and 14]: · Section 1 adds a $25 or 1 percent tax penalty for failure to file electronically unless an exemption is issued by DOR · Section 2 requires electronic submission of tax returns, license applications, and other documents submitted to DOR; this changes the general tax statutes, AS 43.05, and would apply to all tax types administered by the department; provides a process to request an exemption if a taxpayer does not have the technological capability to do so · Section 3 changes the per-gallon tax rate for the three major categories of alcoholic beverages · Section 4 changes the per-gallon tax rate for the first 60,000 barrels sold in the state from small craft breweries that meet the federal definition of a small brewer · Section 5 changes statutes describing tax filing so that taxpayers must submit their statements electronically · Section 6 changes the surety bond requirement · Section 7 clarifies the effective date · Section 8 is transitional language allowing for regulations · Section 9 is the effective date for Section 8 · Section 10 is the effective date for the rest of the bill 3:35:11 PM REPRESENTATIVE JOSEPHSON has been told the consumer would pay more than the estimated $0.10 per drink, because there are additional costs that the bar owner or wholesaler would pass to the consumer. MR. SPANOS suggested that the industry should respond to that question. REPRESENTATIVE JOSEPHSON asked whether the percentage of revenue directed to the Alcohol and Other Drug Treatment & Prevention Authority fund is an exception to the prohibition on designated funds. MR. SPANOS answered that the fund is a special fund subject to appropriation. REPRESENTATIVE JOSEPHSON posited that if the legislature imposed an increase of $10 million, would the administration seek the additional $30 million from another source. MR. SPANOS stated the intent of the administration is to balance the budget, but he could not directly address what would happen in that situation. 3:37:13 PM REPRESENTATIVE KITO questioned at what point the tax is assessed or paid. MR. SPANOS explained that the tax is placed at the wholesale level, thus if alcohol is imported to a warehouse, and the warehouse owner holds the license, the warehouse owner is the taxpayer; when the liquor is sold to the bar owner, the tax is paid. He characterized the tax as "a true excise tax meaning the tax is hidden up the chain." An exception would be that when liquor is shipped directly to a retail store, the store owner is the taxpayer. REPRESENTATIVE KITO asked how a wholesaler proves the tax has been assessed and paid. MR. SPANOS said that licensees have self-reporting requirements, and all importers of alcohol are licensed with DOR, which investigates and verifies purchases and reporting. REPRESENTATIVE KITO asked whether the electronic reporting requirements in HB 248 - and other legislation - have been implemented or are brand new to taxpayers. MR. SPANOS said corporate income taxpayers must file electronically if required to do so for federal purposes. The ROL system is in use, but this is a new requirement. REPRESENTATIVE LEDOUX referred to the 50 percent payment designated for the Alcohol and Other Drug Treatment & Prevention Authority fund, and asked whether the payment to this fund can be confirmed. 3:40:32 PM MR. SPANOS expressed his understanding that the funds have been appropriated every year; however, he will verify. REPRESENTATIVE LEDOUX questioned whether the tax increase will result in $40 million to the general fund (GF) and $20 million to the Alcohol and Other Drug Treatment & Prevention Authority fund. MR. SPANOS said initially $40 million goes to GF, and from that $20 million would be appropriated to the special fund. REPRESENTATIVE HUGHES observed that if HB 248 passes, individuals may choose to order liquor online. She asked whether the administration completed an analysis on the potential impact of online purchases of alcohol to small local businesses and to jobs. MR. SPANOS said DOR did not. CHAIR OLSON opined that shipping wine is very expensive, and liquor cannot be mailed, thus outside purchases would not affect businesses. REPRESENTATIVE HUGHES questioned why there was no analysis on the potential economic impact of this and other revenue bills; furthermore, she asked whether DOR considered that in rural areas, the increased cost might encourage black market activity. MR. SPANOS acknowledged that black market activity is always a concern; he restated that the focus of the tax bills is to close the budget gap, and their impact on revenue. He pointed out that the funds directed to the Alcohol and Other Drug Treatment & Prevention Authority fund is used to assist with "those types of activities." 3:44:46 PM REPRESENTATIVE HUGHES said she was troubled that there is a focus on how to pay for government, without concern for residents and their communities. She reviewed the changes to taxes to small breweries and noted that breweries in her area could grow and expand, but the tax would stop growth. MR. SPANOS said he would confirm the production numbers of all of the breweries in Alaska and the tax rates thereof. REPRESENTATIVE JOSEPHSON returned attention to the increase in funding to the Alcohol and Other Drug Treatment & Prevention Authority fund and asked whether the increase would be offset from another category such as behavioral health, or the Mental Health Trust Authority. MR. SPANOS said he will inquire. CHAIR OLSON stated that HB 248 would impact constituents who may be unaware of its consequences; in a manner similar to tobacco taxes, the bill seeks to increase the cost to those who buy a product from an industry that has "significant problems," but is not illegal. He predicted there would be a response to the bill if it passes. 3:49:22 PM REPRESENTATIVE LEDOUX questioned whether the change to the amount of the required bond intends to give DOR discretion with respect to individuals who apply for a bond. MR. SPANOS said currently DOR analyzes the estimated tax prior to approving a bond, and the bond is usually double the amount of the estimated tax amount, with a minimum of $25,000; however, the removal of the minimum bond value allows DOR to accept a smaller bond amount for a business with an expected tax amount of $5,000, for example. REPRESENTATIVE LEDOUX said, "But it doesn't say that the upper amount, is like, 25 or 50, or something like that, it just gives you total discretion." MR. SPANOS responded that under the current statute, DOR has total discretion to increase the amount to cover the estimated tax. In further response to Representative LeDoux, he said he would review the language in the regulations. REPRESENTATIVE LEDOUX said, "So, you're telling me that if we have a statute that says ... 'of $25,000', that by regulation you can make it [$50,000] or [$100,000] or [$150,000]? That's kind of perplexing to me." 3:52:17 PM COMMISSIONER HLADICK said this provision in the bill addresses doing away with the $25,000 minimum requirement, so the state has the ability to charge a small businessman less. REPRESENTATIVE LEDOUX asked, under the current law, if the state has the discretion to raise the amount, why it does not have the discretion to lower the amount. MR. SPANOS said he will review the regulations. REPRESENTATIVE HUGHES asked how many wholesalers - distributers with a warehouse - would be affected, since the bars and liquor stores would not be affected. MR. SPANOS explained that the bill would address small wineries that are producing wine and must get a tax bond, as well as specialty importers. He agreed there are only a few large warehouses, which are the main taxpayers. [HB 248 was held over.]