BILL ANALYSIS
SENATE HEALTH AND HUMAN SERVICES
COMMITTEE ANALYSIS
Senator Deborah V. Ortiz, Chair
BILL NO: AB 71
A
AUTHOR: Jerome Horton
B
AMENDED: July 24, 2003
HEARING DATE: August 20, 2003
7
FISCAL: Appropriations / Urgency
1
CONSULTANT:
Dunstan / ak
SUBJECT
Tobacco Products: Licensing for Tax Purposes
SUMMARY
This bill would establish a statewide licensing program for
tobacco manufacturers, importers, wholesalers, distributors
and retailers administered by the State Board of
Equalization for monitoring and collection of excise taxes,
and it would impose additional criminal and civil penalties
on violators of tobacco-related tax laws.
ABSTRACT
Existing State law:
1.Requires, under the Cigarette and Tobacco Products Tax
Law, that distributors and wholesalers of cigarette and
tobacco products be licensed by the State Board of
Equalization (BOE).
2.Requires the BOE to administer statutory provisions
relating to the cigarette and tobacco products tax.
3.Requires licensed cigarette distributors to purchase and
affix an appropriate stamp to, or make an appropriate
meter impression upon, each package of cigarettes prior
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to distribution, as provided.
4.Imposes the following taxes on a pack of cigarettes:
a 10-cent cigarette tax, used for the state General
Fund;
a two-cent cigarette tax, used for breast cancer
research;
a 25-cent cigarette tax (Proposition 99, passed
November 1988), used for tobacco-related education
programs, disease research, indigent medical and
hospital care and natural resources programs;
a 50-cent cigarette tax (Proposition 10, November
1998), used for child development programs.
The BOE calculates a comparable tax for tobacco products,
such as chewing tobacco, pipe tobacco, and cigars.
1.Provides that any person who knowingly sells, offers to
sell or retains for sale, any package of cigarettes to
which no tax stamp or meter impression is affixed is
guilty of a misdemeanor, punishable by up to a year in
jail and a fine of $1,000, or both.
2.Provides that, in addition to any criminal fine or jail
sentence, a violator shall pay a civil penalty of $100
for each unstamped carton of 200 cigarettes, which
penalty shall be split between the prosecuting
jurisdiction and the BOE.
3.Prohibits other activities in the distribution, marketing
and sale of cigarettes and tobacco products (including
tax evasion, sale without a license, sale of counterfeit
products and sale of fraudulent tax stamps), which are
subject to license revocation, misdemeanor prosecution,
civil penalties and asset forfeiture.
4.Requires any cigarette or tobacco product manufacturer
who has not entered into the Master Settlement Agreement
(MSA) to place specified amounts into a qualified escrow
fund in order to sell cigarettes to consumers in
California.
5.Requires that all persons engaging in the retail sale of
cigarettes and tobacco products shall check the
identification of tobacco purchasers, to establish the
age of the purchaser, if the purchaser reasonably appears
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to be under 18 years of age.
6.Prohibits any person, firm, or corporation from selling,
giving or in any way furnishing cigarettes or tobacco
products to any person who is under the age of 18 years.
Existing local law:
1.Requires tobacco retailers to obtain a license for the
retail sales of cigarettes and tobacco products in those
jurisdictions that have enacted their own local
ordinances.
This bill:
1.Creates the California Cigarette and Tobacco Products
Licensing Act of 2003 (Act) to provide for the licensure
by the BOE of manufacturers, distributors, wholesalers,
importers and retailers of cigarette or tobacco products
that are engaged in business in California.
2.Requires a retailer to have and maintain a license to
sell cigarettes or tobacco products. A separate license
is required for each location owned or controlled by a
retailer.
3.Requires a retailer to apply for the license and pay a
one-time fee of $100 per license in order to engage in
the sale of cigarettes or tobacco products and authorizes
the BOE to investigate the background of the applicant
and review the application prior to issuing a license.
