BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 680 (Wolk)
As Amended April 1, 2013
Hearing Date: May 7, 2013
Fiscal: No
Urgency: No
TH
SUBJECT
Tobacco Settlement Fund
DESCRIPTION
Existing law requires tobacco manufacturers selling cigarettes
to consumers in California to either become signatories to a
Master Settlement Agreement (MSA), and make defined annual
settlement payments to the state, or to remain non-signatories
and make annual payments to a state-held escrow account.
Existing law calculates the amount of each non-signatory
manufacturer's required escrow contribution based on the number
of tobacco "units sold" per year, which is the number of
individual cigarettes sold by the manufacturer to California
consumers as measured by the state excise taxes collected on
these sales.
This bill would revise the definition of "units sold" to specify
that it equals the number of cigarettes sold to consumers in
California regardless of whether or not the state excise tax was
collected on the sale. This bill would exclude from the
definition of "units sold" any cigarettes sold at federal
military installations, any cigarettes sold by a Native American
tribe to a member of that tribe on that tribe's land, or
cigarette sales that are otherwise exempt from state excise tax
pursuant to federal law.
BACKGROUND
On November 23, 1998, a $206 billion settlement was reached
between California and 45 other states, Puerto Rico, the
District of Columbia, three territories, and five major
(more)
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cigarette manufacturers in the United States, concerning
antitrust, consumer protection, and health-related litigation
claims that were pending against the major tobacco companies at
the time. The resulting Master Settlement Agreement (MSA)
placed significant limitations on tobacco-related advertisements
by tobacco companies and promised multi-billion dollar annual
payments to the states. At the time of settlement, California
was projected to receive approximately $25 billion in settlement
funding through 2025. As part of the agreement, the states
dropped their lawsuits against the named tobacco companies and
agreed to impose similar settlement terms via state law on those
tobacco companies that elected not to join the MSA.
California implemented the relevant terms of the MSA against
non-signatory tobacco companies, in part, by enacting the Model
Escrow Statute, which required these non-signatories to make
annual payments into a state-held escrow account based on the
total number of cigarettes sold to California consumers as
measured by state excise taxes collected on the sales. (See SB
822 [Escutia, Chapter 780, Statutes of 1999], codified at Health
and Safety Code Sec. 104555 et. seq.) The implementing statute
specified that funds held in the escrow account would be used to
pay judgments or settlements on any claim released by the state
against the non-signatory tobacco manufacturers, or would be
released back to the manufacturers under certain circumstances.
The statute also authorized the California Attorney General to
enforce its terms, and to bring a civil action on behalf of the
state against any tobacco product manufacturer that failed to
place the mandated funds into the escrow account.
Through its enforcement activities, the Attorney General's
office has found that certain manufacturers are avoiding their
obligation to contribute to the tobacco settlement escrow
account by selling tax-evaded cigarettes in the state.
According to the Attorney General:
This is a significant problem as the market for tax-evaded
product is large and growing. In 2011, the most recent
year for which data is available, more than 11.6 billion
cigarettes were sold in the United States without state
excise tax being paid. [citation omitted.] Many of those
tax-evaded cigarettes are sold by tribal manufacturers
through tribal distribution channels operating outside the
reach of State taxing authorities. In recent years, the
Attorney General's Office has been involved in a number of
lawsuits against tribal retailers and distributors
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purchasing cigarettes through these tribal distribution
channels. In one recent case, the Attorney General found
that over the course of four years, more than 300 million
tax-evaded cigarettes had been sold by a single tribal
distributor. See People v. Huber, DR 110232 (Humboldt
County Sup. Ct. 2011). Had those cigarette sales been
subject to the State's Escrow Statute, more than $5.5
million dollars in escrow would have been owed on those
sales alone.
The MSA includes provisions that require signatory states to
diligently enforce the terms of the agreement, and to fund
tobacco settlement escrow accounts at a rate roughly equivalent
to the level of settlement payments received from signatory
manufacturers under the MSA. Failure to diligently enforce the
agreement and any related implementing statute exposes
non-compliant states to substantial reductions in their MSA
settlement payments. The Attorney General's office has been
party to a protracted dispute with signatory tobacco
manufacturers over California's compliance with the MSA
concerning these tax-evaded in-state cigarette sales. To
resolve this dispute, and to ensure California's continued
compliance with the MSA, this bill, sponsored by the California
Department of Justice, re-defines the phrase "units sold" in the
implementing statute so that annual contributions owed to the
escrow account by non-signatory manufacturers are no longer
measured by the receipt of state excise taxes, but instead by
the actual number of cigarettes sold in-state in a given year.
