BILL ANALYSIS AB 1617 Page 1 GOVERNOR'S VETO AB 1617 (DeSaulnier) As Amended September 5, 2007 2/3 vote ----------------------------------------------------------------- |ASSEMBLY: |47-31|(May 29, 2007) |SENATE: |22-14|(September 10, | | | | | | |2007) | ----------------------------------------------------------------- ASSEMBLY: 48-29 (September 12, 2007) Original Committee Reference: G.O. SUMMARY : Prohibits transportation of cigarettes to persons in California except when such shipments are made either to an entity that is licensed by the Board of Equalization (BOE) for tobacco transactions or to certain other specified entities, and broadens the definition of bidis, a prohibited tobacco product. The Senate amendments : 1)Delete the requirement that a violation, as defined, is a misdemeanor and shall be subject to penalties, as specified. 1)Provide that a district attorney, city attorney, or the Attorney General (AG) may bring a civil action to assess civil penalties against any person, firm, corporation, or other entity that violates this section and may also recover the costs of investigating and prosecuting the action, including expert fees, reasonable attorney's fees, and court costs. The civil penalties shall be assessed according to the following schedule: a) Not more than $1,000 upon the first violation; b) Not more than $5,000, upon the second violation; and, c) Not more than $25,000, upon the third violation, or subsequent violations. 2)Delete provision that allows the AG, district attorney or city AB 1617 Page 2 attorney to bring a civil action against violators who will be subject to a maximum $5,000 per violation, as specified. 3)Provide the civil penalties assessed, as specified, shall be in addition to any other penalties that may be applicable, including, but not limited to, civil penalties, as defined. 4)Provide that if this bill and AB 1585 are both enacted and become effective on or before January 1, 2008, and this bill repeals and adds Section 22963 of the Business and Professions Code and AB 1585 amends that section, then the provisions of this bill repealing and adding that section shall become operative and the provisions of AB 1585 amending that section shall not become operative, regardless of the order of enactment. EXISTING LAW : 1)Imposes an excise tax of $0.87 per pack (20) of cigarettes. 2)Imposes a surcharge on tobacco products at a rate to be annually determined by BOE. The tobacco products tax rate is equivalent to the combined rate of tax on cigarettes. The surcharge rate for fiscal year (FY) 2005-06 is 46.76%. 3)Provides, in part, that no person may engage in a retail sale of cigarettes in California unless the sale is a vendor-assisted, face-to-face sale. 4)Defines a "face-to-face sale" to mean a sale in which the purchaser is in the physical presence of the seller or the seller's employee or agent at the time of the sale. A face-to-face sale does not include any transaction conducted by mail order, the Internet, telephone, or any other anonymous transaction method in which the buyer is not in the seller's physical presence. This does not prohibit any lawful sale of a tobacco product that occurs by means of a vending machine. 5)Specifies that persons may engage in a non-face-to-face sale of cigarettes to a person in California provided that the seller complies with both of the following conditions: a) The seller has fully complied with all of the requirements of Chapter 10A of Title 15 of the United States (U.S.) Code, AB 1617 Page 3 otherwise known as the Jenkins Act; b) The seller has fully complied with either of the following requirements: i) All applicable California taxes on the cigarettes have been paid; or, ii) The seller includes on the outside of the shipping container for any cigarettes shipped to a resident in California from any source in the U.S. an externally visible and easily legible notice located on the same side of the shipping container as the address to which the package is delivered stating the following: IF THESE CIGARETTES HAVE BEEN SHIPPED TO YOU FROM A SELLER LOCATED OUTSIDE OF THE STATE IN WHICH YOU RESIDE, THE SELLER HAS REPORTED PURSUANT TO FEDERAL LAW THE SALE OF THESE CIGARETTES TO YOUR STATE TAX COLLECTION AGENCY, INCLUDING YOUR NAME AND ADDRESS. YOU ARE LEGALLY RESPONSIBLE FOR ALL APPLICABLE UNPAID STATE TAXES ON THESE CIGARETTES. 6)Requires BOE to provide information relative to a seller's failure or attempt to comply with the Jenkins Act to the AG. The AG is required to provide an annual report to the Legislature regarding all actions taken to comply with, and enforce, the Jenkins Act. 7)Allows the AG or a city attorney, county counsel, or district attorney to bring a civil action to enforce the provisions of Revenue and Taxation Code Section 30101.7 against any person that violates that section. In addition to any other remedies provided by law, the court is required to assess a civil penalty in accordance with the following schedule: a) A civil penalty of not less than $1,000 and not more than $2,000 for the first violation; b) A civil penalty of not less than $2,500 and not more than $3,500 for the second violation within a five-year period; c) A civil penalty of not less than $4,000 and not more than $5,000 for the third violation within a five-year period; AB 1617 Page 4 d) A civil penalty of not less than $5,500 and not more than $6,500 for a fourth violation within a five-year period; and, e) A civil penalty of $10,000 for a fifth or subsequent violation within a five-year period. 