If the applicant maintains a license for alcohol sales
from the Alcoholic Beverage Control Board at the same
location, the BOE is not required to conduct any further
investigation.
4.Requires a wholesaler or distributor to have and maintain
a license to sell cigarettes or tobacco products issued
under the provisions of this bill, in addition to any
other licenses issued by the BOE.
5.Requires a wholesaler or distributor to apply for the
license, pay an annual fee of $1000 per license in order
to engage in the sale of cigarettes or tobacco products
and authorizes the BOE to investigate the background of
the applicant and review an application prior to issuing
a license. If the applicant has already been granted a
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license for cigarettes or tobacco products by the BOE, no
further investigation is required.
6.Requires a manufacturer or importer to apply for a
license in order to engage in the sale of cigarettes and
authorizes the BOE to conduct an inquiry to determine if
the applicant complies with the provisions of the Act.
Manufacturers must pay an administration fee of $.01 per
package of cigarettes manufactured and shipped into the
state during 2001. An importer must pay the same fee for
every package imported into the state during 2001.
7.Establishes criteria for denying a license application by
retailers, distributors and wholesalers that are limited
to:
suspension or revocation by the BOE of a previous
license issued under the Act;
felony violations of revenue and taxation code
provisions related to the stamping of cigarettes;
felony evasion of lawfully determined cigarette or
tobacco product taxes;
failure to possess all required permits or licenses
required under the Revenue and Taxation Code (for
retailers).
1.Establishes criteria for mandatory revoking of a license
for retailers, distributors and wholesalers that are
limited to:
felony violations of revenue and taxation code
provisions related to the stamping of cigarettes;
felony evasion of lawfully determined cigarette and
tobacco taxes;
previous revocation of a permit or license under
any provision of the Revenue and Taxation Code.
9.Allows the BOE to revoke or suspend a license for any
violations of the Act or other Revenue and Taxation Code
sections related to cigarette and tobacco products. In
addition, the BOE may levy a civil penalty for violations
of the Act.
10.Requires the Bureau of State Audits to conduct a
performance audit of the licensing and enforcement
provisions of this bill and report to the BOE and the
Legislature by July 1, 2006.
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11.Requires the BOE to share their data base of licensees
with the State Department of Health Services, Attorney
General and local enforcement agencies.
12.Requires licensees to retain invoices and/or purchase
records for cigarettes and tobacco products for a
specified period and make available these invoices for
inspection by the BOE or a law enforcement agency.
Specifies the information that a manufacturer, importer,
wholesaler or distributor must place on the invoice.
13.Allows the BOE or a law enforcement agency to seize
cigarettes that do not have the proper revenue stamp or
for which taxes are due but not paid.
14.Establishes penalties including fines and imprisonment
for possession or sale of unstamped cigarettes. The
maximum penalty is $50,000 and imprisonment for one year
in the county jail.
15.Bans the sale or possession for sale of counterfeit
tobacco products or cigarettes by a manufacturer,
importer, distributor, wholesaler or retailer.
16.Allows any person convicted of a crime under the bill's
provisions to be charged for the costs of investigation
and prosecution at the discretion of the court.
17.Prohibits manufacturers from selling cigarettes to any
distributors, wholesalers or retailer who does not
possess a license. Also prohibits importers,
distributors, wholesaler and retailers from purchasing
cigarettes unless they possess a license. Any violations
are a misdemeanor.
18.Authorizes the BOE to grant certain employees limited
peace officer status and authorizes those employees and
other peace officers to enter places where cigarettes and
tobacco products are sold, produced or stored.
19.Creates the Cigarette and Tobacco Products Compliance
Fund. All license fees and penalties collected pursuant
to this division shall be deposited in the fund.
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20.Appropriates $11 million from the fund to the BOE with
approximately half being available for reimbursement to
the Department of Justice for investigation and
enforcement assistance.
