HOUSE BILL NO. 503 "An Act relating to the tobacco product Master Settlement Agreement; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill, sponsored by the House Finance Committee, "was drafted by the National Association of Attorneys General and was unanimously supported by its membership. It closes a loophole that benefits tobacco manufacturers that are not covered under the Master Settlement Agreement." TOM WRIGHT, Staff to Representative John Harris, reiterated Co- Chair Wilken's statement. Mr. Wright noted that currently AS 45.53 requires all non-participating manufacturers to deposit a certain amount of money into an escrow account with the intent to "level the playing field". The amount this year is two cents per cigarette and every manufacturer of a cigarette deposits that amount into an escrow account. Mr. Wright stated that the loophole allows those who did not participate in the Master Settlement Agreement, to withdraw from this escrow account, anything above their eligible share. Alaska's allocable share is about .34 percent. He referenced a spreadsheet prepared by the Department of Law titled, "NPM Escrow Release Calculations for hypothetical non participating manufacturer Cheap Smokes, Inc." [copy on file] detailing the consequences of this loophole. He demonstrated that regardless of the number of cigarettes a non-participating manufacturer sells in Alaska, the manufacturer could maintain a balance in the escrow account of only the amount of Alaska's allocable share, thus permitting the manufacturer to pay significantly less than the participating manufacturers. Mr. Wright informed that this legislation would provide that participating and non-participating manufacturers would both be required to contribute the same amount to the escrow account. Mr. Wright noted the bill is comprised of three sections, with the provision that if the first section were found to be unconstitutional, the language of Section 2 would be implemented. If the court determines that neither section is valid, statute would revert to existing language. MICHAEL BARNHILL, Assistant Attorney General, Commercial/Fair Business Section, Civil Division, Department of Law, added that similar legislation has been enacted in at least 29 states. The purpose is to close the loophole unintentionally created when the statute was first adopted in 1999. The loophole was the result of an assumption that non-participating manufacturers' sales would be in all states and therefore the relative percentage of sales in all states would mimic the allocable share. This has not proved true and non-participating manufacturers are selling to "niche markets" in a few states and thus the market share in each state is significantly higher than the allocable share. Senator Dyson understood from the sponsor statement that this legislation would only apply to cigarette. He asked if it would apply to other tobacco products as well. Mr. Barnhill responded that the Master Settlement Agreement applies only to cigarettes. Co-Chair Wilken ordered the bill HELD in Committee.