MINUTES OF MEETING

      ASSEMBLY COMMITTEE ON TAXATION

 

      Sixty-seventh Session

      April 27, 1993

 

 

 

The Assembly Committee on Taxation was called to order by Chairman Robert E. Price at 2:10 p.m., April 27, 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. Michael A. Schneider

      Mr. Larry L. Spitler

 

 

COMMITTEE MEMBERS ABSENT:

 

      Mr. John B. Regan (Excused)

 

GUEST LEGISLATORS PRESENT:

 

      None

 

STAFF MEMBERS PRESENT:

 

      Mr. Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau

 

OTHERS PRESENT:

     

      C.O. Watson, Executive Director, Nevada Association of Tobacco and Candy Wholesalers

      Michael Raifaison, Vice President, Nevada Association of Tobacco and Candy Wholesalers and Manager of Capital Cigar and Candy Company

      Gary Hunter, representing Capital Vending Company, Inc.

      Harvey Whittemore, attorney with Lionel, Sawyer & Collins, appeared as counsel for Southland Corporation and McLane Company, Inc.

      Kevin J. Koch, Director of Corporate Tax for McLane Company, Inc. and representing the WalMart Consolidated Group

      Helen Foley, representing 7-11 franchise owners

      Perry Comeaux, Executive Director, Nevada Department of Taxation

 

Following roll call Chairman Price opened testimony on SB 33.

 

SENATE BILL 33 -  Revises provision governing sales of cigarettes between wholesale dealers. 

                        (BDR 32-1167).

 

Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau, provided committee members with a Bill Explanation for SB 33 attached hereto marked Exhibit C.

 

Chairman Price recognized C.O. Watson, Executive Director, Nevada Association of Tobacco and Candy Wholesalers.  Mr. Watson introduced Michael Raifaison, Vice President of the Nevada Association of Tobacco and Candy Wholesalers and Manager of Capital Cigar and Candy Company in Sparks.

 

Before Mr. Watson testified on SB 33 he brought to the committee's attention a copy of the Attorney General's Opinion addressed to John P. Comeaux dated March 22, 1993, relating to AB 295.  He asked that the Opinion be placed in the record.  A copy of the Attorney General's Opinion has been attached hereto marked Exhibit D.

 

Mr. Watson voiced his support of SB 33.  Mr. Watson provided committee members with prepared testimony attached hereto marked Exhibit E.  Mr. Watson read directly from his prepared testimony marked Exhibit E.

 

Mr. Watson then referred to Exhibit F attached hereto and read directly from that prepared testimony.

 

Gary Hunter, Chief, Revenue Division, Nevada Department of Taxation conveyed he was on annual leave to testify on behalf of Capital Vending Company, Inc., a family owned business owned by his wife.  Mr. Hunter stressed Capital Vending was opposed to SB 33.  He believed SB 33 would increase the cost of cigarettes on transactions between wholesalers.  Under current law one wholesaler could sell to another at not less than the "basic cost."  SB 33 would change that to not less than the cost to the wholesaler.

 

 

Mr. Hunter expanded and explained the term "basic cost" did not represent the true cost to the wholesaler, but a cost that did not take into account various components.  The "basic cost" did not reflect cash discounts, electronic fund transfer discounts, trade loading and stamping allowances.  At the "basic cost" a stamping wholesaler had a 40-50 cent or even more gross profit per carton.  The calculated cost to the wholesaler included all the overhead cost and was added to the "basic cost" calculation.

 

Mr. Hunter informed the committee Capital Vending was purchasing from a local Reno wholesaler at the "basic cost" figure.  If the price was changed to the cost to the wholesaler, the price would be increased.

 

Mr. Hunter said SB 33 was introduced on behalf of the Nevada Association of Tobacco and Candy Wholesalers.  He iterated it was his understanding the Association represented seven or eight of the 35 or so licensed wholesalers in Nevada.  Mr. Hunter voiced his respect for Mr. Watson and explained there was just a difference of opinion.