21.Requires a manufacturer or importer, as a condition of
obtaining a license, to certify that it is a
participating manufacturer as defined in the MSA or is
complying with state law for nonparticipating
manufacturers, in particular setting aside a specified
amount of money into an escrow account for settling of
judgements or claims.
22.Manufacturers shall provide a listing of all brands to
the Attorney General who shall publish on its web site a
directory listing of all brand families. A tobacco stamp
cannot be affixed to a package of cigarettes that is not
listed and the sale or importation of such cigarettes is
illegal.
23.Requires the BOE to report to the Legislature by July 1,
2004, a report on the actual costs incurred by cigarette
distributors to apply tax stamps to the product.
24.Allows the BOE to establish a Tobacco Tax Compliance
Task Force to advise the BOE on cigarette and tobacco
products tax compliance issues. The task force may
include licensees, other states and relevant state
agencies, such as the Department of Health Services and
the Department of Justice.
25.Provides that this act does not preempt or supercede any
local tobacco control law or ordinance other than those
laws or ordinances that are related to the collection of
state taxes.
26.Declares that it is to take effect immediately as an
urgency statute.
FISCAL IMPACT
According to the BOE, AB 71 would generate the following
revenue:
Fiscal Years
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2003-04 2004-05
($ in millions)
License Application Fee
(Retailers--$100 one time) $8.5 $1.7
License Fee
( Wholesales and Distributors $1000) $1.0 $1.0
Per Pack Fee
Manufacturers and Importers $12.6 0
____________________________________________________________
_________
Total $22.1 $2.7
After the initial year, the funds from retailers are solely
from new businesses. Those retailers maintaining a license
do not need to apply or pay renewal fees.
BACKGROUND AND DISCUSSION
Public health and smoking
According to the Department of Health Services (DHS),
cigarette smoking continues to be the leading cause of
preventable deaths in California. Over 40,000 Californians
die each year from smoking-related deaths and the total
comprises 19 percent of all deaths within the state. The
public health costs from smoking soar when the toll from
illness, disability and productivity loses are totaled. In
a study done by the University of California, San Francisco
for DHS, the medical costs related to smoking were
estimated to be over $8 billion annually.
Owing to the significant health impacts, there has been a
substantial decline in smoking. California has one of the
lowest rates in the nation.
Despite the progress in reducing smoking, 18-24 years olds
are an age group that has actually increased their smoking
prevalence between 1996 and 2001, according to DHS. This
group of young people now has the highest prevalence rate
of all age groups. Although California's rate for this age
group is lower than the nation's, it has increased at a
more rapid rate.
Underage smoking
According to the General Accounting Office (GAO), every day
in this country about 6,000 youths experiment with
cigarettes and 3,000 young people become regular smokers.
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The U.S. Department of Health and Human Services estimates
that 90 percent of smokers begin prior to their 20th
birthday. Conversely, if children and adolescents can be
prevented from using tobacco products, they are unlikely to
become users later in life.
Of these underage smokers, estimates are that one-third of
these smokers will eventually die from smoking-related
diseases. Besides the long-term health consequences,
youths are also at risk for numerous early health
consequences, including a general decrease in physical
fitness, early development of artery disease and a slower
rate of lung growth.
To address the concerns about youth tobacco use, in 1992
Congress enacted Section 1926 of Title XIX of the federal
Public Health Service Act, commonly called the Synar
amendment. The Synar amendment requires states to enact
and enforce laws that prohibit the sale of tobacco to
individuals under 18 years of age. It requires the U.S.
Substance Abuse and Mental Health Services Administration
(SAMHSA) to withhold up to 40 percent of a state's alcohol
and substance abuse block grant funding unless the illegal
sales rate of cigarette and tobacco products to minors is
controlled. SAMHSA requires that each state reduce its
retailer illegal sales rate to 20 percent or less by fiscal
year 2003. This rate is calculated by sending underage
decoys to a random survey of retailers and having them
attempt to buy cigarettes.
