BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2496
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          Date of Hearing:   April 12, 2010

                   ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION
                                   Joe Coto, Chair
                  AB 2496 (Nava) - As Introduced:  February 19, 2010
           
          SUBJECT  :   Cigarette and tobacco products

           SUMMARY  :   Amends the California Cigarette and Tobacco Products  
          Licensing Act of 2003 (Act) in governing the financial and other  
          obligations of non-participating tobacco manufacturers (NPMs) as  
          part of its diligence obligation.  Specifically,  this bill  :  

          1)Requires a manufacturer or importer to additionally consent to  
            jurisdiction of the California courts for the purpose of  
            enforcement of the Master Settlement Agreement (MSA) and a  
            specified provision of the Cigarette and Tobacco Products Tax  
            Law (Tax Law).

             a)   Requires the manufacturer or importer to additionally  
               identify the registered agent to the Attorney General.

             b)   Authorizes a peace officer or board employee granted  
               limited peace officer status to inspect any site with  
               respect to violations of a specified provision of the Law.

             c)   Prohibits those persons from acquiring a package of  
               cigarettes unless the brand family or product manufacturer  
               of the cigarettes is included on a directory posted by the  
               Attorney General, as specified.

          2)Authorizes a tobacco product manufacturer that elects to place  
            funds into a qualified escrow fund to make an irrevocable  
            assignment of its interest in the funds to the benefit of the  
            State of California.

             a)   Requires any funds assigned to the state that are  
               withdrawn to be deposited into the General Fund as a credit  
               against any judgment or settlement which may be obtained  
               against the tobacco product manufacturer who has assigned  
               the funds. 

          3)Requires a stamp or meter impression to be made on rolls of  
            tobacco, as specified, and makes conforming changes to related  
            provisions.








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             a)   Requires certification of additional information, as  
               specified.

             b)   Establishes circumstances under which a manufacturer and  
               brand families are to be excluded from the directory of  
               tobacco product manufacturers that are participating  
               manufacturers and brand families under the MSA, and would  
               require those distributors, after receiving notice from the  
               Attorney General, to provide notice to its customers of any  
               manufacturer or brand family removed or excluded from the  
               Attorney General's directory of tobacco product  
               manufacturers that are participating manufacturers (PMs)  
               under the MSA.

             c)   Requires a newly qualified NPM or a NPM who poses an  
               elevated risk of noncompliance with the Tax Law or the MSA,  
               to post a surety bond, as specified before inclusion onto  
               the Attorney General's directory of tobacco product  
               manufacturers that are PMs under the MSA.

             d)   Specifies that a person is prohibited from shipping or  
               distributing into or within this state for personal  
               consumption in California cigarettes of a tobacco  
               manufacturer or brand family not included in the directory,  
               and would provide that this specification is declaratory of  
               existing law.

             e)   Requires any NPM not located in the United States, as an  
               additional condition precedent to having its brand families  
               listed or retained in the directory, to cause its importers  
               to appoint an agent, as specified, and would impose  
               additional specified responsibilities upon such  
               manufacturer.

             f)   Gives the Attorney General additional specified  
               authority regarding the administration of that law. 

             g)   Requires, as a condition of selling cigarettes in  
               California, a tobacco product manufacturer, as specified,  
               to submit, or authorize to disclose, a copy of its  
               applicable return.  

               i)     Provides that a failure to comply with that  
                 provision would subject the manufacturer and its brand  








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                 companies to removal from the directory. 

               ii)    Imposes a civil penalty on any manufacturer that  
                 intentionally provides an applicable return with  
                 materially false information.

          4)Adds to the forfeiture list cigarette and tobacco products of  
            a tobacco product manufacturer or its brand families that do  
            not appear on the directory maintained by the Attorney  
            General, as required under the Tax Law.

          5)Amends the definition of "bidis" or "beedies," as defined, to  
            include any product that is marked as sold as "bidis" or  
            "beedies", and clarifies that persons who violate the  
            prohibition prescribed under existing law are subject to both  
            criminal and civil liability.

          6)Provides that the provisions of this bill are severable.

           EXISTING LAW  :

          1)Prohibits the sale, offer for sale, distribution, or import of  
            "bidis" or "beedies," defined as a product containing tobacco  
            that is wrapped in temburni leaf or tendu leaf, unless it is  
            sold or intended for sale in business establishments that  
            exclude minors .

          2)Requires, under federal law, states' attorneys general and  
            various tobacco product manufacturers to enter into a Master  
            Settlement Agreement (MSA) as a settlement of various  
            lawsuits, that provides for the allocation of money to the  
            states and certain territories.  

             a)   Enters this state into a memorandum of understanding  
               (MOU) providing for the allocation of the state's share of  
               funds to be received under the MSA between the state and  
               counties and certain cities within the state.

             b)   Requires any tobacco product manufacturer selling  
               cigarettes to consumers in this state to place specified  
               amounts into a qualified escrow fund by April 15 of each  
               year. 