 

Mr. Hunter continued stating Capital Vending Company was a licensed Nevada cigarette wholesaler.  Capital Vending Company was required by NRS to hold a license to conduct its activities.  Capital Vending Company paid its yearly license fee, had a bond posted and filed monthly reports.  Capital Vending provided cigarette vending through machines, wholesaled to retailers, operated a wholesale and retail coffee business called Silver State Coffee and currently developed some mini Stor-All units to rent.  Capital Vending had been in business for eight years.  SB 33 would raise the cost of cigarettes to Capital Vending.  Since vending machines were set at 25 percent multiples, it was doubtful Capital Vending could raise its price to accommodate the raise.  Mr. Hunter said even if Capital Vending did accommodate the raise, it would raise the price to consumers.  Mr. Hunter added Capital Vending could raise its prices to the retailers, but then again that would raise the price to consumers.

 

Mr. Hunter pointed out nothing would happen if SB 33 was not passed.  Everything would continue to be as it was today.  Mr. Hunter emphasized Capital Vending could purchase from any wholesaler in Nevada.  It could even go outside Nevada and purchase, but Capital Vending chose to do business with a local wholesaler in Reno.

 

Mr. Hunter emphasized the current law set the minimum not the maximum.  The fact was that 40 cents to 50 cents per carton gross profit was sufficient for the wholesaler to make a profit.

 

Mr. Hunter communicated original legislation was passed in 1989 for this whole issue.  He wondered why Nevada wanted to be in the business of guaranteeing profits for cigarette wholesalers.  Nevada did not set prices for any other commodity except for dairy products.  The marketplace was what made this country progress as well as supply, demand and pricing.  Nevada should not step in and guarantee profits.  Mr. Hunter urged the committee to oppose SB 33.

 

Mr. Hunter responded to a question stating if SB 33 were passed, depending on the size of the wholesaler, a price for a carton of cigarettes could be raised anywhere from 2 cents to 15 cents per carton.  It would depend on the particular wholesaler and what the overhead costs were.

 

Mr. Hunter clarified for committee members Capital Vending was a wholesaler because it sold to other retailers.  He provided an example stating if there was a liquor store, another retailer could not go to that liquor store and buy cigarettes for resale, unless that liquor store was a wholesaler.  He said Cosco was an example because Cosco sold to other retailers.  Cosco had to be licensed as a wholesaler to sell to the retailers.  Cosco wore two hats because Cosco could sell to consumers and retailers.

 

Harvey Whittemore, attorney with Lionel, Sawyer & Collins, appeared as counsel for Southland Corporation and McLane Company, Inc.  Mr. Whittemore spoke in opposition to SB 33.

 

Mr. Whittemore wanted to denote some of the background with respect to SB 33 and the relevance of the dispute.  He wanted to delineate some policy reasons why it might be appropriate for the legislature to address whether the type of legislation sought by Mr. Watson's group was necessary.

 

Mr. Whittemore conveyed the language contained in NRS 370.373 was the language which the Nevada cigarette wholesalers sought four years ago.  It was protectionist language then and even more so with SB 33.  He interpreted the wholesalers wanted to be guaranteed a certain price when cigarettes were sold to different classes of purchasers. 

 

Mr. Whittemore explained to the committee he did oppose SB 33 in the Senate, but after speaking with Senator Rhoads decided to pass SB 33 out of the Senate.  The Assembly had other similar legislation and it was believed all the issues would be brought before the Assembly and he could fully oppose all the similar legislation as well as SB 33.  He introduced Kevin J. Koch on behalf of McLane Company, Inc.

 

Kevin J. Koch, Director of Corporate Tax for McLane Company, Inc. and representing the WalMart Consolidated Group opposed SB 33.  He briefly delineated his background for the committee.  Mr. Koch provided committee members with a chart illustrating the "Nevada Cigarette Distribution Network" a copy of which is attached hereto marked Exhibit G.  He also provided committee members with a brief history of the "Nevada Association of Tobacco & Candy Wholesalers History of Protectionism and Price Fixing" a copy of which is attached hereto marked Exhibit H.