Stop Tobacco Access to Kids Enforcement (STAKE) Act
In response to the federal law, in 1994 DHS headed up an
effort throughout the state to document how easily
available tobacco products were to minors. Over 400
youths, 13-17 years of age, surveyed more than 1,800 retail
stores: 52 percent of the retailers sold to minors. In
September 1994, the state STAKE Act was enacted to address
tobacco sales to minors and fulfill the federal mandate.
The STAKE Act created a new statewide enforcement program.
The Stake Act granted authority for the program to DHS and
required DHS to:
implement an enforcement program to reduce the
illegal sale of tobacco products to minors and to
conduct sting operations using 15 and 16 year olds;
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operate a toll-free number for the public to report
illegal tobacco sales to minors;
assure that tobacco retailers post warning signs
which include the toll-free number to report
violations;
assure that clerks check the identification of
youthful appearing persons prior to a sale; and,
assess civil penalties ranging from $200 to $6,000
against the store owner for violations.
The STAKE Act compliance checks have been in operation
since late 1995. The result has been:
To date, almost 15,000 compliance checks
conducted statewide.
Of these visits, over 4,000 have resulted in
illegal sales of tobacco to minors, or about 29
percent. This figure should not be confused with
the underage sales rate as this is not a random
sample, but includes stores about which tips have
come in suggesting that they are engaged in
illegal sales.
To date 3,863 cases have been closed during
the penalty assessment phase (fines paid) and
over $1 million collected.
The toll-free public complaint line has
generated over 32,850 calls.
Sites visits have determined if tobacco
billboards existed within 1,000 feet of schools
and playgrounds, which is a violation of state
law.
In subsequent years, the California illegal sales rate
plummeted. From its 52 percent high in 1994, it reached a
low of 12.8 percent in the year 2000.
By 2002 California was in danger of losing federal block
grant funds
Despite the success of the program's early years, by 2002,
California was very close to exceeding the federal target
illegal sales rate and running the risk of losing federal
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funds. (The block grant is approximately $250 million
annually.) The illegal sales rate jumped up from its low
in 2000 to 19.3 percent in 2002.
In response, DHS redoubled their efforts, which appear to
have been successful. These efforts were accompanied by
Governor Davis's executive order increasing spending for
the program and requiring inspectors from the Department of
Alcoholic Beverage Control to look for sign violations.
The recently released 2003 survey saw the illegal sales
rate decline to 12.2 percent. Although compliance with the
underage sales laws improved, almost half of the stores did
not have the signs required under law. DHS research has
shown that those stores not in compliance with sign
requirements were twice as likely to make an underage sale.
When passed in 1995, the STAKE Act provided an ongoing
transfer of $2 million in federal Substance Abuse
Prevention and Treatment block grant moneys be made
available to DHS. The additional funding from the
governor's executive order is not a permanent increase.
When adjusted for inflation, the $2 million in 1995 is only
worth $1.5 million at 2003 prices.
Can more be done to reduce underage sales?
Because of the concern expressed by states, the National
Governor's Association commenced a study of best practices
to reduce tobacco sales to minors. The report specifically
found that
"?for states with tobacco sales license requirements,
suspense and revocation of licenses-the next level of
progressive penalties is a very effective enforcement
tool."
In an effort to improve the health of the nation, the U.S.
Department of Health and Human Services published Healthy
People 2010, which contains the following recommendation on
underage tobacco sales:
"Increase the number of states and the District of
Columbia that suspend or revoke state retail licenses
for violations of law prohibiting the sale of tobacco
to minors."
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SAMHSA, the federal agency charged with implementing the
Synar amendment, noted in their evaluation of California as
a Synar agency that:
"The State may want to consider further amendments to
the STAKE (Stop Tobacco Access to Kids Enforcement)
Act, which would strengthen its State youth access
legislation. Currently, stores that sell to minors
may be subject to a fine for violating the law, but
they face no threat of losing the ability to sell
tobacco products. In addition to providing economic
incentives for retailers not to sell tobacco to
minors, a licensing system would facilitate the
development of a comprehensive listing of retailers
for enforcement operations and conducting the
statewide survey of noncompliance." (emphasis added)
The Tobacco Education and Research Oversight Committee is a
state entity that advises the University of California and
DHS on Proposition 99 implementation issues. The committee
also develops a master plan for tobacco control and
provides advise and recommendations to the Legislature. In
their new master plan, they have identified tobacco retail
licensing as an important element. Their recommendation
includes linking violations of health-related tobacco
control laws when making decisions about license approval
or revocation.
