BILL ANALYSIS                                                                                                                                                                                                    






                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                        Senator Elaine K. Alquist, Chair


          BILL NO:       AB 2496                                      
          A
          AUTHOR:        Nava                                         
          B
          AMENDED:       May 20, 2020                                
          HEARING DATE:  June 16, 2010                                
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          REFERRAL:      Revenue & Taxation                           
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          CONSULTANT:                                                 
          9
          Dunstan                                                     
          6                        
                                        
                                     SUBJECT
                                         
                         Cigarette and tobacco products

                                     SUMMARY  

          Amends provisions of California's Cigarette and Tobacco  
          Products Licensing Act, and Tobacco Products Tax Law, and  
          other statutes as they relate to the obligations of tobacco  
          manufacturers who were not original signatories to the  
          agreement or who have not agreed to the terms of the Master  
          Settlement Agreement (MSA) between the state and the major  
          tobacco manufacturers.

                             CHANGES TO EXISTING LAW  

          Existing law:
          Provides, under the California and Tobacco Products  
          Licensing Act of 2003, for the licensure of manufacturers,  
          importers, distributors, wholesalers and retailers of  
          cigarettes or tobacco products; imposes certain fees,  
          reporting requirements and practices on the part of  
          licensees; and authorizes the imposition of civil and  
          criminal penalties on individuals who violate provisions of  
          the act or other tobacco-related laws, including  
          prohibitions on the sale of tobacco products without a  
          license or to minors. 
                                                         Continued---



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

                   Submit to the Board of Equalization (BOE) a list  
                of all brand families, as defined, that they  
                manufacture or import and to update that list when a  
                new brand family is added. 
                   Consent to the jurisdiction of the California  
                courts for the purpose of enforcing the Tobacco  
                Licensing Act and to appoint a registered agent for  
                service of process in this state. 
                   Certify that it is either a participating  
                manufacturer in the Master Settlement Agreement, or  
                that it is in full compliance with escrow fund  
                requirements for non-participating manufacturers  
                (NPM).  

          Authorizes any peace officer, or BOE employee granted  
          limited peace officer status, to conduct on-site  
          inspections to ensure compliance with the Tobacco Licensing  
          Act and other tobacco-related laws and regulations.  

          Prohibits a tobacco manufacturer, importer, distributor or  
          wholesaler from selling tobacco products to another  
          distributor, wholesaler, retailer or other person who is  
          not licensed in the state, except as specified.  Provides  
          further that no retailer, distributor or wholesaler shall  
          purchase tobacco products from a manufacturer or importer  
          that is not licensed in this state. 

          Prohibits an importer, distributor, wholesaler or retailer  
          from purchasing or otherwise acquiring any package of  
          cigarettes to which a stamp or meter impression may not be  
          affixed, in accordance with provisions of the Tobacco Tax  
          Law.  

          Prohibits the 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.  

          Requires every tobacco manufacturer whose cigarettes are  




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          sold in this state, whether directly or through a  
          distributor, retailer, or similar intermediary, to execute  
          and deliver to the Attorney General (AG) a prescribed form  
          certifying that it is either a participating manufacturer  
          in the MSA or a NPM that is in full compliance with the  
          escrow fund deposit requirements.  Requires the Attorney  
          General to maintain a directory of persons or entities that  
          have complied with the certification requirements

          Requires, under the Tobacco Tax Law, a tax on cigarettes  
          and tobacco products, paid by distributors, through the use  
          of stamp or meter impressions, and generally prohibits the  
          sale or distribution of products that lack the required  
          stamp or meter impressions.  Further authorizes the BOE to  
          conduct on-site inspections to ensure compliance and to  
          seize any non-complying property, as specified.  

          Provides, under the MSA entered into by 46 states and  
          various tobacco companies, that, in return for a release  
          from certain claims brought against them, the tobacco  
          companies agree to pay substantial sums to the states based  
          on volume of sales; fund a national foundation devoted to  
          the interests of public health; and make substantial  
          changes in their advertising and marketing practices,  
          especially with the intention of reducing underage smoking.  
            

