BILL ANALYSIS Ó
AB 1901
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Date of Hearing: April 6, 2016
ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION
Adam Gray, Chair
AB 1901
(Quirk) - As Amended March 14, 2016
SUBJECT: Taxation: cigarettes: unaffixed stamps
SUMMARY: Extends the penalties for possessing, selling, or
buying false or fraudulent cigarette tax stamps to "unaffixed
stamps". Specifically, this bill:
1)Imposes a fine of up to $5,000, or imprisonment not to exceed
one year in county jail, or both, for possessing, selling, or
buying unaffixed stamps in a quantity less than 2,000.
2)Imposes a fine of up to $50,000, or imprisonment not to exceed
one year in county jail, or both, for possessing, selling, or
buying unaffixed stamps in a quantity of 2,000 or greater.
3)Defines "unaffixed stamps" as stamps for which the tax has
previously been paid by a licensed distributor and previously
affixed to a package.
4)Clarifies that "unnafixed stamps" do not include any unused
and unapplied rolls of stamps or loose stamps acquired from
the board or its authorized agent and in the possession of a
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licensed distributor.
5)Requires the Board of Equalization (BOE) to destroy any stamps
seized under this section.
EXISTING LAW:
1) The California Cigarette and Tobacco Products Licensing Act
(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.
3) Defines "Stamps and meter impressions" as indicia of payment
of tax, and include, but are not limited to, stamps, meter
impressions, or any other indicia developed using current
technology.
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4) Requires the BOE to prescribe and approve the types of
stamps and meter impressions, and the methods of applying
stamps and meter impressions to packages of cigarettes.
5) Imposes a fine of up to $5,000, or imprisonment not to
exceed one year in county jail, or both, for possessing,
selling, or buying false or fraudulent cigarette tax stamps or
meter impressions in a quantity less than 2,000.
6) Imposes a fine of up to $50,000, or imprisonment not to
exceed one year in county jail, or both, for possessing,
selling, or buying false or fraudulent cigarette tax stamps or
meter impressions in a quantity of 2,000 or greater.
7) Requires the destruction by the State Board of Equalization
of any stamps seized.
8) Requires any fines assessed to be deposited in the Cigarette
and Tobacco Products Compliance Fund, amounts in which are
available for specified expenditure upon appropriation by the
Legislature.
FISCAL EFFECT: Unknown
COMMENTS:
Purpose of the Bill : According to the author, under existing
law, cigarette distributors are required to pay an 87-cents
excise tax on each pack of cigarettes by purchasing a tax stamp
which is affixed on each pack of cigarettes prior to
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distribution. The BOE's inspection teams have recently
identified cigarette tax evasion schemes where used tax stamps
were re-used and affixed to another cigarette pack to evade the
87-cents per cigarette pack excise tax. BOE inspectors have
also found large collections of used stamps that are intended
for reuse. Current law is ambiguous whether BOE inspection
teams have the authority to seize and destroy the collection of
used stamps, even though it is clear that the used stamps have
been collected for the purpose of re-using the stamp to evade
the stamp tax.
AB 1901 clarifies that it is a misdemeanor for anyone to
possess, buy, sell, or offer to buy or sell any used cigarette
tax stamps. It also authorizes the BOE to seize and destroy
used cigarette tax stamps aggregated for reuse purposes. Unlike
postage stamps or trading cards that are collectibles with
value, cigarette tax stamp collections have value solely related
to tax evasion. During one enforcement operation alone, BOE
staff found a storage unit containing nearly 206,000 unaffixed,
used stamps with a tax value of about $179,000 placed on
transfer sheets and prepared for affixation to cigarette packs.
The author states that AB 1901 serves to combat this tax evasion
scheme, minimize tax evasion opportunities, and assist in making
the marketplace fair and equitable for those that are
legitimately paying the excise tax.
Background : Cigarettes are subject to both the cigarette tax and
the cigarette and tobacco products surtax, collectively referred
to as taxes. The taxes are assessed on each cigarette
distributed in California. The current tax rate is $0.0435
cents per cigarette, which is $0.87 per pack of twenty 20
cigarettes. Distributors pay the taxes by purchasing cigarette
tax stamps from the BOE. Distributors are required to affix the
tax stamp to each package of cigarettes before distribution.
Distributors pass the excise taxes on to their customer, and the
taxes become part of the retail selling price of the cigarettes.
The cost of the cigarette tax stamp includes both taxes.
