BILL ANALYSIS Ó
AB 2770
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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
AB 2770
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None on file
Analysis Prepared by:Kenton Stanhope / G.O. / (916) 319-2531