BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:   April 20, 2016


                   ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION


                                  Adam Gray, Chair


          AB 2770  
          (Nazarian) - As Introduced February 19, 2016


          SUBJECT:  Cigarette and tobacco product licensing:  fees and  
          funding


          SUMMARY: Updates the Cigarette and Tobacco Products Licensing  
          Program under the Board of Equalization (BOE) by increasing  
          licensing, distributor, and wholesaler fees.  Specifically, this  
          bill:  


          1)Increases, beginning January 1, 2017, the current one-time  
            retailer license fee of $100 per location to $265 per location  
            and imposes a $265 fee for the annual renewal of a tobacco  
            retailer license.


          2)Increases, beginning January 1, 2017, the annual distributor  
            and wholesaler licensing fee from $1,000 to $1,200.


          3)Requires BOE to report back to the Legislature no later than  
            January 1, 2020, regarding the adequacy of funding for the  
            Cigarette and Tobacco Products Licensing Act of 2003.   
            Requires the report to include data and recommendations about  
            whether the annual licensing fee funding levels are set at an  
            appropriate level to maintain an effective enforcement  








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            program.


          EXISTING LAW:  


          1)  The California Cigarette and Tobacco Products Licensing Act  
            (Act) of 2003 (AB 71, Horton, Statutes of 2003), created a  
            comprehensive regulatory scheme governing the distribution and  
            sale of cigarettes and tobacco products in this state, and  
            requires the Board of Equalization (BOE) to license  
            manufacturers, importers, distributors, wholesalers, and  
            retailers of cigarettes and tobacco products.  

          2)  Requires retailers to maintain a license to engage in the  
            sale of cigarettes and tobacco products that is valid for a  
            12-month period and must be renewed annually.  A one-time fee  
            of $100 is required for each retail location, along with a fee  
            of the same amount if the licensee fails to renew the license  
            and the license has to be reinstated.  

          3)  Requires distributors and wholesalers of cigarette and  
            tobacco products to pay an annual license fee of $1,000.   
            Cigarette manufacturers and importers are likewise required to  
            obtain and maintain a license to engage in the sale of  
            cigarettes, and were  required to pay by AB 71 a one-time fee  
            in the amount of one cent ($0.01) per package of cigarettes  
            manufactured or imported by the manufacturer or the importer  
            and shipped into this state during the 2001 calendar year, as  
            was reported to BOE (manufacturers and importers that have  
            operated in the state after January 1, 2004, are required to  
            pay a one-time fee commensurate with their respective market  
            share of cigarettes manufactured or imported, and sold in this  
            state during the next calendar year as estimated by BOE).   
            Manufacturers or importers of chewing tobacco or snuff were  
            subsequently required to obtain and maintain a license under  
            the Act to engage in the sale of tobacco products (AB 1749,  
            Horton, Statutes of 2006), and required to pay a one-time  
            license fee of $10,000.  In addition, every manufacturer or  








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            importer of tobacco products, excluding chewing tobacco or  
            snuff, are required to submit with each application a one-time  
            license fee of two thousand dollars ($2,000). The one-time  
            license fee for a manufacturer or importer of tobacco products  
            is limited to ten thousand dollars ($10,000).

          4)  Requires that all moneys collected pursuant to the Act  
            (license fees, penalties and fines) be deposited into the  
            Cigarette and Tobacco Products Compliance Fund, and are  
            available for expenditure upon appropriation by the  
            Legislature solely for administering the Act.  

          5)  Provides that all revenues and expenses generated by AB 71  
            with respect to the taxes imposed under the Cigarette and  
            Tobacco Products Tax Law are to be allocated in the same  
            manner as those revenues and expenses are allocated under  
            existing law.  This allows for the reimbursement of the BOE  
            for expenses incurred in the administration and collection of  
            tobacco taxes.

          6)  Imposes an excise tax of $0.87 cents per pack of 20  
            cigarettes.  An excise on other tobacco products is calculated  
            by the BOE based on the wholesale price of cigarettes.   
            Revenues from the tax on cigarettes and other tobacco products  
            are distributed as follows:  $0.10 cents to the General Fund  
            (GF); $0.50 cents of the per pack tax and an equivalent rate  
            levied on non-cigarette tobacco products to the California  
            Children and Families First Trust Fund (Prop. 10); $0.25 of  
            the per pack tax and an equivalent rate levied on  
            non-cigarette tobacco products to the Cigarette and Tobacco  
            Products Surtax Fund (Prop. 99); and $0.02 cents to the Breast  
            Cancer Fund.

           7) Establishes the Stop Tobacco Access to Kids Enforcement  
            (STAKE) Act, which charges the Department of Public Health  
            (DPH) with developing a program to reduce the availability of  
            tobacco products to persons under 18 years of age and  
            specifies that various agencies, including, but not limited  
            to, DPH, the Attorney General, or local law enforcement  








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            agencies may enforce the STAKE Act.  Requires DPH, after a  
            third, fourth, or fifth violation, to notify the Board of  
            Equalization (BOE) of the violation and for the BOE to then  
            assess an additional civil penalty and to suspend or revoke  
            the sellers' license for a specific amount of time, based on  
            the number of violations in a given period.

