BILL ANALYSIS Ó
SENATE COMMITTEE ON
BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
Senator Jerry Hill, Chair
2015 - 2016 Regular
Bill No: AB 2770 Hearing Date: June 27,
2016
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|Author: |Nazarian |
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|Version: |June 16, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant|Mark Mendoza |
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Subject: Cigarette and tobacco product licensing: fees and
funding
SUMMARY: Prohibits revenues derived from the taxes imposed upon the
distribution of cigarettes and tobacco products be appropriated
to the State Board of Equalization (BOE) for the purpose of
implementing, enforcing, or administering the California
Cigarette and Tobacco Products Licensing Act of 2003 (Licensing
Act); requires BOE to report back to the Legislature, no later
than January 1, 2019, regarding the funding adequacy of the
Licensing Act; requires the report to include information on the
State Auditor's recommendation to eliminate the excess fund
balance in the Cigarette and Tobacco Products Compliance Fund
(Compliance Fund).
Existing law:
1) The Licensing Act creates a comprehensive regulatory scheme
governing the distribution and sale of cigarettes and tobacco
products in this state, and requires the BOE to license
manufacturers, importers, distributors, wholesalers, and
retailers of cigarettes and tobacco products. (Business and
Professions Code (BPC) § 22970 et seq.)
2) Requires a retailer to have a license to sell cigarettes and
tobacco products in this state. Requires a retailer to
obtain a separate license for each retail location that sells
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cigarettes and tobacco products. (BPC § 22972)
3) Requires a retailer license be valid for a 12-month period
and be renewed annually. (BPC § 22972(d))
4) Requires retailers to pay an annual fee of $265 for each new
retail location, beginning June 9, 2016. (BPC § 22973 (d))
5) Requires retailers to file an application for license renewal
accompanied with a $265 per location renewal fee, for
calendar years beginning on and after January 1, 2017, in the
form and manner prescribed by BOE. (BPC § 22973(e))
6) Requires that the wholesaler and distributor license be valid
for a calendar year upon payment of the license fee. (BPC §
22975(b)).
7) Requires distributors and wholesalers to pay a $1,200 fee for
each new location where cigarettes and tobacco products are
sold, beginning June 9, 2016.
(BPC § 22977.1(b))
8) Requires distributors and wholesalers to file an application
for license renewal accompanied with a $1,200 fee beginning
on and after January 1, 2017.
(BPC § 22977.1(c))
9) Imposes an excise tax of $0.87 per pack of 20 cigarettes.
Revenues from the tax on cigarettes and other tobacco
products are distributed as follows:
a) $0.10 to the General Fund (GF) (Revenue and Taxation
Code (RTC) §§ 30101 and 30462);
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b) $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) (RTC §§
30122 and 30123);
c) $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) (RTC §§ 30122 and 30123); and
d) $0.02 to the Breast Cancer Fund (RTC §§ 30101 and
30461.6).
1) Imposes a tax upon the distribution of tobacco products,
based on the wholesale cost of these products at a tax rate
that is equivalent to the combined rate of tax imposed on
cigarettes. (RTC § 30123)
2) Imposes an additional tobacco products tax at a rate
equivalent to the $0.50 per pack cigarette tax. (RTC §
30131.2)
This bill:
1) Prohibits revenues derived from the taxes imposed upon the
distribution of cigarettes and tobacco products be
appropriated to the BOE for the purpose of implementing,
enforcing, or administering the Licensing Act.
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2) Restates that BOE is required to report back to the
Legislature no later than January 1, 2019, regarding the
adequacy of funding for the Licensing Act. 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.
3) Requires that the report mentioned in Item #2), above,
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 Compliance
Fund.
FISCAL
EFFECT: This bill has been keyed "fiscal" by Legislative
Counsel. According to the Assembly Appropriations analysis
dated on May 18, 2016, this bill would result in minor costs to
provide a required report six months sooner than required under
current law and to provide additional information.
COMMENTS:
1. Purpose. The Author is the Sponsor of this bill.
According to the Author, AB 71 (J. Horton, Chapter 890,
Statutes of 2003) 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 Stop Tobacco
Access to Kids Enforcement (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
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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.
2. California Entered Master Settlement Agreement. In the
1990s, many states sued tobacco companies for damages
related to the effects of smoking. In 1998, 46
states-including California-and the four largest cigarette
manufacturers settled these lawsuits with a MSA. The MSA
imposes a variety of obligations on participating tobacco
companies, including a requirement to make annual payments
to each settling state. Annual MSA payments to California's
state and local governments total hundreds of millions of
dollars.