CHANGES TO EXISTING LAW
Existing law implements the terms of the tobacco litigation
Master Settlement Agreement, which grants legal immunity for
past deceptive business practices to major tobacco manufacturers
in exchange for certain voluntary advertising restrictions and
annual settlement payments to states. (See Health & Saf. Code
Sec. 104555 et. seq.)
Existing law requires a tobacco product manufacturer that sells
cigarettes to consumers within the state to either become a
participating manufacturer under the terms of the Master
Settlement Agreement and perform certain financial obligations
pursuant to that agreement, or to pay specified annual amounts
into a qualified escrow account based on the number of
individual cigarette units they sold in the state. (Health &
Saf. Code Sec. 104557(a).)
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Existing law defines "units sold" as the number of individual
cigarettes sold in the state by the applicable tobacco product
manufacturer, whether directly or through a distributor,
retailer, or similar intermediary or intermediaries, during the
year in question, as measured by excise taxes collected by the
state. (Health & Saf. Code Sec. 104556(j).)
Existing law provides that funds contributed to the escrow
account may be used to pay a judgment or settlement on any
released claim brought against a non-signatory tobacco product
manufacturer by the state or any releasing party located or
residing in the state, or may revert back to the tobacco product
manufacturer under certain circumstances. (Health & Saf. Code
Sec. 104557(b).)
Existing law requires tobacco product manufacturers to annually
certify to the Attorney General that the manufacturer has
complied with exiting law, and provides that the failure to
place all required funds into escrow subjects the manufacturer
to civil penalties, as specified. (Health & Saf. Code Sec.
104557(c).)
This bill would, for the purposes of calculating the amount a
tobacco product manufacturer is required to place in the
qualified escrow account, revise the definition of "units sold"
to specify that it is the number of cigarettes sold to a
consumer in the state by the applicable manufacturer, regardless
of whether the state excise tax was collected.
This bill would exclude from the definition of "units sold" any
cigarettes sold on federal military installations, sold by a
Native American tribe to a member of that tribe on that tribe's
land, or that are otherwise exempt from state excise tax
pursuant to federal law.
COMMENT
1. Stated need for the bill
According to the author:
Some non-signatory manufacturers are selling large
quantities of cigarettes through channels such as tribal
smoke shops and the internet where state tax evasion is
prevalent. This practice reduces the amount of funds
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available to satisfy potential liabilities, fuels the sale
of cheap cigarettes which harm public health, and gives the
non-signatory manufacturers an unfair cost advantage over
non-signatory manufacturers that do not rely on these
distribution channels and over signatories to the MSA which
make settlement payments in lieu of escrow deposits.
The solution to this problem [is to amend] existing law to
require non-signatory manufacturers to make escrow deposits
on all cigarettes sold in California that are not exempt
from state tax pursuant . . . to federal law.
Non-signatory manufacturers would not be required to make
escrow deposits for sales which federal law prohibits
California from taxing, such as sales to federal military
installations and tribal sales to tribal members. The
Attorney General's Office would be responsible for assuring
that the non-signatory manufacturers make escrow deposits
on the larger volume of their sales through administrative
action and/or litigation against non-compliant
manufacturers. Closing the tax evasion loophole in
existing law would afford California greater security for
unreleased tobacco liabilities, promote public health, and
eliminate unfair competition.
2. Public policy concerning tobacco manufacturers
The change brought about in calculating "units sold" under this
bill would advance a number of California's public policy
objectives related to cigarette smoking and tobacco manufacture.
First, in enacting the MSA implementing statute, the
Legislature found that "[c]igarette smoking . . . presents
serious financial concerns for the state," and declared it "the
policy of the state that financial burdens imposed on the state
by cigarette smoking be borne by tobacco product manufacturers
rather than by the state." (Health & Saf. Code Secs. 104555(b),
(d).) This bill furthers the policy goal of shifting costs and
liabilities associated with tobacco products from the state to
tobacco manufacturers by requiring non-signatory manufacturers
to contribute an annual amount to the MSA escrow fund that more
accurately reflects their true level of cigarette sales in the
state. By ensuring that non-signatory manufacturers contribute
to the fund at a level commensurate with their volume of sales
in the state, the escrow fund will be in a better position
financially to satisfy potential future liabilities associated
with tobacco use.