          3)Requires, under the Cigarette and Tobacco Products Tax Law, a  
            tax with respect to distributions of cigarettes paid by  








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            distributors through the use of stamps or meter impressions. 

             a)   Requires that these stamps or impressions be affixed to  
               each package of cigarettes sold.

             b)   Requires certification of additional information, as  
               specified. 

             c)   Requires the Attorney General to post on the Attorney  
               General's Internet Web site a directory of tobacco product  
               manufacturers that are participating manufacturers that are  
               participating manufacturers under the MSA, and that have  
               made the required escrow payments and provided  
               certification of related information to the Attorney  
               General.

               i)     Requires the Attorney General's Internet Web site to  
                 include specified brand families, as defined, that have  
                 been identified by the by the tobacco product  
                 manufacturers.

               ii)    Requires that a manufacturer and brand families be  
                 excluded from the directory, under certain circumstances.

               iii)   Requires certain cigarette and tobacco products be  
                 forfeited to the state, under certain circumstances, upon  
                 seizure by the State Board of Equalization.

          4)Enacts the Cigarette and Tobacco Products Licensing Act, which  
            imposes licensing requirements on tobacco manufacturers,  
            wholesalers, retailers and importers; requires manufacturers  
            to pay a one-time fee; and, imposes additional civil and  
            criminal penalties on individuals and businesses that violate  
            tobacco-related, anti-contraband laws and laws prohibiting  
            tobacco-related sales to minors.

          5)Establishes the Stop Tobacco Access to Kids Enforcement Act  
            (STAKE Act) to reduce or eliminate the illegal purchase and  
            consumption of tobacco products by minors. 

             a)   Requires retailers from selling cigarettes and tobacco  
               products to minors under the age of 18 and requires that  
               retailers check identification of individuals trying to buy  
               cigarettes and tobacco products who appear under the age of  
               18.  








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             b)   Increases civil penalties and expands the number of  
               agencies that are permitted to carry out investigations of  
               illegal tobacco sales to minors from the State Department  
               of Public Health (DPH) to include the Attorney General and  
               other state and local agencies.

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   This bill amends the Act with regard to governing  
          the financial and other MSA-related obligations of NPMs as part  
          of its diligence obligation.  Author states, "This bill would  
          bring California law into conformity with Virginia's law and  
          those of the other states to prevent Participating Manufacturers  
          from arguing in future litigation that California has failed to  
          "diligently enforce" against NPMs."   This bill modeled on NPM  
          escrow statute enhancements made in the following states:  
          Virginia, Kentucky, Kansas, and Idaho.

           Background  .  In 1998, Attorneys General in 46 states (including  
          California), the District of Columbia, Puerto Rico, and four  
          U.S. Territories agreed to settle more than 40 pending lawsuits  
          with the nation's four major tobacco companies.  The lawsuits  
          were brought to recover the public costs of treating  
          smoking-related illnesses.  Under the MSA, California is  
          projected to receive more than $25 billion through the year  
          2025, where the funds being shared evenly by the state and local  
          government entities.

          All 52 jurisdictions that signed the MSA did enact the NPM  
          Escrow Statute (which was exhibit T to the MSA) and  
          subsequently, the Tobacco Directory Law which complements the  
          NPM Escrow Statute.  The California NPM Escrow Statute is Health  
          & Safety Code sections 104555-104557.  The California Tobacco  
          Directory Law is Rev. & Tax Code section 30165.1.

          Through the end of 2009, the tobacco companies connected to the  
          MSA have paid more than $66 billion to California and the other  
          51 jurisdictions.  California shares its $8.5 billion from the  
          MSA with all 58 of its counties and its four largest cities.  As  
          a condition of the MSA, tobacco companies are restricted from  
          advertising and product placement and sponsorship.  

          The tobacco company signatories to the MSA are known as  
          "Participating Manufacturers" or "PMs."  The other tobacco  








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          companies who have not settled lawsuit claims with the state nor  
          have they agreed to the terms of the MSA are known as  
          "Non-Participating Manufacturers" or "NPMs."  The NPMs are not  
          bound by the MSA to pay the state to offset the costs of future  
          illnesses caused by their products.

           Non-Participating Manufacturers and their relationship to the  
          Master Settlement Agreement  .  NPMs have neither settled claims  
          with California, nor have they agreed to the terms established  
          in the MSA.  NPMs are not bound by the MSA to pay the state to  
          offset the costs of future illnesses caused by their products.   
          To ensure that the NPMs would not be given a competitive  
          advantage, the MSA included a "Model Reserve Fund Statute" that  
          would require NPMs to make annual payments based upon the number  
          of cigarettes sold in the state, in amounts similar to the MSA  
          payments, but to an escrow account.  

          The escrow accounts serve as a reserve fund, a source of  
          recovery for the state, because the state bears the financial  
          burden for the smoking-related illnesses that indigent  
          California consumers will inevitably suffer from smoking.   
          According to the author maintains that the Legislature intended  
          to prevent the unfair competition that would occur if some  
          tobacco product manufacturers were able to avoid the costs of  
          making settlement payments under the MSA to the disadvantage of  
          tobacco product manufacturers that signed the MSA.

          All 50 states have enacted an NPM escrow statute, and by doing  
          so have ensured there would be a fund against which to recover  
          future claims for medical care.

