BILL ANALYSIS Ó
AB 1030
Page 1
Date of Hearing: April 13, 2011
ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION
Isadore Hall, Chair
AB 1030 (Achadjian) - As Amended: February 18, 2011
SUBJECT : Cigarette and tobacco taxes: violation: penalties.
SUMMARY : Allows the Board of Equalization (BOE) to seize and
sell the tobacco products of licensed cigarette and tobacco
distributors who illegally sell non-taxed product.
Specifically, this bill :
1) Subjects a person who fails to pay a cigarette or tobacco
products tax liability to suspension of their distributor's
license issued pursuant to the Tax Law, and to the seizure of
any assets of the person related to the distribution of
cigarettes or tobacco products.
2) Provides BOE would be required to hold a hearing to confirm
or dismiss the violation and seizure or forfeiture within 30
days of license suspension or asset seizure. If a willful
failure to pay cigarette or tobacco products taxes is confirmed,
the BOE would be authorized to sells the seized assets and to
revoke the person's distributor's license.
3) Specifies except as otherwise provided, the seizure and sale
of property would be administered in the same manner prescribed
for the collection of a delinquent monthly tax, which is
prescribed under Article 5 (commencing with Section 30355) of
Chapter 5 of the Tax Law.
4) Proceeds from the sale of any asset seized under the measure
would be deposited as follows in the following priority:
a) The amount of unpaid tax liability owed under the Tax
Law by the person would be
deposited into the fund to which it is owed. Notwithstanding any
other provision of law,
monies deposited would not be continuously appropriated, and
only be available upon
appropriation by the Legislature.
b) Any remaining moneys would be deposited into the General
Fund.
AB 1030
Page 2
5) Provides BOE would be required to adopt regulations to
implement the provisions of the bill.
EXISTING LAW :
1) The California Cigarette and Tobacco Products Licensing Act
of 2003 provides for the licensure, by BOE, of manufacturers,
distributors, wholesalers, importers, and retailers of cigarette
or tobacco products that are engaged in business in California
and prohibits retailers, manufacturers, distributors, and
wholesalers from distributing or selling those cigarette and
tobacco products unless they are in compliance with those
licensure requirements.
2) The Cigarette and Tobacco Products Tax Law (Law) imposes a
tax on the distribution of tobacco products and on the
distribution of cigarettes, which are paid through the use of
stamps or meter impressions that are required to be affixed to
each package of cigarettes sold. The Law requires that certain
cigarette and tobacco products be forfeited to the state under
specified circumstances, upon seizure by BOE.
FISCAL EFFECT : Unknown.
COMMENTS :
Under existing law, the BOE has the power to seize and sell the
tobacco products of unlicensed distributors that sell non-taxed
products, but does not grant that same power when dealing with
licensed distributors who fail to apply the indicia (cigarette
tax stamp) or fail to remit the taxes due on other tobacco
products (OTP). Furthermore, current law allows law
enforcement, upon discovery, to immediately seize any unstamped
cigarette packages from a retailer or any other person who
possesses, stores, owns, or has made a retail sale of an
unstamped package of cigarettes.
The author states, this demonstrates an inconsistency in
existing law, where a retailer or unlicensed distributor is
subject to immediate seizure of product, yet a licensed
distributor that sells non-taxed product is not currently
subject to the same immediate seizure.
AB 1030 will assist the BOE crackdown on the illegal sale of
AB 1030
Page 3
untaxed tobacco products, by subjecting distributors who
illegally distribute untaxed tobacco products, to suspension of
their distributor's license and seizure of any assets related to
tobacco distribution. This bill would require the BOE to hold a
hearing on the suspension or seizure and, upon confirmation of
the violation, BOE would be able to revoke the license and sell
the assets, the proceeds would be deposited into the fund to
which a cigarette or tobacco products tax liability is owed, to
be available upon appropriation by the Legislature and the
General Fund, as specified.
The sponsor of the bill, the California Distributors
Association, states this bill will allow the BOE to immediately
take steps to suspend the license of those distributors that are
found in violation. Recent cases have found that distributors
acting illegally have continued to evade taxes until their final
conviction, causing the State to lose additional revenue.
According to the author's office, this problem was recently
highlighted when "Operation Blunt Force," an investigation that
commenced in 2008, resulted in the arrest and indictment of more
than 20 individuals. Cumulatively, the loss to California in
unpaid tobacco excise taxes from the conduct charged in the 12
criminal cases filed to date is estimated at more than $35
million (not including penalties and interest).
