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