          The MSA also provides if a state fails to "diligently enforce"  
          against NPMs, its MSA payments may be severely reduced.   
          California's NPM escrow law was previously amended in 2003.   
          Under AB 71 (J. Horton, Chapter 890, Statutes of 2003)  
          California amended its tobacco laws to address known schemes for  
          avoiding escrow deposits and MSA payments.

           Policy consideration  .  If NPMs are not bound by the MSA to pay  
          California and other MSA states and U.S. territories, the  
          Committee may wish to consider whether the Attorneys General  
          have the authority to require NPMs to contribute funds into the  
          escrow account.  Also, the Committee may wish to consider  
          looking at the amount of contributions from the PMs and NPMs and  
          ask if the dynamics surrounding this bill, the escrow account,  








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          and the MSA could have an effect on the Board of Equalization's  
          ability to collect taxes.  

           Related legislation  .   AB 2733 (Ruskin, 2010 Legislative Session)   
          prohibits the transfer of title or possession of cigarettes or  
          tobacco products without consideration, exchange, or barter if  
          the cigarettes or tobacco products had been purchased for resale  
          under a license issued pursuant to the California Cigarette and  
          Tobacco Products Licensing Act (Act) and the transfer occurs  
          without a license or after receipt of a notice of suspension or  
          revocation of the license.  In the Assembly Governmental  
          Organization Committee and is scheduled to be heard on April 12,  
          2010. 
           
          Prior legislation  .   SB 1927 (Hayden, Chapter 1009, Statutes of  
          1994)  enacts the Stop Tobacco Access to Kids Enforcement (STAKE)  
          Act to address the increase in tobacco sales to minors in  
          California and fulfill the federal mandate that prohibited the  
          sale of cigarettes and tobacco products to minors.

           AB 71 (Jerome Horton, Chapter 890, Statutes of 2003)  enacts the  
          Cigarette and Tobacco Products Licensing Act of 2003 and imposes  
          licensing requirements on tobacco manufacturers, wholesalers,  
          retailers, and importers.  Requires manufacturers to pay a  
          one-time fee.  Imposes civil and criminal penalties on  
          individuals and businesses that violate tobacco-related,  
          anti-contraband laws, and laws prohibiting tobacco-related sales  
          to minors. 

           AB 2344 (Beall, 2008 Legislative Session)  would have required  
          tobacco retailers to pay an annual licensing fee of $185 to  
          offset the State Board of Equalization's funding shortfall for  
          the administration and enforcement of the California Cigarette  
          and Tobacco Products Act.  Vetoed by the Governor.

           SB 400 (Kuehl, 2005 Legislative Session)  would seek to make  
          changes to the penalties imposed on a retailer convicted of  
          furnishing cigarettes or tobacco products to a minor under 18  
          years of age.  Held on the Senate Appropriations Committee  
          Suspense File.

           SB 433 (Ortiz, 2004 Legislative Session)  would change the  
          conditions under which the State Board of Equalization levies  
          penalties against tobacco retailers for sales to minors and  
          requires local agencies to report convictions for illegal sales  








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          to the State Board of Equalization.  Held on the Senate  
          Appropriations Committee Suspense File. 

           SB 1843 (Budget and Fiscal Review Committee, 2002 Legislative  
          Session)  would have enacted the Cigarette and Tobacco Products  
          Licensing Act of 2002.  Also, would have established licensing  
          requirements for cigarettes and tobacco products retailers,  
          wholesalers and importers, creates an enhanced cigarette tax  
          compliance and enforcement program; revises the cigarette  
          "distributor discount" for applying tax stamps; appropriates  
          funds to implement the program in 2002-2003;  establishes a  
          long-term funding mechanism  for the program.   Held in the  
          Assembly.
           
          AB 2205 (Koretz, Chapter 687, Statutes of 2002)  creates an  
          additional $100 penalty on each knowingly possessed carton of  
          untaxed cigarettes where the proceeds would be used to fund a  
          local competitive grant program to reduce availability of  
          tobacco products on the black market.  The program had a sunset  
          clause that took place on January 1, 2006.  

           SB 1766 (Ortiz, Chapter 686, Statutes of 2002)  requires that all  
          sales of cigarettes in the State be vendor-assisted,  
          face-to-face sales unless the seller receives valid  
          identification, that the purchaser is over 18, the product is  
          shipped to the address provided on the identification, the sales  
          is at least for two cartons, and the seller either provides the  
          State Board of Equalization with all taxes due on the sale or  
          includes with the shipment a notice that the purchaser is  
          responsible for state taxes.  

           AB 1830 (Frommer, Chapter 685, Statutes of 2002)  prohibits the  
          sales of tobacco products to minors through the United States  
          Postal Service or through any other public or private postal or  
          package delivery service, and imposes specified age-verification  
          requirements on tobacco product sellers or distributors. 

           Double-referral  .  This bill is double-referred to the Assembly  
          Judiciary Committee.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Breathe California








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           Opposition 
           
          None on file
           
          Analysis Prepared by  :    Rod Brewer / G. O. / (916) 319-2531