According to information provide by the Centers for Disease
Control and Prevention (CDC), 32 states have state tobacco
licensing. Of these, 26 allow license suspension and/or
revocation for underage sales.
Why do states license activities?
A license is a permit granted by an appropriate
governmental body to a person, firm or corporation to
pursue some occupation or to carry on some business subject
to regulation. Another aspect of a license is the granting
of permission to do something that otherwise would be
illegal and that permission can be withdrawn.
To protect consumers, the state licenses a variety of
specific professions, choosing the licensing option when a
person or business is engaged in an activity or occupation
that could be injurious to consumers, the state or some
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other party.
Activities that are potentially dangerous to consumers such
as gambling or alcoholic beverage sales are also licensed.
Alcohol sales and gambling are also two activities that
there is a very real and significant threat of tax evasion,
which is one reason that California has chosen to license
these activities. However, the state is also concerned
about underage use of alcohol and participation in
gambling, which is another reason that the state has chosen
to license these activities. Issuance of a license gives
the state more control over the business practices and a
speedy method to apply a remedy through either outright
suspension, revocation or more often through the mere
threat of such an action.
It is unusual in California to license a taxpayer. For
most taxed activities, there is not the need for the
increased oversight and ease of revocation of privileges
that accompany a license. However, licensing taxed
activities is not unprecedented, as noted earlier - the BOE
already licenses tobacco wholesalers and distributors.
Financing the program
AB 71 would raise $22.1 million in initial start-up fees
from licensees. Subsequent annual license fees on
wholesalers and distributors--and those retailers obtaining
a license for the first time--would raise approximately
$2.7 million per year. Fines and penalties would also be
available for paying administrative fees.
Additional funds would come from the bill's requirement
that any person convicted of a crime under its provisions
"may be charged the costs of investigation and prosecution
at the discretion of the court."
This provision has precedent in California law. Various
administrative enforcement statutes for licensed businesses
provide that a violator may be required to pay the costs of
investigation and prosecution of the violation. (The
Senate Judiciary Committee analysis mentions, as examples,
respiratory therapists, accountants, and yacht and ship
brokers.)
The initial appropriation for the administration of the
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program is $11 million from the Cigarette and Tobacco
Products Compliance Fund. The funds are appropriated to
the BOE with a requirement for a reimbursement agreement
with the Department of Justice. According to the Senate
Revenue and Taxation Committee analysis, the Department of
Justice has not estimated the administrative costs
associated with this bill. After the first year, license
fees would not come close to covering that amount, although
the second year of funding should be covered by the first
year surplus.
Once the program is fully under way, the BOE estimates that
AB 71's enforcement program would result in additional
tobacco excise tax revenues of between $38 million and $62
million annually, resulting from improved tax enforcement
and reduced tax evasion. The bill contains specific
provisions that any additional tax receipts brought in by
the program would be distributed according to existing law.
Within several years, the Legislature would have to find a
source of funds to continue the program, assuming that
penalties and fines do not provide sufficient revenues and
program costs do not dramatically diminish.
Tax evasion
There is no way to determine with certainty the level of
cigarette and tobacco products' tax evasion. The BOE
estimates that illegal tobacco sales cost California $288
annually in lost excise taxes. The Center for Tobacco
Control Research and Education at the University of
California, San Francisco has published a conflicting
forecast. They estimate that the state loses between $7
million and $45 million annually.