          Requires any tobacco product manufacturer selling  
          cigarettes to consumers within this state, whether directly  
          or through a distributor, retailer, or similar  
          intermediary, to either become a participating manufacturer  
          as that term is used in the MSA, or place into a qualified  
          escrow account specified amounts based on the volume of  
          products sold within the state. 

          Provides, under the federal Prevent All Cigarette  
          Trafficking Act of 2009 (PACT Act), that persons or  
          businesses that sell cigarettes and smokeless tobacco  
          products via the Internet or other non-face-to-face means  
          must pay all applicable federal, state, local, or Tribal  
          taxes and affix appropriate stamps; comply with various  
          state and local laws as if the Internet or other  
          non-face-to-face sellers were tobacco product retailers in  
          the same state as their customers; and check the age and  
          identification of customers both at the point of sale and  




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          at the point of delivery. 

          This bill:
          Requires a manufacturer or importer to consent to  
          jurisdiction of the California courts for the purpose of  
          enforcement of the MSA and a specified provision of the  
          Cigarette and Tobacco Products Tax Law.  Requires the  
          manufacturer or importer to identify the registered agent  
          to the Department of Justice.

          Authorizes a peace officer or board employee that is  
          granted limited peace officer status to inspect any site  
          with respect to specified violations of state tax law.

          Prohibits a manufacturer or importer from acquiring a  
          package of cigarettes unless the brand family or product  
          manufacturer of the cigarettes is included on a directory  
          posted by the DOJ, as specified.  Deletes the DOJ's fee on  
          manufacturers for implementing and maintaining the  
          directory. 

          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.  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. 

          Requires a stamp or meter impression to be made on rolls of  
          tobacco, as specified, and makes conforming changes to  
          related provisions: 
                 Requires certification of additional information,  
               as specified; 
                 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 DOJ, to  
               provide notice to specified customers. 
                 Deletes provisions referring to cigarettes or  
               tobacco products from a NPM located outside the United  
               States that is removed form the directory.




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          Requires a newly qualified NPM or a NPM that poses an  
          elevated risk of noncompliance, as defined, with tobacco  
          products tax law or the MSA, to post a surety bond, as  
          specified before inclusion onto the DOJ's directory of  
          tobacco product manufacturers that are participating  
          manufacturers under the MSA.

          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.

          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.

          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.  Provides that a failure to comply with  
          that provision would subject the manufacturer and its brand  
          companies to removal from the directory and, imposes a  
          civil penalty on any manufacturer that intentionally  
          provides an applicable return with materially false  
          information.

          Adds to the forfeiture list cigarette and tobacco products  
          that do not meet requirements specified by BOE or the  
          Attorney General (AG).  Requires the BOE and the DOJ to  
          share the data, including e-mail addresses, for  
          distributors, importers, manufacturers, and wholesalers.   
          Eliminates the reference to the track and trace provisions  
          under state law that is applicable to delivery sales. 

          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. 




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          Provides that the provisions of this bill are severable. 

          
                                  FISCAL IMPACT  

          According to the Assembly Appropriations Committee  
          analysis, AB 2496 will have the following fiscal impacts:
                 Minor costs that are absorbable within existing  
               resources as this bill enhances the AG's authority to  
               enforce the existing provisions of the Master  
               Settlement Agreement.
                 Administrative costs of between $10,000 and  
               $50,000, according to the Board of Equalization  
               estimates of an earlier version of the bill.
                 Potential minor non-reimbursable local costs for  
               investigation and prosecution of violations,  
               potentially offset by fine revenue. 
                 No effects on the state's tax revenues.


                            BACKGROUND AND DISCUSSION  

          According to the author and sponsor, the California  
          Department of Justice, this bill is necessary in order to  
          strengthen enforcement against NPMs and to follow the lead  
          of other states that have recently enhanced their NPM  
          enforcement legislation.  They contend that this bill seeks  
          to ensure that NPMs are fully compliant not only with the  
          escrow funding requirement, but also to ensure that they  
          are fully compliant with certain provisions of the state's  
          Tobacco Licensing Act and tobacco tax laws.  They argue  
          that it is particularly important that California update  
          its statute in light of these recent changes in other  
          states, as they note that one provision of the MSA requires  
          states to "diligently enforce" provisions against NPMs or  
          run the risk of having their MSA payments reduced.  The  
          author and sponsor contend that, bringing California law  
          into conformity with those other states will prevent the  
          signatory tobacco companies from reducing MSA payments or  
          arguing in possible future litigation that California has  
          failed to diligently enforce provisions against the NPMs.  