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Second, the Legislature has found that "[c]igarette smoking
presents serious public health concerns to the state and to the
citizens of the state," and that it "causes lung cancer, heart
disease, and other serious diseases, and that there are hundreds
of thousands of tobacco-related deaths in the United States each
year." (Health and Safety Code Sec. 104555(a).) Non-signatory
manufacturers that are able to evade payment of state excise
taxes and, consequently, payments to the escrow fund,
artificially depress the market cost of their cigarettes and
fuel the sale of cheap cigarettes in California, all of which
ultimately harms public health. Changing the definition of
"units sold" to include cigarettes that avoid payment of state
excise taxes would have the effect of increasing the marginal
cost of these cheap cigarettes, bringing their value closer in
line to the established market value, which, through increased
marginal cost, would ultimately benefit public health.
Third, California has long disfavored unfair business practices
in its markets. For over 70 years, California's Unfair
Practices Act (Bus. & Prof. Code Sec. 17000 et. seq.) has
protected California consumers and businesses alike from
"unlawful, unfair or fraudulent business act[s] or practice[s]."
(Bus. & Prof. Code Sec. 17200.) (See also Bus. & Prof. Code
Sec. 17001, "The Legislature declares that the purpose of this
chapter is to safeguard the public against the creation or
perpetuation of monopolies and to foster and encourage
competition, by prohibiting unfair, dishonest, deceptive,
destructive, fraudulent and discriminatory practices by which
fair and honest competition is destroyed or prevented.")
Non-signatory tobacco manufacturers that avoid state excise
taxes and related escrow payments on cigarettes obtain an unfair
cost advantage both over other non-signatory manufacturers that
do not rely on these market tactics, and over MSA signatories
that make settlement payments in lieu of escrow deposits.
Amending the definition of "units sold" in the MSA
implementation statute will help eliminate the exploitation of
this unfair cost advantage and level the market among tobacco
manufacturers.
Finally, when California became a signatory to the MSA in 1998,
the Legislature made a policy decision to accept structured
settlement payments in lieu of prosecuting individual actions
against tobacco manufacturers in the courts. Tobacco
manufacturers that avoid their obligation to contribute to the
MSA escrow account threaten this policy decision by exposing the
state to downward adjustments of future MSA payments and severe
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penalties under the MSA for failing to collect escrow payments
on in-state sales. The Attorney General's office estimates that
the practice of evading the MSA's escrow provisions by these
manufacturers "could put hundreds of millions of dollars in
annual payments to the State at risk beginning as soon as 2015."
(California Department of Justice, Background Information Sheet
for SB 680). Changing the definition of "units sold" in the
implementing statute will help preserve California's MSA
revenues from both future unwarranted downward adjustments as
well as the assessment of penalties for failure to diligently
enforce the agreement.
3. Impact to tribal sovereignty
Cigarettes sold by Native American tribes on Indian reservations
to tribal members for their own consumption are exempt from
state taxation as a matter of federal law. (See Moe v.
Confederated Salish and Kootenai Tribes of Flathead Reservation
(1976) 425 U.S. 463.) This federally imposed tax immunity for
cigarette sales by tribes on reservation land is tied to
Congress' unique obligation toward Native Americans, and the
recognition that members of federally recognized Indian tribes
belong to a quasi-sovereign tribal entity that maintains a
special political relationship with this country's state and
federal governments. (See Morton v. Mancari (1974) 417 U.S.
535.) State taxation power, however, does reach on-reservation
cigarette sales made to persons other than reservation Indians.
(See Washington v. Confederated Tribes of Colville Reservation
(1980) 447 U.S. 134.) Staff notes that the definition of "units
sold" in this bill, exempting cigarettes sold by a Native
American tribe to a member of that tribe on that tribe's land,
is sufficiently narrowly tailored to avoid any possibility that
the implementation of this bill would run afoul of the Supreme
Court's pronouncements concerning the scope of a state's taxing
power, or that the bill's provisions would "unnecessarily
intrud[e] on core tribal interests." (Washington v.
Confederated Tribes of Colville Indian Reservation (1980) 447
U.S. 134, 162.)