Evasion occurs through three different basic mechanisms:
Interstate Diversion. This runs the gamut from a tourist
from California picking up a couple of packs in Reno to
mail order and internet sales all the way to organized
crime transporting large quantities from low-tax states.
There are several states that are potential suppliers.
In Nevada, cigarette taxes are $.37 per pack, Wyoming
$.12 and New Mexico $.21, all significantly less than
California's $.87.
International Smuggling. This can be the diversion of
cigarettes that are manufactured within the country for
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export. Currently, it is more common that international
smuggling takes the form of counterfeit cigarettes
manufactured abroad being smuggled into the country.
Counterfeit California Tax Stamps. There are a variety
of ways to counterfeit the tax stamps.
According to the BOE, the market for illegal sales of
cigarettes is driven primarily by organized crime, at
levels reaching from street gangs to international
terrorists. According to newspaper reports, in May federal
officers arrested participants attempting to smuggle $8
million of cigarettes from North Carolina to Michigan; the
proceeds were to be sent to Hezbollah.
As evidence of the problem of evasion, the BOE points to
incidents last year when California authorities arrested 19
people for smuggling activities that defrauded the state of
nearly $12 million in cigarette taxes. Also, the BOE
reports that it is currently investigating potential cases
with a possible disposition of $105 million in tax
revenues. This number may represent tax obligations
spanning multiple years, and the outcome of ongoing
investigations is uncertain. The BOE estimates that
tobacco investigation cases result in collection of about
$10 million in cigarette taxes annually, an amount already
above the lower bound of the UCSF study.
Interstate diversion by individual consumers may increase
dramatically. A management consulting firm, Forrester
Research, estimates that by 2005 states will lose $1.4
billion in tax revenues from Internet sales. This growth
is occurring to a great extent because of a failure to
enforce the federal Jenkins Act. The Jenkins Act requires
any person who sells or ships cigarettes across a state
line to a buyer, other than a license distributor, to
report the buyer to the state tax administrator. A recent
report by the GAO found that Internet and mail order firms
are widely ignoring the federal Jenkins act. A large
number even advertised on their web site that they will not
comply with the law or report sales.
This growth of Internet and mail order sales had led some
states to adopt safeguards. California adopted stricter
requirements for mail order and Internet sales last year -
SB 1766 (Ortiz), Chapter 686, Statutes of 2002. New York
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has banned outright Internet and mail order sales. Their
law has been challenged and the state has prevailed at the
U.S. Circuit Court of Appeals.
Master Settlement Agreement
States' attorneys general and various cigarette and tobacco
product manufacturers (participating manufacturers) have
entered into a Master Settlement Agreement (MSA). The MSA
provides that in settlement of various lawsuits, the
participating manufacturers agree to make payments
perpetuity, with an estimated value of over $200 billion.
The MSA provides for the allocation of money to the states
and certain territories. California has entered into a
memorandum of understanding providing the state's share of
moneys to be allocated between the state and counties and
certain cities in the state. The states agree to release
the participating manufacturers from specific claims that
the states had and might have in future for costs arising
out of tobacco-related illness. The participating
manufacturers agreed to limit substantially their
advertising, promoting or packing of cigarettes, including
a ban on targeting youth. The MSA does not address youth
access to cigarettes and tobacco products at the retail
level.
Non-participating manufacturers (NPMs) have no obligations,
neither public health nor payments, under the MSA. This
left a situation where NPMs would have lower costs and
fewer restrictions on their marketing making it easy for
NPMs to undercut the participating manufacturers. To
protect themselves, the participating manufacturers
negotiated a "NPM adjustment," which allows them to reduce
their payments to the states should they lose market share
to the NPMs.
California along with many states has adopted a so-called
"NPM Statute." Such a statute requires the NPMs to escrow
funds against which a state could recover any future
judgement or settlement that the state may obtain based on
its claims against NPMs for costs arising out of
smoking-related illness. Unlike the payments under the
settlement agreement, these funds still belong to the
manufacturer and eventually revert to the manufacturer if
not needed for the payment of judgements. The effect is to
help neutralize some advantages that NPMs would otherwise
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have to expand their markets at the expense of
participating manufacturers. Diligent enforcement of the
NPM statute means that the state can protect itself from
financial losses from the NPM adjustment.
