BILL ANALYSIS AB 2496 Page 1 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 a) Requires any funds assigned to the state that are withdrawn to be deposited into the General Fund as a credit against any judgment or settlement which may be obtained against the tobacco product manufacturer who has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. AB 2496 Page 2 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 AB 2496 Page 3 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 AB 2496 Page 4 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. AB 2496 Page 5 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 AB 2496 Page 6 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, AB 2496 Page 7 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 AB 2496 Page 8 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 AB 2496 Page 9 Opposition None on file Analysis Prepared by : Rod Brewer / G. O. / (916) 319-2531