BILL ANALYSIS                                                                                                                                                                                                    


            Senator Lois Wolk, Chair

                                                        AB 2496 -Nava

                                                  Amended: May 20, 2010


            Hearing:  June 23, 2010                         Fiscal: Yes


             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.


                 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. 

                   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  

                     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  


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                  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  

                 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  

                   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 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  


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            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 AG 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  

                   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  


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            identification of customers both at the point of sale and  
            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 (DOJ).

                 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  

                   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 that 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  


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                 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 from the directory.

                   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  

                   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  

                   Adds to the forfeiture list cigarette and tobacco  
            products that do not meet requirements specified by BOE or  
            the AG.  Requires the BOE and the DOJ to share the data,  
            including e-mail addresses, for distributors, importers,  


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            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. 

                   Provides that the provisions of this bill are  

            FISCAL EFFECT: 

              According to the BOE, the delivery sale provisions of  
            this bill may have a positive impact on the state excise  
            tax collected on sales of cigarettes and tobacco products  
            and also on use tax collected on cigarettes and tobacco  
            products purchased from out-of-state retailers. However,  
            the BOE has no way of measuring the potential impact these  
            provisions may have, and therefore, cannot provide an  
            estimate at this time.


            A.   Purpose of the Bill 
                   The bill is sponsored by the DOJ and is intended to  
            allow for better enforcement of Internet and other delivery  
            sales of cigarettes and tobacco products in this state,  
            strengthen the AG's and BOE's ability to diligently enforce  
            the Model Statute and Tobacco Directory Law, and to provide  
            retailers relief of any financial hardship resulting from  
            cigarettes and tobacco product inventory that immediately  
            becomes illegal to sell upon removal from the Tobacco  
            B.   Background: The MSA


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                 The 1998 MSA settled dozens of lawsuits that had been  
            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 



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             C.   What is BOE's role in enforcing the Model Statute?

                 The BOE has several responsibilities with respect to  
            "diligent enforcement" of the Model Statute, which protects  
            the state's approximately $900 million annual revenue  
            payment stream from the MSA. The BOE's enforcement role,  
            which coincides with administration of the Cigarette and  
            Tobacco Products Tax Law, is as follows: 

             The BOE is authorized to adopt any regulations necessary  
            to ascertain, based on the amount of state excise tax paid  
            on cigarettes, the number of tax paid cigarettes sold by  
            NPMs. As a result of this provision, the BOE provides the  
            AG with annual statistics of cigarettes sold in California  
            by NPMs. 

             The Tobacco Directory Law prohibits a distributor from  
            affixing a tax stamp to a package of cigarettes, or paying  
            the tax on a tobacco product defined as a cigarette, unless  
            the brand family of cigarettes or tobacco product, and the  
            tobacco product manufacturer that makes or sells the  
            cigarettes or tobacco product, are included on the Tobacco  
            Directory. A violation of this prohibition could result in  
            the revocation or suspension of the license or licenses of  
            the distributor and/or a civil penalty and subject such  
            products to seizure and forfeiture by the BOE. 

             The Licensing Act requires every manufacturer or importer  
            required to obtain and maintain a license to engage in the  
            sale of cigarettes. In order to be eligible to obtain and  
            maintain a license, a manufacturer or importer that is a  
            "tobacco products manufacturer" pursuant to the Model  
            Statute must (1) certify to the BOE that it is a  
            "participating manufacturer" or is in compliance with the  
            Model Statute, and (2) submit to the BOE a list of all its  
            brand families. BOE also has the authority to revoke or  
            suspend the license of a distributor for selling product  
            not listed on the California Tobacco Directory.  

             The Licensing Act allows an employee of the BOE to enter  
            into, and conduct an inspection of, any building, facility,  


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            site, or place, for which there is evidence of the failure  
            to comply with the requirements of the Model Statute or the  
            Tobacco Directory Law. 


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            D.   BOE's Administrative Concerns

                   The BOE has several administrative concerns with  
            this bill.  BOE contends that, in its current form, certain  
            sections of the bill are not compatible with the Licensing  
            Act or the Cigarette and Tobacco Products Tax Law with  
            respect to requirements, definitions, and administration.  
            According to the BOE, it has been working with the AG's  
            staff on amendments that will make the bill workable within  
            the existing structure of the tobacco tax laws the BOE  
            administers. More specifically, BOE would like the  
            following amendments:

                   An Unnecessary Licensing Act Requirement.  Delete  
                 the bill's additional requirement for every  
                 manufacturer and every importer to provide to the BOE  
                 a copy of federal permit issued by the federal Alcohol  
                 and Tobacco Tax and Trade Bureau in order to be  
                 eligible to obtain and maintain a license under the  
                 Cigarette and Tobacco Products Licensing Act of 2003  
                 (Licensing Act) because this requirement is  
                 unnecessary for the BOE's tax administration. 

                   Delivery Sales.  BOE would like to delete the  
                 proposed Tax Law Section 30165.3, which would add  
                 provisions to implement the federal Prevent All  
                 Cigarettes Trafficking Act of 2009 (PACT Act) that is  
                 intended to address state excise tax losses on  
                 non-face-to-face delivery sales to consumers, and  
                 instead amend the implementing provisions into  
                 existing Revenue and Taxation Code Section 30101.7.

                   Sell-Off Period.  Revise the proposed Tobacco  
                 Directory Law provision within the Tax Law that  
                 requires notice to, and sell-off period for, a  
                 distributor's customer so that they are workable, as  
                 intended by the sponsor.

                   Seizure and Forfeiture.  Delete the proposed  
                 amendments to Tax Law Section 30436 in order to  
                 maintain existing law. 


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             At the time this analysis was written, these amendments  
            were not yet available.

            Support and Opposition

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

                 Oppose:  None on file. 


            Consultant: Meg Svoboda