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Other forms of tobacco products are taxed at the same rate, but
in a different manner. Under current law, "tobacco products"
include, but are not limited to, all forms of cigars (except
"little cigars"), smoking tobacco, chewing tobacco and snuff,
and any other articles or products made of or containing at
least 50 percent tobacco. The tax, which is a component of the
cigarette and tobacco products surtax, is paid by tobacco
products distributors. The tobacco products tax is imposed upon
the first distribution of tobacco products at a rate determined
annually by the BOE. The tobacco products tax rate is equivalent
to the combined rate of the taxes applied to cigarettes. The
rate is applied to the wholesale cost of the tobacco products.
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 Act include, in part, the following: 1)
Possession, storing, owning, or has made sales of an unstamped
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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 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.
Tax Evasion Schemes : The BOE's Investigation Division actively
investigates and makes seizures of unstamped or counterfeit
stamped cigarettes and imports of domestic labeled cigarettes or
export type cigarettes stamped in violation of the law.
According to a BOE report in 2014, they estimate that cigarette
and tobacco products excise tax revenue evasion was about $214
million in fiscal year 2012-13. This estimate is comprised of
$198 million by retailers who purchase and sell untaxed
cigarettes and tobacco products and $16 million in casual
evasion by consumers. These estimates include all forms of tax
evasion schemes, including the use of unnafixed stamps.
Cigarette and tobacco product tax evasion schemes can be
perpetrated in several ways. The most commonly known scheme is
what is punishable under current law-affixing fraudulent stamps
or meter impressions on non-MSA compliant and/or out-of-state
diverted cigarettes and reselling them on the black market. As
stated above, the BOE's inspection teams have recently
identified cigarette tax evasion schemes where used tax stamps
were re-used (aka "unnafixed" stamps) and affixed to a different
cigarette pack. Rather than using fraudulent stamps,
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perpetrators-often actual retailers-collect the removed
cellophane wrapper on a legal pack of cigarettes containing a
legitimate stamp, and give them to people known as
"aggregators." The aggregators then remove the stamps from the
wrapper and affix them to non-MSA compliant or out-of-state
diverted cigarettes, thus evading the $0.87 California tax.
Current law does not account for and, thus, does not punish the
use, collection or sell of re-used stamps. The picture below is
from an undisclosed retailer who was collecting stamps for an
"unnafixed stamp" tax evasion scheme.
Cigarette and Tobacco Products Taxes Revenues : The revenues
from excise taxes on cigarettes and tobacco products are
deposited into four funds, which are all affected by tax evasion
schemes. The allocation of funds is as follows: of the total
eighty-seven cents ($0.87) tax per package of twenty (20)
cigarettes, ten cents ($0.10) is deposited into the Cigarette
Tax Fund, and two cents ($0.02) goes into the Breast Cancer
Fund. Twenty-five cents ($0.25) is deposited into the Cigarette
and Tobacco Products Surtax Fund and may only be used for the
following purposes:
Tobacco-related health education programs and disease
research.
Medical and hospital care and treatment of patients who
cannot afford those services, and for whom payment will not
be made by any private coverage or federal program.
Programs for fire prevention; environmental
conservation; protection, restoration, enhancement, and
maintenance of fish, waterfowl, and wildlife habitat areas;
and enhancement of state and local parks and recreation.
Fifty cents ($0.50) is deposited into the California Children
and Families Trust Fund and is used for programs that encourage
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proper childhood development, including the development of
professional and parental education and training, informed
selection of childcare, development and education of childcare
providers, and research into the best practices and standards
for all programs and services relating to early childhood
development.
Double referral : Should AB 1901 pass the Assembly Committee on
Governmental Organization on Wednesday, April 6, 2016, this bill
will be referred to the Assembly Committee on Revenue and
Taxation for further consideration.
Prior/Related legislation : SBX2-5 (Leno) of 2015/2016 Second
Extraordinary Session. Expands the definition of tobacco
products to include e-cigarettes and extends current
restrictions and prohibitions against the use of tobacco
products to e-cigarettes. The bill also establishes an annual
e-cigarette retailer licensing fee of $265 per location.
(3/10/16 - Ordered to Engrossing and Enrolling).
ABX2-11 (Nazarian) of 2015/2016 Second Extraordinary Session.
Revises the Cigarette and Tobacco Products Licensing Act of 2003
to change the retailer license fee from a $100 one-time fee to a
$265 annual fee, and increase the distributor and wholesaler
license fee from $1,000 to $1,200. (3/16/16 - Ordered to
Engrossing and Enrolling).
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
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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.
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REGISTERED SUPPORT / OPPOSITION:
Support
California State Board of Equalization (Sponsor)
American Cancer Society-Cancer Action Network
The American Lung Association in California
California Distributors Association
Fiona Ma, Chairwoman, California State Board of Equalization
Opposition
None on file
Analysis Prepared by:Kenton Stanhope / G.O. / (916) 319-2531