MINUTES OF MEETING
ASSEMBLY COMMITTEE ON TAXATION
Sixty-seventh Session
March 16, 1993
The Assembly Committee on Taxation was called to order by Chairman Robert E. Price at 2:00 p.m., March 16, 1993, in Room 332 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda, Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Mr. Robert E. Price, Chairman
Mrs. Myrna T. Williams, Vice Chairman
Mr. Rick C. Bennett
Mr. Peter G. Ernaut
Mr. Ken L. Haller
Mrs. Joan A. Lambert
Mr. John W. Marvel
Mr. Roy Neighbors
Mr. John B. Regan
Mr. Michael A. Schneider
Mr. Larry L. Spitler
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau
OTHERS PRESENT:
C. O. Watson, Executive Director, Nevada Association of Tobacco and Candy Wholesalers (NATCW)
Ray Vega, owner of Vega Wholesale Distributing Co., Las Vegas and President of the NATCW
Marilyn Patton, owner of U & I Distributing Co., Sparks and Yerington and Secretary of the NATCW
Mike Rafason, manager of Capital Cigar and Candy Co., Sparks and Vice President of the NATCW
Don Nelson, General Manager of U & I (Patton) Distributing Company
Janice Wright, Deputy Executive Director, Nevada Department of Taxation
Gary Hunter, Chief of the Revenue Division, Nevada Department of Taxation
Dan Reaser, Esq., Lionel Sawyer & Collins, representing McLane Company, Inc.
Kevin J. Koch, Director Corporate Tax, McLane Company, Inc., Temple, Texas
Harvey Whittemore, representing RJ Reynolds Tobacco, USA and Southland Corporation
Perry Comeaux, Director, Nevada Department of Taxation
Chairman Price opened the meeting and stated AB 100 had been postponed and would be rescheduled for hearing at the request of its proponents. He then called for testimony on AB 295. The bill explanation is attached as Exhibit C.
ASSEMBLY BILL 295 - Clarifies provisions governing sale of cigarettes by wholesale dealers. (BDR 32-1181)
Mr. Spitler, sponsor of the bill, stated he had requested the bill on behalf of C. O. Watson. The purpose of AB 295 was to resolve inequalities which had arisen since passage, in 1989, of legislation relative to the basic cigarette cost. He introduced C. O. Watson, Executive Director of the Nevada Association of Tobacco and Candy Wholesalers.
Mr. Watson's presentation was distributed to the committee. Due to its size, Mr. Watson's presentation summary is attached as Exhibit D. Refer to his complete testimony entitled TESTIMONY AB 295 in secretary's minute book (Also available in the Research Library.) as EXHIBIT E.
Mr. Watson introduced members of his association to the committee. They were: Ray Vegas, owner of Vegas Wholesale Distributing Company in Las Vegas and President of the association; Marilyn Patton, owner of U & I Distributing Company in Yerington and Sparks and Secretary of the association; Mike Rafason, Manager of Capital Cigar and Candy Company in Sparks and Vice President of the association; and, Don Nelson, General Manager of U & I (Patton) Distributing in Sparks.
Mr. Watson read excerpts from schedules A, B, C, D, E, and F of his exhibit. Mr. Watson contended cigarette cost, based on the manufacturer's invoice, did not and should not include any discounts other than trade discounts. He explained, it was the position of the association all other terms of sale discounts were incentives only and did not affect the manufacturer's invoice cost of cigarettes.
In response to a question from Mr. Marvel, Mr. Watson stated AB 295 clarified and continued the present application of the law by putting into statute wording to define what made up "manufacturer's invoice" cost of cigarettes. He explained the Tax Commission had been struggling with this definition and what had been the legislative intent on passage of the 1989 legislation.
Marilyn Patton of U & I Distributing gave a brief history of her firm. She told the committee she believed the legislative intent of this law was to keep a level playing field for all cigarette wholesalers. Since some nonresident large wholesalers had found ways to come into Nevada and circumvent the law, this bill would potentially eliminate ambiguities. She stated AB 295 resulted from a request made by the Tax Commission at hearings relative to complaints lodged against those out-of-state wholesalers.