3. Licensing Program Supports Activities Related to MSA.
Under the MSA, states must maintain accurate records of
cigarette sales and must "diligently enforce" various
payment requirements related to those sales, including the
payment of state excise taxes. To fulfill California's
obligations under the MSA, the Legislature created new
programs administered by BOE and Department of Justice,
including a new Cigarette and Tobacco Products Licensing
Program.
4. BOE Licensing Act. In 2003, AB 71 enacted the 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
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the taxes due and payable.
The Licensing 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. Once licensed, businesses are subject to
recordkeeping and inspection requirements. 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.
Violations of the Licensing 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 Licensing 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.
5. 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
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following purposes:
a) Tobacco-related health education programs and disease
research.
b) 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.
c) 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:
a) Cigarette Tax Fund - $86 million;
b) Cigarette and Tobacco Products Surtax Fund - $268
million;
c) Breast Cancer Fund - $20 million; and
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d) California Children and Families Trust Fund - $461
million.
1. BOE Licensing Act Issues. As AB 71 was developed and made
its way through the Legislature, it was determined that the
licensure fees would not permanently sustain the Licensing
Act program. Since the Licensing Act enforces the Cigarette
and Tobacco Products Tax Law (RTC § 30001, et seq.), and
directly benefits the funds established pursuant to that
program, the funding for the Licensing Act would eventually
shift to the cigarette and tobacco products tax funds:
General Fund, Breast Cancer Fund, Cigarette and Tobacco
Products Surtax Fund (Prop. 99) and California Children and
Families Trust Fund (Prop. 10). However, there was concern
about the Licensing Act program and the impact it would have
on the cigarette and tobacco products tax funds if the
Licensing Act expenses were more than the revenues
generated. To address this concern, a sunset date of
January 1, 2010, was incorporated into the Licensing Act to
ensure it would not harm the cigarette and tobacco products
tax funds. Furthermore, AB 71 included uncodified language
to clarify that all revenues and expenses generated by the
Licensing Act are to be allocated in the same manner as
those revenues and expenses are allocated under the
Cigarette and Tobacco Products Tax Law to make sure no one
cigarette and tobacco product fund benefited or was burdened
when the funding shift took place. In 2006, AB 1749 (J.
Horton, Chapters 501, Statutes of 2006) repealed the sunset
date for the Licensing Act due to the amount of additional
excise tax revenues generated. The BOE has estimated that
the Licensing Act and enhanced cigarette tax stamp generates
an additional $66.8 million in cigarette excise tax
annually. The Licensing Act generates an additional $24.5
million in additional tobacco products tax. The resulting
additional sales and use tax revenue is estimated to be
$44.4 million annually.
2. State Auditor Report. In March 2016, the California State
Auditor released a report concerning the costs of the
Cigarette and Tobacco Products Tax Program and the Cigarette
and Tobacco Products Licensing Program administered by the
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BOE.
The report concludes that although the BOE's enforcement
efforts are effective and properly funded, other funding
options and cost saving measures exist for the licensing
program. In 2004, the BOE 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
BOE 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 BOE 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 BOE 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.
3. BOE Report. In 2014, representatives from Prop. 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
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Legislature required BOE to report back with other funding
options. Some of BOE's proposals include:
a) Instituting a recurring fee at the retail level to
increase the share of costs covered by the licensing fees;
b) Increasing the taxes assessed on cigarettes and
tobacco products by an unspecified amount;
c) Tax electronic cigarettes, dissolvable tobacco, and
other recently developed products by expanding the
definition of tobacco product;
d) Paying for the cigarette and tobacco products
licensing program with funds from the GF; and,
e) Reduce spending and cap administrative costs on the
cigarette and tobacco products licensing program.
The Legislative Analyst's Office 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.
1. Arguments in Support. First 5 California offers its
"strong support of AB 2770 (Nazarian), which would prohibit
the taxes imposed upon the distribution of cigarettes and
tobacco products to the Board of Equalization (BOE) for the
purposes of implementing, enforcing, or administering the
Cigarette and Tobacco Products Licensing Program. The bill
also would require the BOE to report to the Legislature
annually regarding the adequacy of funding for the licensing
program."
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SUPPORT AND OPPOSITION:
Support:
First 5 California
Opposition:
None on file as of June 21, 2016.
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