          FISCAL EFFECT:  According to a Senate Appropriations analysis of  
          ABX2-11 (Nazarian) (identical bill to AB 2770), the bills will  
          have:


            Unknown administrative costs for the BOE to make required  
            computer system changes and notify retailers.  Previously, the  
            BOE indicated a January 1, 2017 operative date would allow  
            them to make the necessary changes within existing resources  
            without delaying other projects.



           Ongoing annual revenue increases of $11.1 million per year  
            from increased licensing fees on tobacco retailers and on  
            distributors and wholesalers.



          





          COMMENTS:  


           Purpose of the bill  : According to the author, AB 71 was intended  
          to reduce illegal sales of cigarette and other tobacco products  
          within the State. However, the one-time licensing fee is not  
          adequate to cover costs associated with maintaining a viable  








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          enforcement program. Inadequate funding of this program can lead  
          to lack of field enforcement or a reduction in compliance staff,  
          which leads to further decrease in funding.  Field enforcement  
          is crucial to help maintain MSA compliance and enforce the STAKE  
          Act.  AB 2770 benefits businesses as it stops violators from  
          circumventing the law and competing with legitimate businesses.  
          The goal of the licensing program is to decrease untaxed tobacco  
          distributions and reduce illegal sales of cigarettes and tobacco  
          products. Furthermore, AB 2770 protects the viability of tobacco  
          health and education programs by ensuring that the licensing  
          program is funded by the licensing fee revenue. AB 2770 will  
          eliminate the need to divert tobacco excise taxes, from their  
          intended purpose, to instead pay for the deficit in the tobacco  
          licensing program.


           Background  : Master Settlement Agreement (MSA) is an accord  
          reached in November 1998 between the state Attorneys General of  
          forty-six states (including California), five U.S. territories,  
          the District of Columbia and the five largest tobacco companies  
          in America concerning the advertising, marketing and promotion  
          of tobacco products.  In addition to requiring the tobacco  
          industry to pay the settling states approximately $10 billion  
          annually for the indefinite future, the MSA also set standards  
          for, and imposed restrictions on, the sale and marketing of  
          cigarettes by participating cigarette manufacturers.





          Under the MSA states must pass laws requiring non-participating  
          manufacturers to make payments to the state based on their  
          cigarette sales, and to diligently enforce the payments  
          requirements by tracking all cigarettes sold in the state.  To  
          fulfill California's obligations under the MSA, the Legislature  
          created new programs administered by the BOE and the Department  
          of Justice, including BOE's cigarette and Tobacco Licensing  
          Program.








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           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  
          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  








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          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.

           Cigarette and Tobacco Products Taxes Revenues : The revenues from  
          excise taxes on cigarettes and tobacco products are deposited  
          into four funds.  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  
          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.









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          According to the BOE, in fiscal year 2014/2015, California  
          received $835 million from taxes on cigarettes and other tobacco  
          products. These funds were allocated as follows:

                 Cigarette Tax Fund - $86 million
                 Cigarette and Tobacco Products Surtax Fund - $268  
               million
                 Breast Cancer Fund - $20 million
                 California Children and Families Trust Fund - $461  
               million  
          
          State Auditor Report  : In March 2016, the California State  
          Auditor released a report concerning the costs of the Cigarette  
          and Tobacco Products Tax Program (tax program) and the Cigarette  
          and Tobacco Products Licensing Program (licensing program)  
          administered by the BOE. 

          The report concludes that although the board's enforcement  
          efforts are effective and properly funded, other funding options  
          and cost saving measures exist for the licensing program. In  
          2004 the board implemented the licensing program and began  
          licensing all entities involved in the sale of cigarette and  
          tobacco products in California, with a goal to inspect annually  
          10,000 of these licensees. In 2005 the board's tax program put  
          into use an encrypted cigarette tax stamp. According to the  
          BOE's most recent estimate, in fiscal year 2012-13 the BOE's  
          three-part approach to enforcing compliance with California's  
          cigarette and tobacco products excise tax laws-licensing,  
          inspections, and an encrypted cigarette tax stamp-prevented the  
          loss of $91 million in tobacco tax revenue.

          The report found since fiscal year 2006-07, license fees have  
          not covered all of the licensing program's costs. For example,  
          in fiscal year 2014-15 licensing fees contributed only $1.8  
          million of the $9.8 million needed to administer the program. To  
          make up the program's $8.0 million shortfall, the board uses  
          money from the four funds that receive cigarette and tobacco  
          products taxes (see above). Although it is legally permissible  
          to use excise taxes to fund the licensing program, the board has  








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          accumulated an excess amount of unspent license fees that it  
          could use to offset the shortfall. 

          The report makes several recommendations for handling the $8.0  
          million shortfall, including, encouraging the Legislature to  
          pass legislation to implement a funding model that will include  
          a license fee increase or a combination of license fee  
          increases, continued use of money from the Cigarette Tax Fund,  
          and a cigarette tax increase.