8)Imposes a sales or use tax on the sale or purchase of tangible personal property in California. If an out-of-state seller has nexus within California, the seller is required to collect the use tax from the purchaser at the time of sale. If the seller does not have nexus, or does not collect the use tax, the purchaser is required to pay the use tax directly to BOE. 9)Prohibits the distribution or sale of tobacco products directly or indirectly to any person under age 18 through the U.S. Postal Service (USPS) or through any other public or private postal or package delivery service. AS PASSED BY THE ASSEMBLY , this bill prohibited transportation of cigarettes to persons in California except when such shipments are made either to an entity that is licensed by the BOE for tobacco transactions or to certain other specified entities, and broadened the definition of bidis, a prohibited tobacco product. FISCAL EFFECT : Unknown COMMENTS : Purpose of this bill: According to the author, this bill "is intended to facilitate the collection of taxes on cigarettes and tobacco products sold to residents of California over the Internet or by mail order. It is also intended to protect public health of California residents and to prevent sales of cigarettes and tobacco products to minors." This bill will benefit the state, and specifically public health, in three ways. First, it will help curb the use of tobacco by minors by helping to reduce the purchase of tobacco over the internet by minors. Currently there is no reliable way to verify the age of a purchaser who buys tobacco over the internet. California has an obligation to eliminate minor's access to tobacco products to guard against addiction and a lifetime of poor health. Second, this bill will improve public health by recouping tobacco taxes that are currently evaded through Internet tobacco purchasers. Current law is hard to AB 1617 Page 5 enforce on tobacco retailers who fail to pay their share of taxes. Third, this bill will close the loopholes on the definition of "bidis" whose sale is banned in California. Bidis are hand-rolled, unfiltered cigarettes with a higher tar and nicotine content than regular cigarettes. They are often flavored and marketed to minors. By closing the loopholes, this bill will keep these dangerous products away from minors. Background: This bill is patterned after a New York statute (Public Health Law Section 1399-ll), which prohibits direct shipment and transportation of cigarettes to consumers. New York banned Internet cigarette sales in 2000, saying that such transactions posed a serious threat to public health and the economy. According to legislative analyses, the law was intended to make it more difficult for children to get cigarettes and to allow fewer smokers to avoid a state excise tax on cigarettes. The law was challenged by Brown & Williamson Tobacco, a unit of British American Tobacco PLC, and Santa Fe Natural Tobacco Co., now a unit of R.J. Reynolds Tobacco Holdings. In February 2003, the 2nd U.S. Circuit Court of Appeals reversed a federal court ruling that had thrown out the state law. The lower court based its decision on a finding that the statute favored local tobacco retailers over out-of-state competitors. New York State AG Eliot Spitzer was quoted as saying that although state laws ensure that the sale of cigarettes to individuals remains legal, the ruling "reaffirms the power of the state to prevent the circumvention of those laws by Internet, mail order and telephone sellers." In April 2003, California AG Bill Lockyer filed six lawsuits against Internet tobacco retailers, alleging violations of the Jenkins Act, RTC Section 30101.7, and other unlawful and unfair business practices. The AG cannot directly enforce the Jenkins Act, but the unfair business practices claim included the defendants' failure to comply with the Jenkins Act as the unlawful activity. Five of these Internet tobacco retailers stipulated to entry of judgment against them. Each retailer and its principals agreed not to do business in California and to pay penalties, costs and attorneys' fees totaling more than $1 million. A default judgment AB 1617 Page 6 was entered against another retailer for $4.3 million. Additionally, the two biggest of these retailers agreed to file Jenkins Act reports with BOE dating back to January 1, 2000. The two companies reported about 400,000 shipments to California residents. BOE is attempting to collect use and excise taxes from the California purchasers. Last year, a number of credit card companies announced that they will refuse to handle payments to online tobacconists. The companies made this announcement after being shown evidence that many Internet retailers were not complying with applicable laws, including the Jenkins Act. GOVERNOR'S VETO MESSAGE : This bill would prohibit cigarette sales via the Internet to individual California consumers and only permit shipping of cigarettes via the Internet to certain licensed businesses. This bill is intended to help curb smoking by minors and also help the state collect all applicable taxes on tobacco. In vetoing nearly identical legislation last year, I noted that the federal Jenkins Act, which requires the sale of tobacco across state lines to be reported to [BOE], is already in place to help identify taxable sales of tobacco. Further, existing law reduces youth access to cigarettes over the Internet by requiring Internet sellers and shippers to verify the age of the purchaser. Proponents should address any perceived deficiencies in these laws rather than seeking an outright prohibition that will be difficult to enforce. Analysis Prepared by: Eric Johnson / G. O. / (916) 319-2531 FN: 0003713