 

Mr. Koch walked committee members through Exhibit H beginning with legislation as early as June, 1973.  He said to believe SB 33 would not increase the price of cigarettes to consumers was a fallacy.  Mr. Koch continued walking the committee through the dates as referenced on Exhibit H.  He believed AB 295 was another attempt to further fix the price of cigarettes in Nevada and harmed the retailers and consumers.

 

Mr. Whittemore pointed out the proposed legislation would abolish an entire class of wholesalers.  Those were the wholesalers who purchased from wholesalers.  He iterated if the price was forced to be the same as the retailer, there was nothing to stop the retailer from purchasing from the one master wholesaler rather than purchase from other wholesalers who were involved in the business.  The discounts one wholesaler gave to another wholesaler was something that should be encouraged in terms of free market enterprise.  He realized while the product was heavily taxed and the use of the product might be discouraged by some segments in society, it was clearly a legal product and one that was significantly important in terms of the tax base of Nevada.

 

Chairman Price relayed Nevada provided protection and tax breaks for a very large number of businesses and industries.  He mentioned the Dairy Commission was set up to protect the Nevada market.  He believed there was legislation to lend some protection to the liquor industry.  He added in the farming industry there was a broad range of tax reduction mechanisms.  He conveyed through economic development there were many companies that made application for deferral of sales tax on projects.

 

Mr. Whittemore did not believe his testimony nor that of Mr. Koch's was negative with respect to the fact that there was the initial class of legislation; however, appropriate adjustments were made in 1989 in further attempts to create a protected class that might cross the line of what was appropriate.  Mr. Whittemore did understand it was clearly a policy decision which was before the committee.

 

Mr. Ernaut iterated the main difference between SB 33 and the other price supports in Nevada was the other industries were market price based industries as opposed to the retail sale industry of cigarettes. 

 

Helen Foley, representing 7-11 franchise owners, did not support nor oppose SB 33, but testified there was a general confusion over who was allowed to become a wholesaler and who was not.

 

Ms. Foley said a few years ago Harrah's and Dart Discount Liquors became wholesalers.  From what she understood the wholesaler's license had a requirement that a $10,000 inventory must be met.  It was also understood Nevada did not enforce the requirement.  She vocalized that left the only requirement to be met was a $100 registration fee.  Ms. Foley wanted to know why the law was not enforced.  She conveyed the 7-11 franchise owners believed in the marketplace and that was the place where prices should be set, rather than restrictions put in place by government.

 

Perry Comeaux, Executive Director, Nevada Department of Taxation, disagreed with Ms. Foley and emphasized the Department of Taxation did in fact enforce the $10,000 inventory requirement.  He said if a situation came to the Department's attention, the law would be enforced.

 

Mrs. Lambert asked how much it had cost the Department of Taxation to enforce 1989 legislation.  Mr. Comeaux did not have a cost estimate, but said many, many hours had been spent.  The cost came out of the general fund dollars.

 

Mr. Watson wanted to point out Capital Vending was basically a retailer through vending machines; however, Capital Vending was not qualified to buy cigarettes from the manufacturer and must buy from other wholesalers.  Capital Vending did not have a choice.  Mr. Watson wanted to know how Mr. Hunter acquired the knowledge that there was a 40 cent per carton profit as an independent wholesaler because the incentives were between the manufacturer and the wholesaler.

 

Mr. Watson clarified there was no relation between SB 33 and AB 295.  Mr. Watson said SB 33 affected only the transfer between wholesalers and AB 295 was the basic cost of cigarettes from the manufacturer to the wholesaler.

 

There being no further business to come before committee, the meeting was adjourned at 2:55 p.m.

 

      RESPECTFULLY SUBMITTED:

 

 

                             

      DIANNE LAIRD

      Committee Secretary

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Assembly Committee on Taxation

Tuesday, April 27, 1993

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