Ray Vega of Vega Wholesale provided background information on his firm. Then he added, AB 295 was necessary to bring clarity to the statute. Wholesalers from outside the state, the largest one owned by Wal-Mart, had come into the state and created an unfair market condition. He compared his costs of doing business, including the payment of Nevada taxes and employee costs, with those of nonresident wholesalers who serviced local businesses. He said companies which did not have a significant capital investment in Nevada had an unfair advantage. He told the committee McLane had been going from state to state trying to overturn "below cost bills." He added about thirty-four states currently have laws or statutes similar to AB 295. He also explained AB 295 was analogous to the protection provided the dairy farmers under the Dairy Commission. Without this bill, Mr. Vega indicated the profits and benefits from the sale of cigarettes would be taken out of state and not help build Nevada's economy.
Mr. Watson reviewed schedules I through L for the committee and concluded his prepared remarks by summarizing his presentation as set out in schedule M of Exhibit D.
Chairman Price asked Mr. Watson if the association had filed various complaints against the out-of-state wholesalers with the Department of Taxation and/or the Tax Commission. Mr. Watson affirmed the association had done so. Yet, he said, the violations had continued.
Mrs. Patton added in order to compete with those firms, U & I would have to sell cigarettes below its cost. She felt predatory pricing practices were addressed in this bill and, if passed, those inequities would be eliminated.
Chairman Price confirmed the existence of other Nevada laws which tried to maintain the "level playing field" concept. But, he added, he felt most of the laws were pretty clear as to intent.
Janice Wright, Department of Taxation, was next to speak. She explained the department's position on AB 295 was completely neutral. If passed, this bill would more clearly define what made up the basic cost of cigarettes. She maintained the concern expressed by the commission at the joint hearing of the Taxation Committees on February 4 was the definition of the basic cost of cigarettes put the Department of Taxation in the middle between the parties. She added, the Department had made both sides very angry.
An inordinate amount of time had been spent trying to administer this issue between the interested parties by the department and the commission over the past four years, Ms Wright elaborated. She requested the committee give the department information as to the legislature's goal or intent relative to defining costs.
She introduced Mr. Gary Hunter, Chief of the Revenue Division, Department of Taxation. Mr. Hunter said the department was in the middle of a bad situation which had been presented to the commission twice. Although both sides had made valid points, clarification was needed because determination of costs was open to interpretation, whether or not various discounts were included in those costs.
Chairman Price asked Mr. Hunter if the department was comfortable with the language in AB 295. Mr. Hunter replied the wording was adequate if the committee chose to agree with the association's stand: AB 295 would clarify the association's definition/interpretation. Mr. Hunter cited the original statute which included manufacturer's invoice language, which clarified costs, was based on a law taken from another state. However, as it was originally adopted in Nevada, such language was deleted. Now the association was trying to add manufacturer's invoice language back into the law.
Mr. Hunter, in response to a question posed by Chairman Price, stated any change in definition would not result in revenue generation for the state. Therefore, he felt there was no need for a fiscal note.
Replying to Mrs. Willliams' question, Mr. Hunter stated he knew of no other product which had similar discount and incentive structures. The only somewhat analogous product, which was controlled in a similar manner, was dairy products.
First to speak in opposition was Dan Reaser, Esq. of Lionel Sawyer & Collins, representing McLane Company, Inc., who introduced Kevin J. Koch, Director Corporate Tax for McLane. Mr. Reaser distributed handouts explaining his client's position which are attached as Exhibit F.
Mr. Reaser opened by stating McLane Company, Inc. was a subsidiary of Wal-Mart Corporation. He added Wal-Mart had 1100 Nevada employees, paid Nevada taxes, and had capital investments in Nevada. The main differences, he elaborated, were his client's corporate headquarters were located out of state and McLane did not control over seventy percent of the cigarette market in the state.
Mr. Reaser commented he felt the purpose of the bill was to confirm the association's long standing attempt to make sure wholesalers involved in interstate commerce did not affect the association's 70 percent market share. He stated McLane's had legitimate concerns with AB 295, as they would with any attempt by local businesses, through the legislature, to pass and maintain laws which allowed price fixing; thereby inviting the legislature to impart the state's exemption from anti-trust and Federal Trade Commission prohibitions on price fixing.