          Master Settlement Agreements (MSA)
          The 1998 MSA settled dozens of lawsuits that had been  




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          brought by states, each one seeking to recover the public  
          costs stemming from smoking-related illnesses.  The MSA  
          relieved the tobacco companies from past, present and  
          certain future legal actions brought by the states for  
          recovery of smoking-related public health expenses.  In  
          exchange for this immunity from state actions, the tobacco  
          companies agreed to make payments to the states in  
          perpetuity and to make changes in their advertising and  
          marketing practices.  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 smoking. 

          Because smaller tobacco manufacturers were not signatories  
          or did not subsequently agree to the terms of the  
          settlement, the MSA also called upon each state to enact a  
          "Model Reserve Fund Statute."  The model statutes would  
          impose similar obligations on NPMs so that they would not  
          enjoy a competitive advantage.

          All 50 states have enacted such statutes.  In California,  
          the model statute requires any tobacco manufacturer selling  
          products in this state to either: (1) agree to become a  
          "participating manufacturer" and be bound by the terms of  
          the MSA; or, (2) 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 years 

          Ban on sale of "bidis"
          Bidis are tobacco products that are hand-rolled, unfiltered  
          and wrapped in specific plant leaves, namely temburni or  
          tendu leaf.  The sale of bidis is banned under state law  
          because bidis are much higher in tar and nicotine than  
          regularly manufactured cigarettes and a very serious health  
          threat.  In addition they are marketed to youth.  Bidis  




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          appeal to minors because they are cheaper than ordinary  
          cigarettes and come in flavors that appeal to youth, such  
          as strawberry, chocolate and grape.  This bill amends the  
          law to include any products that are marketed and sold as  
          bidis.  Under current law, retailers are still able to sell  
          some bidis that are outside of the definition in current  
          law because they are wrapped in other types of plant  
          leaves. 

          Related bills
          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.  This bill is in Senate Revenue and Taxation  
          Committee. 

          Prior legislation
          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.  

          SB 322 (Ortiz), Chapter 375, Statutes of 2001, prohibits  
          the sale, offer for sale, distribution or importation of a  
          tobacco product commonly referred to as bidis or beedies. 

          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 MSA, or, if a non-participating member, to deposit  
          specified funds in a qualified escrow fund each year. 

          Arguments in support
          The California Department of Justice, the sponsor, argues  
          that this bill will enhance the department's efforts to  
          enforce existing provisions of state law related to the  
          Master Settlement Agreement between California and the  
          major tobacco manufacturers.  The department also argues  
          that this measure would protect against the sale of  
          cigarettes below market prices, and would help protect the  
          state's share of tobacco settlement payments that are due  
          to it under the Master Settlement Agreement.




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          The American Lung Association supports this bill because it  
          will strengthen existing law regarding payments from  
          non-participating manufacturers under the Master Tobacco  
          Settlement Agreement.  The American Lung Association  
          believes that this bill will provide the state with  
          additional tools to ensure payment by NPMs, especially for  
          new, foreign, and elevated risk NPMs.  The American Lung  
          Association also supports the provision in this bill that  
          allows NPMs to assign their interest in the funds to the  
          state, so that such funds may ultimately be directed toward  
          tobacco prevention efforts.  The County of Santa Barbara  
          supports the bill because it will help protect the flow of  
          tobacco settlement funds that the county uses to provide  
          various public health services to county residents.


                                  PRIOR ACTIONS

          Assembly Governmental Organization:    17-1
          Assembly Judiciary:              8-1
          Assembly Appropriations:        14-2
          Assembly Floor:                 58-16


                                     COMMENTS

           This bill has been double-referred to the Senate Revenue &  
          Taxation Committee.



                                    POSITIONS  
                                        
          Support:  California Department of Justice (sponsor)
                 American Lung Association 
                 County of Santa Barbara


          Oppose:  None received


                                   -- END --