BILL ANALYSIS                                                                                                                                                                                                    ”



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          ASSEMBLY THIRD READING


          AB  
          2770 (Nazarian)


          As Amended  May 12, 2016


          Majority vote


           ------------------------------------------------------------------ 
          |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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          |                |     |HernŠndez, 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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