SB 131-ELECTRONIC TAX RETURNS & ALCOHOL TAX  1:37:46 PM CHAIR COSTELLO reconvened the meeting and announced the consideration of SB 131. 1:39:30 PM BRANDON SPANOS, Deputy Director, Tax Division, Department of Revenue (DOR), introduced SB 131 on behalf of the administration, starting with the history. The alcohol tax in Alaska began in 1933 and the basic structure has stayed the same since 1937. The tax is charged and collected monthly at the wholesale level. CHAIR COSTELLO asked how the tax is charged and collected. MR. SPANOS explained that licensed, bonded warehouses can import alcohol into those warehouses and the tax is due when it is sold from those warehouses. Alternatively, if a company buys and imports alcohol, the tax is levied when it's imported. There is also a tax on brewing or distilling spirits in the state. That tax is due when the alcohol is sold. Continuing to review the history, he said the tax rate has increased with inflation and public need and to keep up with other states. The last major change in the alcohol tax was in 2002 when the tax was raised to 10 cents per drink. At that time, the Alcohol and Other Drug Abuse Treatment and Prevention Fund was created and 50 percent of the tax goes to that fund, subject to appropriation. Currently, revenue from the alcohol tax is about $40 million per year, so about $20 million goes to the Treatment and Prevention Fund for the mental health budget. 1:41:39 PM CHAIR COSTELLO asked how the administration came up with the dime a drink slogan for the bill, because it could be more than that, depending on the amount of alcohol in the drink. MR. SPANOS replied it's based on the 2002 legislation when the tax was increased. A review of the history of that legislation indicated that one ounce of distilled spirits, five ounces of wine, or 12 ounces of beer are each considered one drink. The dime was attached at that time and the administration is proposing to double that rate to 20 cents per drink. The exception is small craft brewery beer that has a tax of about 3.3 cents per drink for the first 60,000 barrels of beer sold in the state, provided the brewery meets the federal definition of a reduced rate brewer. MR. SPANOS displayed a chart to show what doubling the tax rates to 20 cents per drink looks like. For distilled spirits, the rate goes from $12.80 per gallon to $25.60 per gallon. For wine, the rate goes from $2.50 per gallon to $5.00 per gallon. For beer, cider, or malt beverages, the rate goes from $1.07 per gallon to $2.14 per gallon. For small-brewery beer, the tax for the first 60,000 barrels goes from 35 cents per gallon to 70 cents per gallon. Additionally, the bill requires electronic filing for all taxpayers and increases the bonding requirement from $25,000 to an amount determined by DOR. 1:43:34 PM MR. SPANOS revealed that Alaska's alcohol taxes currently are among the highest in the U.S. For wine, the taxes are the highest; for spirits Alaska is second highest behind Washington; and for beer Alaska is second highest behind Tennessee. If SB 131 were to pass, the alcohol tax rate in Alaska would be the highest in all three categories. 1:44:18 PM SENATOR MEYER asked, "If we're already the highest, why would we want to double it." MR. SPANOS replied the administration is trying to raise revenue from a variety of sources throughout the state and alcohol is part of that. SENATOR MEYER commented that this has nothing to do with deterring drinking. "It's strictly a cash grab." MR. SPANOS said that's correct. CHAIR COSTELLO recounted a discussion in a House Labor and Commerce hearing that the increased tax would be enough of a deterrent that fewer people would drink. She asked him to respond to that and expressed hope that the administration would analyze the impact that all the taxes will have on the public and the budget. MR. SPANOS confirmed the discussion took place and the administration responded that it had not done an analysis. Commissioner Hladick noted that his experience was that a tax increase results in a drop in use for a year and then it goes back up. That hasn't been confirmed, but a higher tax would certainly factor into a person's decision about how much alcohol they might purchase, he said. 1:46:17 PM SENATOR STEVENS asked if local taxes are added to the state alcohol taxes. MR. SPANOS replied there are sales taxes in certain jurisdictions but he didn't know if there are specific taxes on alcohol. He offered to look into it. SENATOR MEYER asked if the committee can expect to see an economic analysis of what doubling the alcohol tax would do to small businesses. He remarked that people may not stop drinking at home, but they may cut back consumption at bars and restaurants. MR. SPANOS responded they haven't done that analysis but he'd take the request back for discussion. Turning to the revenue impact of SB 131, he said the Department of Revenue estimates that doubling the tax rate will nearly double tax collections, or an additional $40 million per year. He noted that that does not take into account any reduction in consumption. According to current statute, half or about $20 million will be deposited to the Alcohol and Other Drug Abuse Treatment and Prevention Fund, subject to appropriation. The other $20 million will be deposited to the unrestricted general fund. These estimates are based on the fall 2015 revenue forecast and do not account for stockpiling. 