According to the Attorney General, enforcement of the NPM
statute has been costly and cumbersome. NPMs are allowed
to sell cigarettes for a period of 16 months in a state
before the law obligates them to make an escrow deposit.
Many NPMs are located in foreign countries making it
difficult to effect service of process and enforce
judgements. According to the Attorney General, NPMs have
found other ways to avoid compliance.
According to the National Association of Attorneys General
approximately 15 states have already enacted similar
language, so-called complementary legislation to help
implement their NPM statutes.
Stated need for bill
According to the author, this bill would improve
enforcement of tax and anti-contraband laws, and recapture
millions of dollars in taxes currently lost to the state.
The author states that earlier efforts to license the
tobacco industry have failed due to the complexity of the
subject matter and the number of issues at stake (e.g.,
which agency should have jurisdiction, what issues should
be left to local government control, how tax and health
issues should intersect).
The Attorney General argues that the portions of AB 71 that
address the implementation of the MSA greatly advance and
enhance enforcement of California's reserve fund statute,
safeguard annual MSA payments, and prevent unfair
competition by NPMs.
Arguments in support
The California Beverage Merchants support the bill because
of the economic damage caused by illegal sales of tobacco.
The California Distributors Association points out that the
state is currently losing large amounts of tax revenue.
The City of Los Angeles and the League of California Cities
support the bill because it does not preempt local
authority. The City of Los Angeles believes it has an
active and successful local program and does not want to
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see it interfered with.
The Office of the Attorney General supports the bill
because it believes the licensing program will help stem
the growing trade in untaxed tobacco products.
Arguments in opposition
The American Heart Association, the American Lung
Association and the American Cancer Society are concerned
that the bill does not do enough to protect public health.
They argue that without a tie to underage sales violations,
a license of a retailer who makes underage sales to minors
will never be at risk. They are also concerned that there
is not a long-term financial plan for the program, a
concern that is exacerbated by the UCSF study which
forecasts a much lower level of cigarette and tobacco
products tax evasion. They also argue that tobacco
products manufacturers, chewing tobacco, pipe tobacco and
cigars should have to pay a fee for and obtain a
manufacturers license.
The California Taxpayers Association is opposed to the bill
because of the $.01 increase in cigarettes and tobacco
products from the fee on manufacturers and importers. They
argue that this fee will increase tax evasion and is a
regressive means of raising revenue.
R.J. Reynolds Tobacco Company is also opposed because of
the fee on manufacturers. They claim that the fee will
cost them $3.7 million and argue that the money will be for
solving a tax evasion problem that they played no role in
creating or fostering.
QUESTIONS AND COMMENTS
1.This bill does not consider violations of underage sales
prohibitions as factors for the BOE to consider in
issuing, suspending or revoking licenses. The committee
may want to consider this issue. The committee could
amend the bill to make violations of any underage sales
prohibitions as grounds for mandatory denial or
revocation. Alternately, such violations could be
treated as other violations of the Act and serve as a
basis for licenses action at the discretion of the BOE.
A third alternative would be to limit violations only to
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STAFF ANALYSIS OF ASSEMBLY BILL 71 (Jerome Horton) Page
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those that are found by DHS and the BOE, not local
governments.
2.The Centers for Disease Control and Prevention (CDC)
ranks all state tobacco control programs. As part of the
rating, the CDC looks at the level of funding they
believe would result in an effective program. For
California, they estimate that additional funds would be
required. They estimate that California spend about
$3.44 per capita, and that a program meeting the best
practices would require $5 to $14 dollars per capita.
The committee may want to consider additional funding for
the STAKE program, especially in light of the danger of
losing federal substance abuse grant funds.
3.The funding for the future of the program is uncertain.
