BILL ANALYSIS Ó
AB 2770
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ASSEMBLY THIRD READING
AB
2770 (Nazarian)
As Amended May 12, 2016
Majority vote
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Governmental |12-8 |Gray, Alejo, Bonta, |Bigelow, Gallagher, |
|Organization | |Campos, Cooley, |Linder, |
| | |Cooper, Daly, |Maienschein, Salas, |
| | | |Steinorth, Waldron, |
| | | |Wilk |
| | |Cristina Garcia, | |
| | | | |
| | | | |
| | |Eduardo Garcia, | |
| | |Gipson, | |
| | | | |
| | | | |
| | |Jones-Sawyer, Levine | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Appropriations |14-6 |Gonzalez, Bloom, |Bigelow, Patterson, |
| | |Bonilla, Bonta, |Gallagher, Jones, |
| | |Calderon, Daly, |Obernolte, Wagner |
| | |Eggman, Eduardo | |
| | |Garcia, Roger | |
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| | |Hernández, Holden, | |
| | |Quirk, Santiago, | |
| | |Weber, Wood | |
| | | | |
| | | | |
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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, 2018, 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
program. The report shall also include information on BOE's
compliance with the State Auditor's recommendation in the
State Auditor's March 2016 report to eliminate the excess fund
balance in the Cigarette and Tobacco Tax Compliance Fund.
EXISTING LAW:
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1)The California Cigarette and Tobacco Products Licensing Act
(Act) of 2003 (AB 71 (Horton), Chapter 890, 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 $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), Chapter 501, Statutes of 2006), and required to pay
a one-time license fee of $10,000. In addition, every
manufacturer or importer of tobacco products, excluding
chewing tobacco or snuff, are required to submit with each
application a one-time license fee of $2,000. The one-time
license fee for a manufacturer or importer of tobacco products
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is limited to $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 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 to the General Fund (GF); $0.50 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 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
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
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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 Assembly Appropriations Committee,
this bill will have minor costs to provide a required report six
months sooner than required under current law and to provide
additional information.
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 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 Master Settlement
Agreement (MSA) compliance and enforce the STAKE Act. This bill
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, this bill protects the viability of tobacco health
and education programs by ensuring that the licensing program is
funded by the licensing fee revenue. This bill 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: MSA is an accord reached in November 1998 between
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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.
BOE Licensing Act: In 2003, AB 71 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
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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
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 $0.87 tax per package of 20 cigarettes,
($0.10) is deposited into the Cigarette Tax Fund, and $0.02 goes
into the Breast Cancer Fund. Twenty-five cents is deposited
into the Cigarette and Tobacco Products Surtax Fund and may only
be used for the following purposes:
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1)Tobacco-related health education programs and disease
research.
2)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.
3)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 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.
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:
1)Cigarette Tax Fund - $86 million
2)Cigarette and Tobacco Products Surtax Fund - $268 million
3)Breast Cancer Fund - $20 million
4)California Children and Families Trust Fund - $461 million
State Auditor Report: In March 2016, the California State
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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
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.
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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:
1)Instituting a recurring fee at the retail level to increase
the share of costs covered by the licensing fees;
2)Increasing the taxes assessed on cigarettes and tobacco
products by an unspecified amount;
3)Tax electronic cigarettes, dissolvable tobacco, and other
recently developed products by expanding the definition of
tobacco product;
4)Paying for the cigarette and tobacco products licensing
program with funds from the GF; and,
5)Reduce spending and cap administrative costs on the cigarette
and tobacco products licensing program.
The Legislative Analyst's Office (LAO) briefly 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.
Identical Bill: AB 11 X2 (Nazarian), Chapter 6, Statutes of
2015-16 Second Extraordinary Session - identical bill to AB 2770
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- was one of a package of tobacco reform bills that were
introduced during the 2015/2016 Second Extraordinary Session.
There were four other bills in the package (see Prior/Related
Legislation) that were ultimately signed by the Governor on May
4, 2016. This action by the Governor has rendered all
provisions, except one minor technical change, in AB 2770
redundant as it will already be placed in statute.
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. This bill requires the
BOE to report back by 2018 and to include additional information
on BOE's compliance with the State Auditor's recommendation in
the State Auditor's March 2016 report to eliminate the excess
fund balance in the Cigarette and Tobacco Tax Compliance Fund -
other than this minor difference, ABX2-11 is identical.
Related/Prior Legislation: AB 11 X2 (Nazarian), Chapter 6,
Statutes of 2015-16 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.
SB 5 X2 (Leno), Chapter 7, Statutes of 2015-16 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.
AB 7 X2 (Stone), Chapter 4, Statutes of 2015-16 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
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lobbies, meeting & banquet rooms, warehouses, break rooms,
businesses with 5 or less employees.
SB 7 X2 (Hernandez), Chapter 8, Statutes of 2015-16 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.
AB 9 X2 (Thurmond and Nazarian), Chapter 5, Statutes of 2015-16
Second Extraordinary 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.
AB 10 X2 (Bloom) of Second Extraordinary Session of 2015-16.
Allows counties to impose a tax on the privilege of distributing
cigarettes and tobacco products. (Vetoed by Governor)
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.
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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.
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.
Analysis Prepared by:
Kenton Stanhope / G.O. / (916) 319-2531 FN:
0003024
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