BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 602 - Padilla
Amended: April 20, 2009
Hearing: April 22, 2009 Fiscal: Yes
SUMMARY:
Prohibits the State Board of Equalization (BOE) from
issuing new retail tobacco licenses in areas of
overconcentration, as defined. Repeals the current
restrictions that limits BOE's enforcement actions against
retail tobacco license holders. Requires enforcement
agencies to notify BOE of retailers' violations of underage
sales laws.
EXISTING LAW
Federal Law
Existing federal law provides that the federal government
may reduce each state's alcohol and substance abuse block
grant funding unless the youth purchase survey conducted by
each state, using underage decoys to purchase cigarettes,
is below 20 percent.
State Law
Existing state law requires the BOE to administer the
Cigarette and Tobacco Products Licensing Act of 2003, a
statewide cigarette and tobacco products license program
for the sale of cigarettes and tobacco products. Existing
SB 602-Padilla
Page 7
law requires BOE to license manufacturers, distributors,
wholesalers, importers and retailers of cigarette or
tobacco products who are engaged in business in California.
Existing law also requires a retailer to have and maintain
a license to sell cigarettes or tobacco products.
Existing law requires that all persons engaging in the
retail sale of cigarettes and tobacco products shall check
the identification of tobacco purchasers, to establish the
age of the purchaser, if the purchaser reasonably appears
to be under 18 years of age. Existing law also prohibits
any person, firm or corporation from selling, giving, or in
any way furnishing cigarettes or tobacco products to any
person who is under the age of 18 years.
Existing law requires DPH to take primary responsibility
for enforcement of the Stop Tobacco Access to Kids
Enforcement Act (STAKE Act). Existing law also requires
DPH to enlist the assistance of persons who are 15 or 16
years of age as decoys for the purpose of attempting to
purchase cigarettes. Existing law, Penal Code Section 308,
makes it a violation to sell or furnish cigarettes or
tobacco products to minors.
Existing law provides BOE the authority to take enforcement
action if a retailer is convicted of either a Penal Code
violation of selling cigarettes or tobacco products to any
person who is under the age of 18 years or if a retailer is
convicted of violating the provisions of the STAKE Act.
Existing law limits this authority of BOE to take
enforcement action during periods when the statewide
underage sales rate in California, as measured in an annual
survey conducted by the Department of Public Health (DPH),
is 13 percent or more.
Existing law provides for a range of penalties, from
issuing a warning letter on the first violation to revoking
the license on the eighth violation within a 24-month
period that can be levied against a licensee during the
period when BOE has the authority to act on licenses for
violations of underage sales laws. Specifically, the
existing penalty structure is as follows:
SB 602-Padilla
Page 7
Upon the first conviction of a violation, the
retailer receives a warning letter from the BOE that
delineates the circumstances under which a retailer's
license may by suspended or revoked and the amount of
time the license may be suspended or revoked. The
retailer and its employees are required to receive
training on tobacco control laws from the Department
of Health Services upon a first conviction.
Upon the second conviction of a violation within 12
months the retailer is subject to a fine of five
hundred dollars ($500).
Upon the third conviction of a violation within 12
months the retailer is subject to a fine of one
thousand dollars ($1,000).
Upon the fourth to the seventh conviction of a
violation within 12 months BOE is required to suspend
the retailer's license to sell cigarette and tobacco
products for 90 days.
Upon the eighth conviction of a violation within 24
months BOE is required to revoke the retailer's
license to sell cigarette and tobacco products.
Existing Local Law:
Existing local ordinances in some jurisdictions require
tobacco retailers to obtain a license for the retail sales
of cigarettes and tobacco products in those jurisdictions.
Existing local ordinances in some jurisdictions require
cigarette and tobacco product retailers to comply with
specific provisions of the jurisdiction's land use and
zoning ordinances, including provisions that regulate the
location of these retailers.
THIS BILL
This bill would prohibit BOE from issuing a new license to
SB 602-Padilla
Page 7
a retailer in an area of overconcentration, defined as a
census tract in which the ratio of retail licenses to
population exceeds the ratio of retail licenses to
population in the county overall. The bill does provide
that BOE may issue a new license if the local governing
body finds that public convenience or necessity would be
served by the issuance.
This bill gives BOE authority to levy penalties against a
license holder for violations of underage sales at any
time, regardless of the results of the youth purchase
survey. This bill provides that the existing penalties for
any violations either of the STAKE Act or Section 308 of
the Penal Code (within the limited periods when BOE is
allowed to act) will apply all of the time. The penalties
for retailers' convictions of violations are as follows:
First conviction results in the retailer receiving
a warning letter.
Second conviction results in the retailer being
subject to a $500 fine.
Third conviction results in the retailer being
subject to a $1,000 fine
Fourth through seventh convictions result in the
BOE suspending the license for 90 days.
The eighth conviction result in permanent
revocation of the license.