U.S. Attorney Wagner stated, "This investigation has exposed
systematic and widespread tax evasion in the distribution of
tobacco products in California. Participants in the industry,
who might be tempted to short-change the State of California,
should take note of the indictments?and should understand that
our investigations are not over." These cases have been
investigated by a specialized task force composed of the U.S.
Attorney's Office, the California Attorney General's office, the
ATF and BOE.
The indictments allege that various distributors and wholesalers
of OTP, both in California and other states schemed to defraud
the State of California through the use of dummy corporations,
false invoicing, and the filing of false excise tax returns.
Some defendants are alleged to have filed monthly reports with
BOE that materially understated their OTP transactions and the
amounts of excise taxes owed. Other defendants did not file any
reports with BOE.
AB 1030
Page 4
Background :
BOE Licensing Act : In 2003, AB 71 (J. Horton, Chapter 890)
enacted the Cigarette and Tobacco Products Licensing Act
(Licensing Act), which established a statewide licensure program
administered by BOE to help stem the tide of untaxed
distributions and illegal sales of cigarettes and tobacco
products. Prior to the bill, BOE's Investigations Division had
been encountering a large number of cigarettes and tobacco
product distributors who were unlicensed. The purpose for being
unlicensed is to conceal the nature of their business and to
evade the tax. These unlicensed distributors normally maintain
minimal assets and are typically transient, which hinders BOE's
ability to collect the taxes due and payable.
The Act requires every retailer, distributor, wholesaler,
manufacturer and importer to obtain and maintain a license to
engage in the sale of cigarettes or tobacco products.
Currently, BOE has approximately 38,000 retailers and 1,000
distributors and wholesalers licensed to engage in the sale of
cigarettes and tobacco products in California. A distributor
and wholesaler license is valid for a calendar year upon payment
of a fee of $1,000 per location, unless surrendered, suspended,
or revoked prior to the end of the calendar year, and may be
renewed each year upon payment of such fee.
Violations of the Licensing Act include, in part, the following:
1) Possession, storing, owning, or has made sales of an
unstamped package of cigarettes bearing a counterfeit California
tax stamp or tobacco products on which tax is due but has not
been paid; 2) Sales of cigarettes or tobacco products to any
distributor, wholesaler, importer, retailer, or any other person
who is not licensed or whose license has been suspended or
revoked; 3) Retailer and wholesaler purchases of cigarette or
tobacco products from any person who is not licensed or whose
license has been suspended or revoked; 4) Distributor purchases
of cigarettes or tobacco products from any person who is
required to be licensed pursuant to the Licensing Act but who is
not licensed or whose license has been suspended or revoked; 5)
Failure to maintain records or make such records available to
BOE and law enforcement agency, as specified; 6) A person or
entity that engages in the business of selling cigarettes or
tobacco products in this state without a license or after a
license has been suspended or revoked; and 7) Failure to allow
an inspection.
AB 1030
Page 5
Double-referral : This measure is double-referred to the Assembly
Committee on Revenue and Taxation.
Prior legislation :
AB 2496 (Nava), Chapter 265, Statutes of 2010. Amends the
California Cigarette and Tobacco Products Licensing Act of 2003
in governing the financial and other obligations of
non-participating tobacco manufacturers (NPMs) as part of its
diligence obligation.
AB 2733 (Ruskin), Chapter 607, Statutes of 2010. Amends the
Licensing Act to prohibit a licensee whose license has been
suspended or revoked from giving cigarette and tobacco products
away or displaying those products during the period of license
suspension or revocation, as specified.
624 (Padilla, Chapter 653, Statutes of 2007. Increases the
civil penalties under the Stop Tobacco Access to Kids
Enforcement (STAKE) Act and expands the role of agencies that
are permitted to carry out investigations of illegal tobacco
sales to minors under the STAKE Act from the Department of
Public Health to include the Attorney General and other state
and local agencies.
AB 71 (Jerome Horton, Chapter 890, Statutes of 2003. Enacted
the Cigarette and Tobacco Products Licensing Act of 2003. This
bill was a comprehensive attempt to reduce illegal sales of
cigarette and other tobacco products within California. This
bill created a statewide licensing program for retailers,
enhancing the powers of BOE's tobacco compliance and enforcement
division, expanding DOJ's tobacco compliance and enforcement
responsibilities, and enacting and increasing criminal and civil
penalties for sales of counterfeit cigarettes and other tobacco
products.
REGISTERED SUPPORT / OPPOSITION :
Support
California Distributors Association (Sponsor)
Opposition
AB 1030
Page 6
None on file
Analysis Prepared by : Eric Johnson / G. O. / (916) 319-2531