If the BOE is correct that a great deal of evasion is
going on, it is likely that the program will be continued
and a permanent source of funding will be necessary.
Those that benefit from the reduced evasion are
retailers, wholesalers, distributors, manufacturers and
importers as illegal sales are channeled into the legal
market. Other beneficiaries include those that benefit
from tobacco-tax funded programs. The committee may want
to consider which of these groups should bear the
responsibility for continuing the program. Should it be
the licensees or the taxpayers as a whole?
4.Since this bill deals with evasion of cigarette and
tobacco taxes, the committee may want to consider further
restriction of Internet and mail order sales.
5.The advisory committee established under the Act is
discretionary. Given the number of parties involved,
including state, federal and local government agencies,
the committee may want to consider making the advisory
committee mandatory.
6.The bill requires the Bureau of State Audits to conduct a
report on the effectiveness of the program. The
committee may want to consider requiring additional
information on the effectiveness of state and local
programs in dealing with the problems of underage sales
and youth access to tobacco.
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STAFF ANALYSIS OF ASSEMBLY BILL 71 (Jerome Horton) Page
19
Related pending legislation
AB 1276 (J. Horton) -- Requires the Attorney General to
post on the Internet a list of tobacco product
manufacturers participating under the MSA. This measure is
on the Assembly inactive file.
SB 1016 (Bowen) -- Requires persons who wish to engage
legally in non-face-to-face sales of cigarettes to persons
in California to comply fully with the federal Jenkins Act,
requires the BOE to provide information received pursuant
to the Jenkins Act to the Attorney General, and requires
the Attorney General to report annually to the Legislature
regarding all actions taken to comply with and enforce the
Jenkins Act. This measure is in Assembly Appropriations.
Prior legislation
Since the early 1990s a number of legislators have
introduced bills on this topic. Among the most recent
efforts are:
SB 1700 (Peace, 2002) -- would have imposed similar
tobacco sales and distribution licensing program. This
measure died in the Assembly.
SB 1701 (Peace), Ch. 881, Stats. of 2002 -- requires the
BOE to replace existing tax stamps with encryptable
version.
SB 1702 (Peace, 2002) -- would have provided limited
peace officer powers to specified BOE investigators.
This measure died in the Assembly.
AB 2906 (Horton, 2002) -- would have prohibited tax
stamps on tobacco products if the manufacturer is not a
participant in the MSA or does not pay into the required
escrow account. This measure died in the Senate.
Continued---
PRIOR ACTIONS
Senate Revenue & Taxation: 4 - 1Do Pass as Amended
Senate Judiciary: 6 - 0Do Pass as Amended
Assembly Floor: 67 - 8Pass
Assembly Appropriations: 17 - 7Do Pass
Assembly Revenue & Taxation: 7 - 0Do Pass
Assembly Govt. Org.: 18 - 5Do Pass
POSITIONS
Support: American Federation of State, County, and
Municipal Employees
California Beverage Merchants
California Distributors Association
City of Los Angeles
League of California Cities
Office of the Attorney General
7-Eleven
Oppose:American Cancer Society (unless amended)
American Cancer Society (Marin Unit-West Bay
Region)
American Lung Association (unless amended)
American Heart Association (unless amended)
Berkeley Tobacco Prevention Coalition (unless
amended)
California Association of Retail Tobacconists,
Inc.
Cal-Tax
Coalition for a Tobacco-Free Monterey County
County of Yolo
R.J. Reynolds Tobacco Company
San Francisco Tobacco Free Coalition (unless
amended)
The following organizations have written to express their
concerns about AB 71:
American Lung Association of San Francisco and
San Mateo Counties
Coalition Engaged in a Smoke Free Effort (Santa
Barbara County)
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STAFF ANALYSIS OF ASSEMBLY BILL 71 (Jerome Horton) Page
21
Tobacco Education and Research Oversight
Committee (Proposition 99
advisory committee)
Youth Leadership Institute
1 Individual
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