This bill requires state and local law enforcement agencies
to notify BOE of any convictions of a violation of either
the STAKE Act or Section 308 of the Penal Code in a timely
manner. This bill requires BOE to take appropriate action
pursuant to that notification.
FISCAL EFFECT:
According to the BOE's Excise Taxes Division, there are
approximately 38,200 licensed retail locations selling
cigarettes or tobacco products in California. This figure
has been fairly stable since the inception of the Licensing
Act. On average, there are about 6,000 new licenses issued
SB 602-Padilla
Page 7
annually, with a corresponding amount of licenses
surrendered.
There may be an unknown minor state revenue loss if fewer
licenses are granted. Neither the BOE nor committee staff
are able to quantify the revenue impact for the "area of
overconcentration" provided in this bill; BOE believes it
could result in a net loss of excise tax and licensing fees
due to fewer retail locations.
The proposed changes to reporting requirements related to
sales to minors would not affect the state's revenues as
there is no sales to minors considered in any revenue
estimates..
Administrative costs for this program already exceed the
amount collected in fees; costs to administer this bill
would be significant.
COMMENTS:
A. Purpose of the Bill
According to the author, it is critical to prevent youth
from smoking by decreasing access to tobacco products and
ensuring that retailers do not sell to minors in the first
place. SB 602 seeks to strengthen current tobacco laws
aimed at reducing illegal sales of tobacco products to
minors by requiring the state tobacco licensing authority
to revoke or suspend retail tobacco licenses upon a
recommendation of tobacco enforcement agencies. SB 602
also seeks to prevent the proliferation of tobacco retail
outlets in California communities by allowing
over-concentration to be a condition for license denial.
The author also argues that the enforcement powers of the
Tobacco Licensing Act should not be constrained by the
results of a statewide youth purchase survey, and in order
to adequately address youth smoking in the state,
enforcement agents need the flexibility to levy penalties
on those who willfully and repeatedly sell tobacco to
SB 602-Padilla
Page 7
minors. The author notes that, while California can pride
itself with having one of the nation's lowest adult smoking
rates, smoking prevalence among youth remained in the
double digits from 2004 to 2008 compared to the mid 1990s
when California saw a sharp decline in youth smoking. The
author states that the decrease in the smoking rate has
slowed significantly, signaling that more needs to be done
to drive down youth smoking prevalence.
The author quotes studies that indicate that areas dense
with tobacco retail outlets have higher youth smoking
rates. The author argues that by prohibiting the issuance
of a tobacco license in over-concentrated areas, SB 602
will limit the availability of tobacco products, restrict
the proliferation of tobacco retail outlets in areas
already saturated with tobacco stores, and help the state
to continue to reduce the use of tobacco among youth.
Additionally, the BOE has never suspended or revoked a
license of a retailer caught selling tobacco to minors,
according to the author. The author also argues that the
13 percent youth sales rate trigger, and the disconnect
between the BOE and tobacco enforcement entities are
barriers that currently keep bad retailers from being
penalized by the state for violations of underage sales
laws. The author argues that by removing the 13 percent
trigger in current law, and providing for a notification
process between the two, SB 602 will allow the state to
address bad actors who sell tobacco to minors.
B. California Licensing Requirement
AB 71 (Jerome Horton, Chapter 890, Statutes of 2003) was
signed into law to establish the Licensing Act, a statewide
program to license manufacturers and importers of
cigarettes, and distributors, wholesalers, and retailer of
cigarettes and tobacco products. AB 71 was intended to
provide an additional enforcement tool to address the
unlawful distribution and sales of untaxed cigarettes and
tobacco products. AB 71 also provided BOE's Investigation
Division with the statutory authority to more effectively
and efficiently conduct their investigative duties,
SB 602-Padilla
Page 7
including new limited peace officer status and strengthened
penalties and avenues for the collection of cigarette and
tobacco products excise taxes. Prior to the enactment of
AB 71, BOE estimated cigarette excise tax evasion of $238
million annually for retailers, associated with 274 million
packs of cigarettes. This estimate did not include other
tobacco products excise tax evasion or related sales tax
losses.
The state is not the only entity that licenses tobacco
retailers. An unknown number of local governments have
instituted their own license programs. These programs can
enforce their provisions by revoking or suspending a
retailer's license for underage sales.
Despite California's relatively low smoking prevalence the
federal Centers for Disease Control and Prevention (CDC)
estimated that smoking caused the deaths of over 37,000
Californians age 35 years and older. Smokers incur $17,500
more in lifetime health care costs than non-smokers. A
2004 UC study estimated the annual societal cost of
smoking, without considering the cost of tobacco, is $3,331
per smoker, including $1,810 in medical costs and $1,521 in
lost productivity costs.
C. Overconcentration-does it work and are there too many
definitions?