4. This bill would not impact pending litigation
The author indicates that the California Attorney General's
Office has, in recent years, been involved in a number of
lawsuits concerning the subject of this bill. Whether any such
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lawsuits are currently pending is unknown. In the past, this
Committee has raised concerns about bills that could interfere
with pending litigation. Any such interference could result in
a direct financial windfall to a private party, prevent a court
from deciding an action based upon the laws in place at the time
the cause of action accrued, or create a situation where the
Legislative branch is used to circumvent the discretion and
independence of the Judicial branch.
This bill, if chaptered, could conceivably interfere with
pending litigation if a party to a lawsuit sought to apply its
provisions retroactively. However, it is unlikely that a court
would construe the provisions of this bill as having any
retroactive effect. The U.S. Supreme Court has previously
observed that:
[T]he presumption against retroactive legislation is deeply
rooted in our jurisprudence, and embodies a legal doctrine
centuries older than our Republic. Elementary
considerations of fairness dictate that individuals should
have an opportunity to know what the law is and to conform
their conduct accordingly; settled expectations should not
be lightly disrupted. For that reason, the principle that
the legal effect of conduct should ordinarily be assessed
under the law that existed when the conduct took place has
timeless and universal appeal. (Landgraf v. USI Film
Products (1994) 511 U.S. 244, 265 (internal citations
omitted).)
"A statute does not operate [retroactively] merely because it is
applied in a case arising from conduct antedating the statute's
enactment, or upsets expectations based in prior law. Rather,
the court must ask whether the new provision attaches new legal
consequences to events completed before its enactment."
(Landgraf, 511 U.S. at 269-70 (internal citations omitted).)
"This is not to say," however, "that a statute may never apply
retroactively." (McClung v. Employment Dev. Dept. (2004) 34
Cal.4th 467, 475.) In California, "[a] statute's retroactivity
is, in the first instance, a policy determination for the
Legislature and one to which courts defer absent some
constitutional objection to retroactivity." (Id., at 475.)
Under California law, "a statute may be applied retroactively
only if it contains express language of retroactivity or if
other sources provide a clear and unavoidable implication that
the Legislature intended retroactive application." (Myers v.
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Philip Morris Companies, Inc. (2002) 28 Cal.4th 828, 844.)
Neither the author nor the sponsor of SB 680 have expressed an
intent that this bill should be applied retroactively to pending
litigation. Nor does the bill contain express language of
retroactivity. Consequently, courts are unlikely to interpret
its provisions as applying to the sale of cigarettes in the
State of California prior to January 1, 2014.
5. Clarifying amendment
The author offers the following amendment to clarify that
cigarettes exempt from state excise tax pursuant to state law
fall within the scope of "units sold" as defined in this bill.
Author's amendment :
On page 4, line 16, after the word "was," insert the words
"due or"
Support : None Known
Opposition : None Known
HISTORY
Source : California Department of Justice
Related Pending Legislation : None Known
Prior Legislation :
AB 71 (Horton, Chapter 890, Statutes of 2003) required the
licensure of manufacturers, distributors, wholesalers,
importers, and retailers of cigarette or tobacco products that
are engaged in business in California by the State Board of
Equalization. The bill prohibited retailers, manufacturers,
distributors, and wholesalers from distributing or selling
cigarette and tobacco products in the state unless they are
licensed, and authorized the board to suspend or revoke the
license of any manufacturer, distributor, wholesaler, importer,
or retailer of tobacco products that is in violation of the
bill's provisions. The bill also prohibited a manufacturer,
distributor, wholesaler, importer, retailer, or any other person
from selling counterfeit cigarette and tobacco products, and
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provided that a violation of that prohibition is a crime.
SB 822 (Escutia, Chapter 780, Statutes of 1999) required any
tobacco product manufacturer selling cigarettes to consumers
within the state to either become a participating manufacturer
under the terms of the Master Settlement Agreement entered into
between California and leading United States tobacco product
manufacturers and perform certain financial obligations under
the settlement, or place an amount of funds, calculated on the
basis of units of tobacco products sold in the state, into an
escrow fund. The bill specified that the funds in the escrow
fund shall be used to pay a judgment or settlement on any
released claim against the tobacco product manufacturer by the
state or be released to the tobacco product manufacturer in
certain circumstances. The bill authorized the Attorney General
to bring a civil action on behalf of the state against any
tobacco product manufacturer that fails to place the funds into
the escrow account, and specified penalties for any knowing
violation of the requirement to place funds into the account.
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