           BOE Report  :  In 2014 representatives from Proposition 10  
          programs expressed concern about the administrative costs and  
          funding of BOE's Cigarette and Tobacco Program resulting in  
          reduced funds for other special programs, and the Legislature  
          required BOE to report back with other funding options.  Some  
          BOE's proposals include:



                 Instituting a recurring fee at the retail level to  
               increase the share of costs covered by the licensing fees;

                 Increasing the taxes assessed on cigarettes and tobacco  
               products by an unspecified amount;



                 Tax electronic cigarettes, dissolvable tobacco, and  
               other recently developed products by expanding the  
               definition of tobacco product; 



                 Paying for the cigarette and tobacco products licensing  
               program with funds from the GF; and,



                 Reduce spending and cap administrative costs on the  








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               cigarette and tobacco products licensing program.


          The LAO brief notes that closing the funding gap through reduced  
          spending would be risky because the Legislature created the  
          licensing program to comply with the MSA requirement for  
          diligent enforcement of tobacco laws, and states found not to be  
          diligent have had their revenues reduced.


           Policy consideration  :  ABX2-11 (Nazarian) - Identical bill to AB  
          2770 - was one of a package of tobacco reform bills that were  
          introduced during the 2015/2016 Second Extraordinary Session.   
          There were five other bills in the package (see Prior/Related  
          Legislation) that ultimately passed both the Senate and the  
          Assembly.  ABX2-11 and the companion bills were ordered to  
          engrossing and enrolling on March 10 and 16, 2016, and have not  
          yet been sent to the Governor for signature. AB 2770 is a  
          precaution in the event the Governor does not sign ABX2-11, and  
          will continue to move should a veto occur. The committee may  
          wish to consider whether AB 2770 is necessary, if yes, the  
          Committee may further consider whether the same precautionary  
          measures be taken for the other five Second Extraordinary  
          Session bills. 

          Staff Note: ABX2-11 requires the BOE to report back to the  
          Legislature no later than January 1, 2019, regarding the  
          adequacy of funding for their programs. AB 2770 requires the BOE  
          to report back by 2020 - other than this minor difference,  
          ABX2-11 is identical.

           Related/Prior Legislation  : 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).










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          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).





          ABX2-7 (Stone) of 2015/2016 Second Extraordinary Session.  
          Prohibits smoking in owner-operated businesses and removes some  
          exemptions in existing law that allows tobacco smoking in  
          certain workplaces: Hotel/motel lobbies, meeting & banquet  
          rooms, warehouses, break rooms, businesses with 5 or less  
          employees. (3/16/16 - Ordered to Engrossing and Enrolling).





          SBX2-7 (Hernandez) of 2015/2016 Second Extraordinary Session.  
          Increases the minimum legal age to purchase or consume tobacco  
          from 18 to 21, conforms existing law regarding purchasing,  
          selling, and enforcement of tobacco and tobacco products to  
          reflect the new age limit, and deletes existing penalties  
          applicable when a person under 18 years of age purchases  
          tobacco. (3/10/16 - Ordered to Engrossing and Enrolling).





          ABX2-9 (Thurmond and Nazarian) of 2015/2016 Second Extraordinary  








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          Session. Clarifies charter school eligibility for tobacco use  
          prevention program (TUPE) funds; require the California State  
          Department of Education to require all school districts, charter  
          schools, and county offices of education receiving TUPE funds to  
          adopt and enforce a tobacco-free campus policy; prohibit the use  
          of tobacco and nicotine products in any county office of  
          education, charter school, or school district-owned or leased  
          building, on school or district property, and in school or  
          district vehicles; and, require all schools, districts, and  
          offices of education to post a sign reading "Tobacco use is  
          prohibited" at all entrances. (3/16/16 - Ordered to Engrossing  
          and Enrolling).





          ABX2-10 (Bloom) of 2015/2016 Second Extraordinary Session.  
          Allows counties to impose a tax on the privilege of distributing  
          cigarettes and tobacco products. (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  
          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  








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          away or displaying those products during the period of license  
          suspension or revocation, as specified. 



          SB 625 (Padilla), Chapter 654, Statutes of 2007, establishes a  
          $100 reinstatement fee upon retailers that engage in the sale of  
          cigarettes and tobacco products in this state but fail to renew  
          the necessary licenses.


          AB 71 (Horton), Chapter 890, Statutes of 2003, enacts the  
          Cigarette and Tobacco Products Licensing Act of 2003, which  
          imposes licensing requirements on tobacco manufacturers,  
          wholesalers, retailers and importers; requires manufacturers to  
          pay a one-time fee; and, imposes additional civil and criminal  
          penalties on individuals and businesses who violate  
                                                                      tobacco-related, anti-contraband laws, and laws prohibiting  
          tobacco-related sales to minors.  






          REGISTERED SUPPORT / OPPOSITION:




          Support


          First 5 California




          Opposition








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          None on file




          Analysis Prepared by:Kenton Stanhope / G.O. / (916) 319-2531