BILL ANALYSIS Ó
AB 1901
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Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1901
(Quirk) - As Amended March 14, 2016
Majority vote. Fiscal committee.
SUBJECT: Taxation: cigarettes: unaffixed stamps
SUMMARY: Makes it a misdemeanor to buy, sell, or possess
unaffixed cigarette stamps. Specifically, this bill:
1)Provides that any person who possesses, sells, or offers to
sell, or who buys or offers to buy, "unaffixed stamps" is
guilty of a misdemeanor, punishable by a fine or imprisonment
in county jail for up to a year, or both.
2)Defines "unaffixed stamps" as cigarette stamps for which the
tax has previously been paid by a licensed distributor and
previously affixed to a package. The term does not include
any unused and unapplied rolls of stamps or loose stamps
acquired from the State Board of Equalization (BOE) or its
authorized agent and in the possession of a licensed
distributor.
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3)Requires the BOE to destroy any such stamps.
4)Provides that no reimbursement is required under Section 6 of
Article XIIIB of the California Constitution for specified
reasons.
EXISTING LAW:
1)Imposes a tax, under the Cigarette and Tobacco Products Tax
Law, on cigarette distributors at the rate of $0.87 per
package of 20 cigarettes.
2)Requires the cigarette tax be paid through the use of stamps
or meter impressions. Specifically, these stamps or meter
impressions must be affixed to each package of cigarettes
distributed.
3)Imposes a fine of up to $50,000, as specified, 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, and requires the BOE to
destroy any stamps seized.
4)Requires any fines assessed to be deposited in the Cigarette
and Tobacco Products Compliance Fund.
FISCAL EFFECT: The BOE estimates that this bill could
potentially deter tax evasion of roughly $400,000 annually.
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COMMENTS:
1)The author has provided the following statement in support of
this bill:
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 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
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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.
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.
2)This bill is sponsored by the BOE, which notes the following:
This bill serves to combat this used tax stamp scheme,
minimize tax evasion opportunities, and assist in making
the marketplace fair and equitable for those who are
legitimately paying the excise tax.
3)The BOE notes the following in its staff analysis of this
bill:
During inspections and joint operations with other law
enforcement agents, staff has found retail shops
accumulating a significant number of used stamps and
storing them in places such as trash bags located behind
the storefront counter or drawers behind the register area.
In a more sophisticated scheme discovered during an
enforcement operation, staff found a storage unit
containing 205,694 unaffixed used stamps with a tax value
of $178,954 placed on transfer sheets and prepared for
affixation to cigarette packs. In this instance, the used
stamps were also labeled by the cigarette brand to which
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they had been affixed originally. As a result, the
unsuspecting consumer would receive a counterfeit pack of
cigarettes and the tax would be evaded. Within the past
year, staff also found an additional, larger collection of
used stamps in a separate scheme, as well as numerous
smaller collections at retail stores.
4)Committee Staff Comments
a) General background : Existing law requires the cigarette
tax be paid through the use of stamps or meter impressions,
which must be affixed to each package of cigarettes
distributed. Cigarette stamps resemble stickers and are
encrypted with the date, distributor information, and the
cigarette brand. The BOE notes that its inspection teams
authenticate tax stamps with scanning devices. For obvious
reasons, existing law makes it a misdemeanor to sell, buy,
or possess a false or fraudulent stamp or meter impression.
In addition, the BOE is required to destroy any such
fraudulent stamps.
b) Cigarette tax evasion : The BOE notes that its
inspection teams have recently identified tax evasion
schemes involving reused cigarette tax stamps. For
example, an inspector's scan revealed that a stamp affixed
to a pack of Marlboros had originally been applied to a
pack of Camels. In these situations, it is obvious that
the original stamp was subsequently reused and affixed to
another cigarette pack. The BOE notes that these used
stamps can be acquired simply by rummaging through trash
bins. Alternatively, retailers may acquire them by
offering to unwrap cigarette packages for their customers.
The BOE notes:
By applying used stamps to an untaxed cigarette pack,
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taxpayers may evade the tax and disguise duty free,
counterfeit, stolen, smuggled, and otherwise untaxed
cigarettes as legitimate. The majority of these used
stamps appear to be affixed to counterfeit and duty free
cigarettes.
c) This proposal : This bill, sponsored by the BOE, seeks
to address these cigarette tax evasion schemes by making it
illegal to buy, sell, or possess unaffixed cigarette
stamps. Currently, the law makes it illegal to buy, sell,
or possess fraudulent stamps, but makes no reference to
legitimate stamps that were removed from a package and
stored for subsequent re-use to avoid proper taxation.
d) Strick liability : It should be noted that this bill
establishes a strict liability offense. Put simply, this
means that the very act of possessing, buying, or selling
unaffixed stamps would be illegal. A prosecutor would not
need to prove that the person in possession of the stamps
intended to defraud the state or evade proper taxation.
The BOE notes, however, that there is simply no reason
anyone would possess these stamps for legitimate purposes.
Unlike postage stamps or trading cards, they have no value
as collectables. Thus, used cigarette tax stamps have no
value to the person collecting them, except for tax evasion
purposes.
e) Double referral : This bill was double referred with the
Assembly Committee on Governmental Organization and passed
out of that Committee by a vote of 18 to 0 on April 6,
2016. For additional discussion of this bill's provisions,
please refer to that Committee's analysis.
REGISTERED SUPPORT / OPPOSITION:
AB 1901
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Support
State Board of Equalization (sponsor)
Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098