1:48:18 PM MR. SPANOS stated that the estimated one-time cost to implement SB 131 is $50,000. This will be used to update DOR's tax revenue management system (TRMS) and the revenue online (ROL) component, which allows taxpayers to file a return and apply for a tax license online, and make changes to the tax return and license application forms. No additional costs to administer the program are anticipated going forward. MR. SPANOS displayed a two-part slide to show how the $40 million alcohol tax increase fits into the Governor's plan to close the budget gap. He then reviewed the basic impacts of the alcohol tax proposal. Alcohol will be more expensive to buy and a slight decrease in consumption is anticipated due to the higher prices. There is also the possibility of stockpiling alcohol before the tax increase. 1:49:28 PM MR. SPANOS read the following sectional analysis: Sec. 1.Adds a $25 or 1% tax penalty for failure to file electronically unless an exemption is received by the taxpayer. Sec. 2. Requires electronic submission of tax returns, license applications, and other documents submitted to the Department of Revenue. This changes the general tax statutes, AS 43.05, and will 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. Sec. 3. Changes the per-gallon tax rates for the three major categories of alcoholic beverages: malt beverages and ciders from $1.07 to $2.14; wine and other beverages with less than 21% alcohol content from $2.50 to $5.00; and beverages with greater than 21% alcohol content (generally distilled spirits) from $12.80 to $25.60. Sec. 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, from $0.35 to $0.70. Sec. 5. Changes the statutes describing tax filing so that taxpayer must "submit" rather than "send" their statement and that it must be submitted "electronically in a format prescribed by the department." Sec. 6. Changes the surety bond requirement from $25,000 to an amount determined by the department. Sec. 7.Clarifies that the tax increases apply to beverages sold after the effective date. Sec. 8. Transitional language allowing for regulations. Sec. 9. Immediate effective date for the transitional regulatory language in Sec. 8. Sec. 10. Effective date of 7/1/16 for the rest of the bill including the tax rate changes. 1:51:27 PM SENATOR STEVENS questioned the requirement to file electronically. "What do you lose if someone would prefer to file by mail?" he asked. MR. SPANOS replied it's a cost savings that will allow a better use of resources. He clarified that the requirement will apply to all tax types. SENATOR MEYER asked the difference between a small and large brewery. MR. SPANOS recalled that a federally recognized small brewery can produce up to 2 million gallons per year and the first 60,000 barrels sold in Alaska is taxed at a reduced rate. He noted that none of the small brewers currently sell more than that in the state. SENATOR MEYER asked the reason for that. MR. SPANOS said he'd need to look at the history, but he assumes that larger brewers have larger economies of scale and this gives small brewers a competitive edge. He noted that the federal government has a similar statute. 1:54:45 PM CHAIR COSTELLO asked what the tax increase will mean to a couple that orders an Alaskan Amber. MR. SPANOS explained that the tax will double, but it's up to the retailer to decide what to charge for the beer. They could pass through the increase or charge more or less. CHAIR COSTELLO asked if the administration has discussed the proposed increase with the affected businesses to learn what their concerns are. MR. SPANOS said there are a lot of different bills and while he wasn't personally involved in a discussion with the alcohol industry, he assumes they took place. CHAIR COSTELLO asked how many bills are involved in the Governor's Plan. MR. SPANOS said he believes there are eight or nine bills and six or seven talk about taxes. 1:56:51 PM SENATOR STEVENS pointed out that a martini or mixed drink probably contains two or three ounces of spirits so the tax increase would be substantially more than 10 cents. MR. SPANOS confirmed that for three ounces of spirits the tax would be 30 cents more. SENATOR GIESSEL requested information about the number of small breweries and large breweries in the state to better understand the economic impact this will have on Alaska businesses. CHAIR COSTELLO asked if the administration is prepared to provide that. MR. SPANOS said yes they'd provide what they can. He noted that all the breweries in Alaska are considered small breweries. SENATOR GIESSEL clarified that she is looking for an economic analysis of the impact on Alaska businesses. CHAIR COSTELLO offered her understanding that the administration worked with the Institute of Social and Economic Research (ISER) to look at the economic impacts on Alaskans from the tax proposals. She asked if Gunnar Knapp is still working on that project. MR. SPANOS said he'd follow up. 2:00:00 PM SENATOR MEYER emphasized the need for an economic analysis to understand the direct and indirect impacts of the proposed tax increase. "Our economy is already weak enough; I don't think we want to try to make it any weaker." He noted that he, too, thought ISER was going to do an analysis of all the Governor's tax proposals. CHAIR COSTELLO set SB 131 aside until later in the meeting. ^sb133 2:45:37 PM CHAIR COSTELLO opened public testimony on SB 131 and SB 133. 2:46:26 PM CHRYSTAL SCHOENROCK, representing herself, said she owns Forelands Bar in Nikiski and is a state CHARR member. She described the tax on cigarettes as outrageous and sure to hurt her business. The alcohol tax will impact her about the same. Her business is already hurting and it's bound to get worse. She asked the committee to take into consideration "that I think this is just bunk." 2:47:57 PM JOEL KADARAUCH said he represents the ODOM Corporation and the Alaska Beer, Wine and Spirits Wholesalers Association. He pointed out that over 50 percent of the 100 small brewers listed on the DOR website are out of state, that the dime a drink increase is misleading, and that Alaska already has among the highest alcohol tax in the nation. Should SB 131 become law, the taxes would be 7 times the national average for beer, 6 times the national average for wine and over 5.5 times the national average for spirits. He stressed that the proposal is a broad brush approach to increasing selective taxes that fails to recognize the existing burden that is disproportionately onerous and inequitable. Furthermore, only half of the estimated $40 million increase in revenue will be deposited to the unrestricted general fund, which will provide an insignificant monetary contribution to the overall deficit. 