SB 117-PRICE OF CIGARETTES  3:06:01 PM CHAIR PASKVAN announced SB 117 to be up for consideration. ESTHER CHA, aide to Senator McGuire, sponsor of SB 117, said the intent of SB 117 is to close a loophole in law, which allows large high-volume cigarette sellers to price their cigarettes at less than the minimum price set by law if it can be proved that their cost of doing business is lower than the mandated minimum price. She explained that the original purpose of Article 7 in Title 43 was to prevent wholesalers and retails from using predatory pricing practices to promote the sale of cheap cigarettes and use them as a loss leader. However, AS 43.50.800(c) specifically states that a wholesaler or retailer that wishes to advertise, offer to sell, or sells cigarettes at less than the presumptive actual cost to the wholesaler or retailer must first obtain approval from the Department of Revenue (DOR). The department may grant approval only if the wholesaler or retailer provides proof satisfactory to the department that the wholesaler's or retailer's actual cost is lower than presumed. Because of this one clause, the statute didn't work the way it was supposed to. For example, she said if the department determines that a pack of cigarettes' minimum cost is $7 and someone comes in and says they can show their cost of doing business allows them to price cigarettes at $6.50; so they apply to the DOR that determines whether that is true and allows them to sell cigarettes at that price. She said that SB 117 would repeal AS 43.50.800 and replace it with section 6 in the bill which establishes AS 43.50.810. A committee substitute (CS), version E, changes the multipliers. In SB 117 (a) the current percentages are as described in AS 43.50.800(a)(b), but the change in percentage points reflects the compromise among some of the smaller retailers as well as the larger wholesalers. They have discussed this with the DOR and found that the difference is the multipliers. MS. CHA said that supporting documents indicate how increased prices work to help deter people from smoking, especially youth. The studies are accurate, she said, however the price changes that may be in effect with this bill may not be as exaggerated as needed to prevent a very large decrease in consumption. By getting rid of the wholesaler's or retailer's ability to apply for an exemption, SB 117 would also bring parity and balance to competition. It would level the playing field by insuring that all vendors regardless of size and volume or accounting practices will have to price at or above the minimum price set by law. 3:10:08 PM SENATOR MEYER asked how much the price would go up per pack and if it was set per pack or per carton. He also wanted to know how they came up with the multiplier. MS. CHA deferred those answers to Johanna Bales with the department. SENATOR MEYER assumed this applied to just cigarettes and not small cigars. Ms. Cha indicated that was correct. 3:11:25 PM CLIFF CRAEMER, Vice President, Sales and Marketing, Northern Sales Company, said they are a diverse, full-service distributor that does commodities like bread, candy, snacks, beverages and tobacco. He strongly supported the CS for SB 117. He believed that the proposed changes will simplify current law, reduce administrative burden for both the state and licensee, and allow a level playing field for both the wholesalers and the retailers. They support the recommendation of removing the exemption and the proposed changes in the multiplier. This is a compromise between all the parties involved. 3:13:42 PM JOHN MAKAY, Sr. Vice President, Northwest Region, Costco Wholesale Corporation, said Costco doesn't view the existing law as having a loophole. They always sell products above cost. He explained that the provision was inserted in the past to allow Costco to not have to artificially overcharge due to "essentially a price fixing mechanism." It turned out, however, that that provision was very burdensome for both Costco and the DOR. He supported this change, but said it would increase the price slightly. 3:15:41 PM CHAIR PASKVAN asked if Costco factors labor into their cost. MR. MAKAY answered yes; they factor in every cost. Costco and the DOR spent a lot of time figuring out how to determine cost - for example, how much of his salary or their overhead should get applied to one little department in two buildings in a company that has 550 locations. He said it is very subjective and he appreciated the department working with them trying to determine that, but it was an unwieldy process. Tobacco suppliers did not allow deductions that Costco sometimes gets for its other products; so the profit they made on tobacco, even with the existing assumptions, was higher in Alaska than probably anywhere in the country. SENATOR MEYER asked if all the states he covers have minimum pricing for cigarettes. MR. MAKAY answered that none of them do; Alaska is the only one. 3:18:33 PM SENATOR MEYER said he read that 23 other states do have this, so it's not uncommon. Alaska is just the only one in his district. MR. MAKAY said when this was instituted a number of years ago, a fair amount of analysis was done on the states. SENATOR MEYER asked if tobacco can be used as a loss leader in states that don't have minimum pricing. MR. MAKAY replied that he thought so, but Costco has an internal policy of not selling things below cost. He said he wasn't an expert in that area. 3:19:21 PM SENATOR MEYER said he noticed the formula had a trade discount, and asked what that is. MR. MAKAY replied that a lot of discounts have been eliminated by the tobacco companies, except for volume discounts and maybe payment terms. 3:20:16 PM ROGER HAMES, President, Hames Corporation, Sitka, Alaska, supported SB 117 and the CS for all the reasons already stated. He added that he understands that prices would go up fractionally at the most. 3:21:48 PM CHAIR PASKVAN held SB 117 for further work and adjourned the meeting at 3:22 p.m.