Mr. Reaser recalled in 1989 when the existing language was enacted, the department had said the basic cost of cigarettes, the cost to the wholesale dealer, was different from wholesaler to wholesaler depending on individual business practices. Such position had subsequently been challenged and contested by the association. He further added, he felt the purpose of AB 295, and SB 33 of this session, and AB 454 of the Sixty-sixth Session (which was rejected) were all attempts to maintain the ability to fix prices and maintain market share by the local associations. Further, other attempts had been made to assure large companies, regardless of their economies of scale or economic resources, were treated just as Nevada-based companies were; therefore, not entitled to any of the benefits of economies of scale.
He noted issues covered in Exhibit E were covered at length in meetings with the Tax Commission in July and December of 1992. The ultimate result of those discussions was to refer those matters back to the department for adoption of further regulations. As he understood it, the department was awaiting guidance from this legislature before drafting those regulations.
Mr. Reaser said he felt this bill had nothing to do with tax collection and should not have involved the Department of Taxation. However, he did point out passage had the potential to decrease tax revenues due to the increase of sales price to some consumers, thereby possibly reducing demand. He affirmed Ms. Wright's comments concerning the inordinate amount of administrative and governmental resources which had been devoted to this issue. He then introduced Mr. Kevin Koch.
Kevin Koch, Director of Taxation for McLane Company, Inc. reviewed his credentials for the committee. He explained he had worked extensively in the field of income, tax and cost accounting. He stated there was no question as to who established the accounting standards in industry: The Financial Standards Accounting Board and the Internal Revenue Service set the standards. It was his opinion this bill would not enhance competition but would eliminate competition; everyone would have to charge the same price. During the past four years, subsequent to all the complaints filed by the association against McLane, he said McLane had agreed to pay one resultant fine.
Mr. Koch read from Exhibit F and explained each schedule as it applied to his firm and the industry in general.
In his concluding remarks, Mr. Koch referred primarily to Schedules 2 and 4. He illustrated how price differentials fluctuated, due to variances in state stamp taxes and other factors, for Nevada as well as interstate wholesalers. He added consumers were willing to drive into California or Arizona to purchase cigarettes if the price savings was sufficient. Secondarily, he felt the Federal Trade Commission would view the association's letter (their Exhibit 4) as an attempt at price fixing.
Mr. Koch remarked he would provide the committee with any further information or copies of cost and pricing studies, upon request.
Mr. Haller stated he understood this was a taxation bill, based on its BDR number. However, he failed to see how it affected the increase, decrease or change of taxes on cigarettes in Nevada. Mr. Koch replied the bill had nothing to do with any change of tax, only the tax administration and potential collection by the Department of Taxation. He commented the provisions within current law stated the federal income tax standards and conditions which applied to generate the costing calculations.
Mrs. Williams and Mr. Koch discussed electronic funds transfer discounts as they applied to a reduction of cost.
Mr. Schneider stated he felt AB 295 was not a taxation bill but, rather, a commerce bill. Chairman Price pointed out it had been referred to Taxation and he felt it was appropriate to hear, at least initially.
A brief discussion was held relative to Indian smoke shops.
Mrs. Lambert asked how much time had been devoted to this controversy. Mr. Hunter responded the department had literally stacks of communication relative to interpretation in this area of the law. It had become a very large problem for the department since 1989.
Chairman Price asked Mr. Koch what negative effect passage of AB 295 would have on McLane. Mr. Koch explained his firm had made significant investments of resources in developing very large economies of scale, thereby enabling his company to take advantage of the discounts and incentives offered within the industry. Passage of this legislation would effectively increase their basic costs for the cigarettes and they would have to pass those increased costs on to the consumer.
Mr. Reaser added, by way of explanation as a nonaccountant, if McLane currently pays -- due to cost advantages resultant from incentives/discounts/transportation -- $1 per unit, passage of this bill might increase such basic cost to $1.50 in Nevada. He stated, as the law was presently written, Nevada retailers and consumers have benefitted from McLane's efficiencies. Upon passage of this bill such savings would no longer pass through the system.
Mr. Koch informed the committee California, Texas, Arizona, Colorado and Washington were currently working under legislation similar to the 1989 Nevada statute. Based on McLane's nation-wide experience, wholesalers in other states which were comparable to members of the Nevada association were successfully competing with McLane head-to-head. Discussion ensued. Mr. Koch suggested the market creates efficiencies for everyone and the industry works best when open market competition is maintained.