2:52:13 PM RYAN MAKINSTER, Brewers Guild of Alaska, Anchorage, Alaska, testified in opposition to SB 131. He provided preliminary, draft numbers from a study of the economic impact of the legislation. In 2015, the alcohol industry provided about 1,700 direct and indirect jobs and a payroll that expanded to about $78 million. The industry was also directly and indirectly responsible for fees and taxes totaling approximately $34.5 million. In-state spending for things like product needs and property development and construction totaled about $71 million. Responding to an earlier question, he reported that there are 25 breweries in the state; an additional five or six are in the planning stage and one is waiting for an occupancy permit. He explained that all breweries start small and their growth is generally exponential. "The next step takes bigger equipment and bigger space. Subsequently, more employees to run tasting rooms and eventually retail and a few of them, out-of-state distribution." He cited examples throughout the state. 2:56:31 PM DALE FOX, President and CEO, Alaska CHARR (Alaska Cabaret, Hotel, Restaurant and Retailers Association), stated that his organization is obviously opposed to SB 131. He pointed out that Alaskans are generally the least taxed in the nation, but the alcohol industry is the most taxed in the nation. When the committee was told that doubling the tax on distilled spirits would bring it to $25.60 per gallon, there was no mention of what other states are charging. The average is $4.45 per gallon with many states much lower than that. The tax on wine would be $5.00 per gallon when the national average is 83 cents. The tax on beer would be $2.14 per gallon when the national average 28 cents. Even the small brewers in Alaska are paying above the national average. MR. FOX told the committee that an unintended consequence of the proposed alcohol tax is that it will encourage Alaskans to buy off the Internet, either offshore and pay no tax or from another state and pay a much lower tax. The savings will more than pay the FedEx bill. This will cause some Alaskans to go out of business. 2:59:48 PM SENATOR GIESSEL offered her understanding that when someone that lives in a state with a state sales tax buys something online, the vendor has to charge them the equivalent tax. She asked if that was correct. MR. SPANOS clarified that a retailer that sells to someone in a state that does not have a sales tax does not have to charge the tax, but their records have to show that the product was shipped out of the state. 3:01:01 PM JACK MANNING, representing himself, said he's the owner of Duck Creek Market in Juneau and president of the local CHARR. He told the committee that consumers of alcohol will ultimately pay the tax and it might be more than double, because every merchant has their own markup. He remarked that everyone needs to pull together to help with the fiscal situation, "except if you're a drinker of alcohol you've got to pull a little harder." He agreed with previous testimony that if SB 131 were to become law, the effect will turn sales to the Internet. One of the issues with online sales is the state not only loses the tax, it also loses control over who can purchase alcohol. "Anybody who can type on a keyboard can order product." 3:03:29 PM JOHN JACKOVICH, member, Alaska CHARR, Fairbanks, Alaska, testified in opposition to SB 133. He discussed the taxes and fees that he pays and passes along to the consumer. These include the state alcohol tax and the fees levied by the insurance company based on prior year sales. He tries to keep the costs to his customers as low as possible, which is why he is opposed to this proposed tax increase. Quite simply, it's going to be passed along to the customers. 3:06:43 PM CHRYSTAL SCHOENROCK, representing herself, said she owns Forelands Bar in Nikiski and is a state CHARR member. She is opposed to SB 131 because it will hurt businesses. She's already had to lay off some of her employees and cut the hours of others. This will add to the existing burden and cause small businesses to close. She favors a sales tax and legalized gambling as alternative revenue sources. 3:09:06 PM BILL FRY, Bear Creek Winery, Homer, Alaska, testified that SB 133 is excessive. The first year he sold 600 gallons of wine and 12 years later he sold 18,000 gallons, which contributed $45,000 in excise taxes. Last year he and his wife spent $55,000 to purchase over 37,000 pounds of fruit and berries from Alaskan pickers. This is money that stays in the state. He requested an amendment to expand the small brewery exemption to Alaska wineries and possibly distilleries or remove it altogether. 3:11:32 PM LARRY HACKENMILLER, Secretary, Interior CHARR, Fairbanks, Alaska, testified in opposition to SB 131. He emphasized that there is no need to double the alcohol excise tax that brings in about $40 million per year. Instead, repeal the statute that allocates 50 percent of the alcohol excise tax to the Treatment and Prevention Fund and deposit the entire $40 million to the unrestricted general fund. This is the same amount that doubling the tax would bring. 3:16:50 PM CHAIR COSTELLO stated that public testimony on SB 131 and SB 133 will continue at 6:00 pm tonight.