BILL ANALYSIS Ó
AB 1030
Page A
Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1030 (Achadjian) - As Introduced: February 18, 2011
VOTE ONLY
Majority vote. Fiscal committee.
SUBJECT : Cigarette and tobacco taxes: violation: penalties
SUMMARY : Subjects any person who fails to pay a tax liability
in violation of the Cigarette and Tobacco Products Tax Law (Tax
Law) to suspension of their distributor's license and to seizure
of any assets "related to distribution of cigarettes or tobacco
products." Specifically, this bill :
1)Requires the State Board of Equalization (BOE) to hold a
hearing to confirm or dismiss the Tax Law violation and the
resulting seizure or forfeiture within 30 days of a license
suspension or asset seizure.
2)Authorizes the BOE to sell the seized assets and revoke the
license if the BOE confirms a willful failure to pay taxes.
3)Provides that, except as otherwise specified, the seizure and
sale of property shall "be in the manner prescribed for the
collection of a delinquent monthly tax."
4)Provides that the proceeds from any asset seizure and sale
shall be deposited as follows in the following priority:
a) The amount of unpaid tax liability shall be deposited
into the fund to which it is owed. However, monies
deposited shall not be continuously appropriated, and shall
only be available upon appropriation by the Legislature;
and,
b) Any remaining moneys shall be deposited into the General
Fund.
5)Requires the BOE to adopt implementing regulations.
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6)Specifies that its provisions are severable.
EXISTING LAW :
1)Provides for the licensure, by the BOE, of manufacturers,
distributors, wholesalers, importers, and retailers of
cigarette or tobacco products.
2)Imposes tax on the distribution of cigarettes and tobacco
products.
3)Requires that certain cigarette and tobacco products be
forfeited to the state under specified circumstances, upon
seizure by the BOE.
FISCAL EFFECT : The BOE notes that this bill would aid in the
collection of certain taxes due and payable to the state.
However, the BOE has no way of measuring the potential impact
this bill may have and, therefore, cannot provide a revenue
estimate at this time.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Assembly Bill 1030 would assist the ÝBOE] in efforts to
crack down on illegal cigarette distributors by giving the
ÝBOE] the same ability to seize tobacco related products
from illegal licensed distributors as it has when
investigating unlicensed distributors who illegally sell
non-taxed products. It is estimated that illegal tobacco
sales cost the state millions of dollars in tax revenue
each year.
2)This bill is sponsored by the California Distributors
Association (CDA). CDA states, "AB 1030 would allow the ÝBOE]
to seize and sell cigarette and other tobacco products of
licensed distributors who illegally sell non-taxed tobacco
products, and thus recover the lost tax revenue and stop the
illegal activity from continuing. AB 1030 also allows the BOE
to immediately take steps to suspend the license of those
distributors that are found in violation. Currently the BOE
can only take this action against unlicensed distributors. We
fully support removing this loophole, and empowering the BOE
AB 1030
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to recover the lost tax revenue and stop the criminal activity
from continuing."
3)Committee Staff Comments:
a) The California Cigarette and Tobacco Products Licensing
Act of 2003 . The California Cigarette and Tobacco Products
Licensing Act of 2003 (Licensing Act) was enacted, in part,
to combat the unlawful distribution of cigarettes and
tobacco products by organized crime syndicates, street
gangs, and international terrorist groups. ÝBusiness and
Professions Code (B&PC) Section 22970.1]. The Licensing
Act requires the BOE to administer a statewide program to
license manufacturers, importers, distributors,
wholesalers, and retailers of cigarettes and tobacco
products. (B&PC Section 22970.2).
Licenses are subject to suspension or revocation for
violations of the Licensing Act or the Revenue and Taxation
Code (R&TC), as provided. (B&PC Section 22980.3). Upon
first conviction of a violation, a licensee shall receive
written notice from the BOE detailing the Licensing Act's
suspension and revocation provisions, and the BOE may, at
its discretion, suspend the license for up to 30 days.
ÝId.]. If the licensee is convicted of a second violation
within four years, the license shall be revoked. ÝId.].
If the BOE discovers that a distributor possesses unstamped
cigarette packages bearing a counterfeit California state
tax stamp or that a wholesaler possesses unstamped
cigarette packages, BOE is authorized to seize the
unstamped packages at the distributor's or the wholesaler's
location. (B&PC Section 22978.2).<1> Any cigarettes
seized by the BOE are deemed forfeited, and the BOE must
comply with the procedures set forth in the "Seizure and
Forfeiture" provisions of the Tax Law. ÝId.].
Any person or entity that sells cigarettes or tobacco
products in this state without a valid license (or after a
license has been suspended or revoked) is guilty of a
misdemeanor. ÝB&PC Section 22980.2(a)]. Moreover,
continued sales of cigarettes and tobacco products either
-------------------------
<1> The Licensing Act contains similar provisions governing the
seizure of tobacco products on which tax is due. ÝB&PC Section
22978.2(b)].
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without a valid license or after a notification of
suspension or revocation shall result in the seizure of all
cigarettes and tobacco products in the person's possession.