In response to questioning by Chairman Price, Mr. Reaser explained McLane was the first company in Nevada which had prepared and submitted a costing study to the department, as required by statute. Their study was placed on the agenda for review by the Tax Commission. Mr. Watson's association opposed hearing McLane's study. As a result, the Tax Commission referred the matter back to the department so regulations could be adopted to guide the commission in the application of the statute.
Mr. Koch said it was interesting to note the commission at its last meeting, having heard the Associated Foods issue, allowed the entire cash discount (not just the EFT) to be passed through for associations which were in direct competition with companies like McLane and Vega. The commission had stated such discounts were a legitimate cost reduction. The association had also opposed those rulings.
Replying to Mr. Schneider's question, Mr. Koch stated McLane had one stamping operation in Las Vegas but his consolidated group had many employees in Nevada. He added those numbers would expand significantly and the capital investment would be increased within the next year. He stated McLane and Wal-Mart were both paying taxes and SIIS in Nevada. McLane, he said, was the largest provider of groceries and cigarettes to convenience stores in the United States.
Replying to an inquiry from Chairman Price, Mr. Koch explained all drivers were based out of state. McLane's trucks were loaded in California or Arizona at their warehouses, were driven directly to Nevada and made, on average, 34 stops at Nevada convenience stores. Those trucks were dedicated specifically to Nevada; paid Nevada fuel and highway taxes, etcetera.
Mr. Reaser explained bulk ordering and shipping practices used by McLane.
Answering Mr. Marvel, Mr. Koch stated McLane's market share throughout Nevada was under 20 percent, distributed out of their three warehouses.
Mr. Spitler asked if Mr. Koch believed the tax commission had the ability to resolve this issue within the existing law by application of administrative code. Without a doubt, Mr. Koch replied. He stated the law clearly contained provisions for the use of federal income tax accounting standards to develop inventory valuations. He told Mr. Spitler his firm would gladly pay an independent accounting firm to come and inform the committee, commission, or state which of these items fall under the provisions of Generally Accepted Accounting Principles or the federal income tax accounting standards, as applicable to establishing base costs. He elaborated McLane had obtained price variances in all but one state which had regulations similar to those imposed under AB 295. Those states had recognized as legitimate the incentives/discounts at issue. He stated in no other state had they experienced the degree of difficulty they have in Nevada. A brief discussion followed and concluded Mr. Koch's and Mr. Reaser's presentation.
Harvey Whittemore, representing RJ Reynolds and Southland Corporation, stated his opposition to the passage of AB 295. He noted passage would not be cost effective to many, many retailers within the state.
Perry Comeaux, Director of the Department of Taxation, also responded to the questions raised by Mr. Spitler. He stated there was certainly enough direction in the current statute to allow the Tax Commission and the department to administer the "basic cost of cigarettes" law, providing they were made aware of what the legislative intent initially was, either by taking action on AB 295 or a similar bill or by taking no action at all. The department's dilemma had resulted from neither the department nor the commission knowing just how far the legislature had intended to go with existing statute language, as it was open to interpretation which could result in wide variations in base costs.
Mr. Comeaux said the most contentious issue was invoice price because it did not set forth whose "invoice price" was to be used; manufacturer's, wholesaler's from out of state, or otherwise. Additionally, he felt the language should have identified or defined what was meant by trade discounts. If AB 295 passed, it would give specific and detailed direction to the department. If it was not passed, they would need to know what detail was intended so the department could put such a definition into regulation. From an accounting standpoint, he said, the department had already established its position on McLane's requested price structuring, with which it agreed, in part, and disagreed, in part.
In response to Mr. Spitler's question, Mr. Comeaux explained the reason this bill did not originate with the department was he understood the request had been previously made by Mr. Watson. Had such request not been made, the department would have requested a bill to clarify this issue.
Chairman Price told those present, due to other scheduled meetings, no further testimony or action would be taken on AB 295 until further hearings could be scheduled.
There being no further business to come before committee, the meeting was adjourned at 3:35 p.m.
RESPECTFULLY SUBMITTED:
LINDA CHANDLER LAW
Committee Secretary
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Assembly Committee on Taxation
Tuesday, March 16, 1993
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