Some research has shown that underage use of cigarettes is
related to the retail tobacco outlet density. This
research finds that the access to tobacco and proximity to
youth increases the amount of underage smoking. Other
research has yielded contradictory results and has not
found that retail density has affected adolescent cigarette
use. Yet other studies speak about so-called "shoulder
tapping," an adult acquaintance buying tobacco for youth as
the biggest problem. Local governments have used their
land use power to restrict the placement of tobacco outlets
but it does not appear that any, at least in California,
have attempted to address the concentration of tobacco
retailers
SB 602-Padilla
Page 7
While this bill focuses on the definition of
overconcentration and the census track, another bill that
is before this committee, SB 603, restricts the number of
retailers to one per 2,500 persons in the county. While
both definitions exist in the Business and Professions Code
and relate to alcohol licenses, they are not cause for
automatic denial. In both this bill and SB 603,
overconcentration is sufficient for denial of a tobacco
license. The committee may wish to consider if one
definition makes more sense.
D. Penalties work: 3 strikes and you're out?
There is evidence to suggest that the best way to change
behavior, such as eliminating tobacco sales to minors, is
to increase the penalty regime associated with the
behavior. This bill does change the penalty regime as well
as the requirement for when licenses can be revoked.
However, the bill still allows for eight (8) violations
before revoking a license. The Department of Alcohol and
Beverage Control (ABC) only allows for three violations
before license revocation. Given the similarity between
tobacco and alcohol retailers, it may make more sense for
the penalty regime to closely mirror the ABC "3-strikes"
penalty regime. In order to further improve the efficacy
of the penalty regime, it may also make sense to have
higher penalties for the first and second offenses so as to
stop the behavior (selling cigarettes to minors) from
occurring in the first place. The committee may wish to
consider a similar penalty regime to the alcohol program
with high penalties for the first two offenses.
The opposition to this bill states that "only the smallest
proportion of retailers are true offenders. Overwhelmingly
they are law abiding citizens who faithfully follow the
laws prohibiting sales to minors;" the purpose of the
penalty regime would be to eliminate that small proportion
by changing their behavior.
E. ABC, BOE, DPH
The Department of Public Health (DPH) and the Board of
SB 602-Padilla
Page 7
Equalization (BOE) share some information as it relates to
the STAKE Act. The Department of Alcohol and Beverage
Control (ABC) and BOE should also share information since
alcohol retailers are often tobacco retailers. The
committee may wish to consider if there should be
information sharing requirements between the three
departments to the extent that it would facilitate
effective synergies between the three.
F. Arguments in support
Supporters state that California youth cigarette smoking
rates remain high and almost 20 percent of high school
students smoke, meaning that more needs to be done to curb
youth use of tobacco. They argue that tougher penalties
for violations are needed and should not be constrained by
the results of the youth tobacco purchase survey. The
American Cancer Society argues that overconcentration of
retail outlets is equated with easy access to tobacco.
G. Arguments in opposition
The California Grocers Association opposes SB 602 and
argues that the state's tobacco licensing law has been a
success in reducing cigarette tax evasion and reducing
sales to minors. They argue that the overconcentration
provisions will reduce the number of licensees in any
downtown area. They are also concerned that this bill
would lead to increased tax avoidance, and that there is no
research to document the effectiveness of
overconcentration. The California Distributors Association
expresses concerns that the bill would harm retail
establishments and reduce the number of small business in
this state.
H. Is the BOE the appropriate agency?
The mission of the BOE is to serve the public through fair,
effective, and efficient tax administration. The
provisions in this bill may represent a departure from
their traditional "tax collection" functions although they
do issue and enforce tobacco licenses currently. In
SB 602-Padilla
Page 7
general, the BOE requires a license, permit, or
registration for the various tax and fee programs in the
state "to ensure collection of vital revenues for the
state."
The BOE states that although the Licensing Act provided
stricter retailer licensing requirements, compared to
permit requirements for sales and use tax, the stricter
standards were established to support the overall goal of
improving tax collection. The BOE expresses concerns that
the licensing restrictions that this bill proposes appear
to be related to health, public safety, or other non-tax
purposes.
I. Related Legislation
SB 601 (Padilla) adds provisions to the Licensing Act to
prohibit the issuance of a retail license for a location
within 1,000 feet of a school and limits retail licenses to
"traditional retail locations."
SB 603 (Padilla) under the Licensing Act, imposes an annual
retailer fee, limits the total number of retailer licenses
issued in a county, and provides for the transfer of a
license under specified conditions.
All three bills are set for hearing in this committee on
April 22, 2009.
J. Technical Amendments
The purpose of this bill is to grandfather in all existing
retailers and state that the bill does not apply to license
transfers; the bill language needs to be technically
clarified.
Support and Opposition
Support: American Cancer Society
American Heart Association
SB 602-Padilla
Page 7
Breathe California
California Dental Association
California Medical Association
Magna Systems Incorporated
Oppose: California Distributors Association
California Grocers Association
---------------------------------
Consultant: Gayle Miller