ÝB&PC Section 22980.2(c)]. Any cigarettes and tobacco
products seized shall be deemed forfeited. ÝId.].
b) The Tax Law's Seizure and Forfeiture Provisions : The
Tax Law's "Seizure and Forfeiture" provisions specify that
certain property, upon seizure by BOE, is forfeited to the
state. (R&TC Section 30436). Included, are unstamped
cigarettes, and tobacco products upon which the tobacco
products surtax has not been paid, when those items are
offered for sale or possessed by any person with the intent
to sell them without payment of applicable taxes. ÝId.]
The BOE is required to give notice of the seizure and
forfeiture by personal service or certified mail to all
persons known to have any right, title or interest in the
property. (R&TC Section 30437). This notice must include
a description of the property, the reason for the seizure,
and the time and place of the seizure. ÝId.] Any person
claiming an interest in the property may file a verified
petition with BOE requesting the release of the property on
the ground that it was erroneously or illegally seized.
(R&TC Section 30438). If BOE denies the petition for
release, notice of the denial must be mailed to the
petitioner within five days. (R&TC Section 30439). The
petitioner then has 20 days to file an action against the
BOE in the Sacramento County Superior Court for release of
the seized property. (R&TC Section 30439).
c) Special Tax Law Provisions Governing Payment by
Unlicensed Persons : If any person distributes cigarettes
or tobacco products without first securing a license, the
tax becomes immediately due and payable on account of all
cigarettes or tobacco products distributed. (R&TC Section
30210). The BOE is charged with ascertaining, as best it
can, the amount of cigarettes or tobacco products
distributed, along with the tax due on that amount. (R&TC
Section 30211). In addition, BOE must generally assess a
penalty of 25% of the tax amount or $500, whichever is
greater, and must give the unlicensed person notice of the
determination. ÝId.] The BOE must collect all taxes,
penalties, and interest due from the unlicensed person by
seizure and sale of the property in the manner prescribed
for the collection of a delinquent monthly tax. (R&TC
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Section 30212).
d) What Problem is this Bill Designed to Address? :
According to BOE, there have been cases where licensed
distributors have been able to stay in business during the
pendency of felony tax evasion charges. In such cases, the
BOE cannot revoke the distributor's license until a
conviction is obtained. In addition, the BOE is not
entitled to seize the distributor's product, because
distributors, by design, are legally entitled to possess
untaxed cigarettes and tobacco products (i.e., the
possession of untaxed product is not prima facie evidence
of illegality). This bill attempts to address this
loophole in existing law by subjecting any distributor who
fails to pay a Tax Law liability to suspension of their
license and to seizure of any assets related to
distribution. The language of this bill, however, raises
the following questions:
i) To Whom, Specifically, Does this Bill Apply? : This
bill provides that any person "who fails to pay a tax
liability" in violation of the Tax Law "shall be subject
to" suspension of their distributor's license. Does this
mean that the suspension is automatic in all cases where
the distributor has failed to pay applicable taxes, or is
BOE granted discretion to decide whether suspension is
appropriate on a case by case basis? If the suspension
is automatic, does it make sense to apply such a harsh
provision in all situations? For example, should these
provisions apply to distributors that are merely late
paying appropriate taxes? Committee staff understands
that the author is currently working with BOE staff to
narrow the scope of this bill by clarifying that the
suspension and seizure provisions shall only apply to
distributors indicted on charges of felony tax fraud.
ii) What Assets are Subject to Seizure? : This bill
provides for the seizure of any assets "related to
distribution" of cigarettes and tobacco products. Given
the relative ambiguity of this provision, it is not
entirely clear to Committee staff what assets this bill
is targeting for seizure. Committee staff understands
that the author is currently working to develop
amendments clarifying the types of property that would be
subject to seizure.
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iii) What Happens to Assets Seized? : It is not entirely
clear to Committee staff what happens to assets once
seized. For example, are these assets subject to sale
following BOE's hearing, or would they simply be frozen
until a final determination is made on the underlying
criminal case? Committee staff suggests amendments
clarifying the author's intent.
iv) Does this Bill Comport with Basic Due Process? : As
noted above, this bill requires the BOE to hold a hearing
to confirm or dismiss the Tax Law violation and the
resulting seizure or forfeiture within 30 days of a
license suspension or asset seizure. The BOE is then
authorized to sell the seized assets and revoke the
license if the BOE confirms a willful failure to pay
taxes. Committee staff is informed that, under existing
law, a distributor would then be entitled to file suit in
Superior Court challenging the seizure. As such,
Committee staff suggests explicitly referencing these
provisions in this bill and clarifying the timeline for
filing such a suit.
v) How Does this Bill Apply the Proceeds of Asset
Sales? : Under this bill, the amount of unpaid tax
liability would be deposited into the fund to which it is
owed. Any remaining moneys would then be deposited into
the General Fund. Committee staff is informed that this
latter provision is inconsistent with existing asset
seizure laws, which provide for any proceeds above and
beyond the underlying liability, to be returned to the
taxpayer.
e) Double-referral : This bill was double-referred to the
Assembly Committee on Governmental Organization, which
passed this bill out on a 16-0 vote on April 13, 2011. For
additional discussion of AB 1030, please refer to that
committee's analysis of the bill.
REGISTERED SUPPORT / OPPOSITION :
Support
California Distributors Association
AB 1030
Page G
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098