BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 2496
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          Date of Hearing:   May 19, 2010

                                Felipe Fuentes, Chair

                     AB 2496 (Nava) - As Amended:  May 13, 2010 

          Policy Committee:                              Governmental  
          Organization Vote:                            17 - 1 
                        Judiciary                               8 - 1 

          Urgency:     No                   State Mandated Local Program:  
          Yes    Reimbursable:              No


          This bill amends provisions of California's Cigarette and  
          Tobacco Products Licensing Act (Tobacco Licensing Act),  
          Cigarette and Tobacco Products Tax Law (Tobacco Tax Law), and  
          other statutes as they relate to the obligations of tobacco  
          manufacturers who were either not original signatories or did  
          not agree to the terms of the Master Settlement Agreement (MSA)  
          between the state and the major tobacco manufacturers.   
          Specifically, among other provisions, this bill: 

          1)Requires a manufacturer or importer of tobacco products, as a  
            condition of obtaining and maintaining a license to operate in  
            California, to do all of the following:

             a)   Consent to jurisdiction of the California courts for the  
               purpose of enforcement of the Tobacco Licensing Act, the  
               MSA and the Tobacco Tax Law.
             b)   Waive any sovereign immunity defense that may apply to  
               any action brought by the state Attorney General (AG) or  
               Board of Equalization (BOE) to enforce the Tobacco  
               Licensing Act, the Tobacco Tax Law, or the MSA. 
             c)   Provide a copy of any valid, corresponding federal  
               permit issued by the United States Treasury, Alcohol and  
               Tobacco Tax and Trade Bureau. 
             d)   Certify that it is either a "participating manufacturer"  
               (PM) in the Master Settlement Agreement or that it is in  
               full compliance with escrow fund requirements for  
               non-participating manufacturers (NPM) and related  
               provisions of state tobacco laws.  


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          2)Gives the AG additional authority to conduct audits and  
            investigations in order to enforce the MSA, Tobacco Licensing  
            Act, and Tobacco Tax Law, and, as necessary, to issue  
            subpoenas, compel attendance of witnesses, administer oaths,  
            take depositions, and compel the production of books, records,  
            and other documents relevant to an audit or investigation. 

          3)Requires, as a condition of selling cigarettes in California,  
            a tobacco manufacturer to provide certain federal tax returns  
            and forms.  Makes failure to file forms, or the submission of  
            false forms, subject to civil penalties and removal from the  
            AG's directory. 

          4)Amends Tobacco Tax Law to conform to recently enacted federal  
            legislation regulating the sale and distribution of tobacco  
            products over the Internet or in any other non-face-to-face  
            manner.  Clarifies that provisions of federal law that require  
            Internet sellers to comply with state laws also require  
            compliance with state laws governing escrow fund obligations  
            and specified provisions of the Tobacco Licensing Act and  
            Tobacco Tax Law. 

           FISCAL EFFECT  

          1)Costs associated with this legislation are minor and  
            absorbable within existing resources as this bill enhances the  
            AG's authority to enforce the existing provisions of the  
            Master Settlement Agreement. 

          2)In an earlier version of the bill, the Board of Equalization  
            estimated their administrative costs associated with the  
            legislation would likely be minor, between $10,000 and  

          3)This bill does not affect the state's tax revenues. 

          4)Potential minor non-reimbursable local costs for investigation  
            and prosecution of violations, potentially offset by fine  


           1)Rationale  . The California Department of Justice, the sponsor,  
            intends for this bill to enhance the department's efforts to  
            enforce existing provisions of state law related to the MSA  


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            between California and the major tobacco manufacturers.  The  
            measure would protect against the sale of cigarettes below  
            market prices, and would help protect the state's share of  
            tobacco settlement payments under the Master Settlement  
          2)Master Settlement Agreement  . In 1998 the Attorney General of  
            California, along with the attorneys general of 45 other  
            states and five U.S. territories, entered into a MSA with four  
            major tobacco companies.  (Four other states reached separate  
            agreements with the tobacco companies.)  The MSA settled more  
            than 40 pending lawsuits that were brought on behalf of the  
            states or state entities to recover the public costs of  
            treating smoking-related illnesses.  Under the terms of the  
            MSA, the tobacco companies were released from past, present,  
            and certain future actions brought by the states or state  
            entities for recovering costs associated with smoking-related  
            illnesses.  (It did not release tobacco companies from private  
            civil actions.)  

            In exchange for this release from state actions, the tobacco  
            companies agreed to make payments to each state that was a  
            party to settlement in amounts based on the volume of sale in  
            that state.  For California, the amount is likely to equal  
            about $25 billion through the year 2025.  Under an  
            implementing Memorandum of Understanding signed in California,  
            those funds are divided between the state and local  
            governments.  In addition to the payments, the participating  
            tobacco companies agreed to fund a national public health  
            foundation and to change certain advertising and marketing  
            practices, especially with the intent of reducing underage  

            The MSA, however, did not apply to many smaller tobacco  
            manufactures that were not part of the agreement.  These  
            "non-participating manufacturers" - or NPMs - are not subject  
            to the payment requirements or advertising changes.  To ensure  
            that NPMs would not enjoy a competitive advantage, the MSA  
            included a "Model Reserve Fund Statute" that each state was  
            encouraged to adopt.  These statutes would require NPMs to  
            deposit funds in an escrow account in amounts similar to those  
            required under the MSA.  Not only would this equalize the  
            playing field between the PMs and NPMs, it would also create a  
            reserve fund to pay judgments or settlements on claims brought  
            against the NPM by the state.  All 50 states have enacted such  


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            In California, the model statute requires any tobacco  
            manufacturer selling products in this state to either (a)  
            agree to become a "participating manufacturer" and be bound by  
            the terms of the MSA, or (b) place funds into a qualified  
            escrow account, with the amount to be determined by the volume  
            of sales within the state.  The amount that a NPM must place  
            in the escrow account is supposed to approximate the amount  
            that it would be required to pay if it were a participating  
            manufacturer in the MSA agreement.  Existing law provides that  
            any funds not withdrawn will be returned to the NPM after 25  

            (This bill would amend this provision so as to authorize the  
            NPM to make an irrevocable assignment of its share of the  
            funds to the State of California, with any funds so assigned  
            to the state to be deposited in the GF as a credit against any  
            future judgment or settlement.)

           3)Related Legislation  . SB 822 (Escutia; Chapter 780, Statutes of  
            1999) created California's version of the MSA model statute,  
            requiring tobacco manufacturers selling products within the  
            state to either become a participating manufacturer under the  
            terms of the Master Settlement Agreement, or, if a  
            non-participating member, to deposit specified funds in a  
            qualified escrow fund each year. 

            AB 71 (Horton; Chapter 890, Statutes of 2003) created the  
            Cigarette and Tobacco Products Licensing Act of 2003, which  
            generally provides for the licensing of tobacco manufacturers,  
            importers, distributors, wholesalers, and retailers, and  
            prohibits any such entity from operating in California without  
            a license.  Authorizes BOE to suspend or revoke licenses for  
            violations of the Act and related provisions of law. 

            Currently, AB 2733 (Ruskin) amends the Tobacco Licensing Act  
            to prohibit displaying or gifting of cigarettes and tobacco  
            products during any period of license suspension and  
            revocation.  The bill also requires a person that has received  
            a notice of suspension or revocation to post a copy of the  
            notice at the primary entrance and near the cash register.   
            That bill is currently pending in this committee. 

           Analysis Prepared by  :    Julie Salley-Gray / APPR. / (916)  


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