BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 2770 (Nazarian) - Cigarette and tobacco product licensing:   
          fees and funding
          
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          |Version: June 16, 2016          |Policy Vote: B., P. & E.D. 8 -  |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 1, 2016    |Consultant: Brendan McCarthy    |
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          This bill meets the criteria for referral to the Suspense File.

          Bill  
          Summary:  AB 2770 would prohibit tobacco tax revenues from being  
          appropriated to the State Board of Equalization to support the  
          Cigarette and Tobacco Products Licensing Program.


          Fiscal  
          Impact:  
           Unknown cost pressure to provide General Fund monies to  
            support the Cigarette and Tobacco Products Licensing Program  
            (General Fund).  In recent years, the Licensing Program has  
            been funded with a combination of licensing fees paid by  
            tobacco retailers and distributors and revenues derived from  
            taxes imposed on tobacco products. Recently, the licensing  
            fees assessed on tobacco retailers and distributors were  
            increased, with the intention of fully funding the Licensing  
            Program with licensee fees. Those fee increases go into effect  
            on January 1, 2017. The current year budget still provides  
            some funding from tobacco tax revenues to support the  
            Licensing Program, because the increased license fee revenues  







          AB 2770 (Nazarian)                                     Page 1 of  
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            will only be in place for one-half of the current year. Under  
            the bill, if projected fee revenues are not sufficient to  
            fully fund the Licensing Program, there would be pressure to  
            either augment the fee revenues with General Fund revenue or  
            reduce program expenditures. Until full-year fee revenues have  
            been collected, there is uncertainty about whether the fee  
            revenues will be sufficient to fully fund the Licensing  
            program. 

            In addition, the licensing fee levels are set in statute. As  
            the costs to implement the licensing program grow over time  
            due to cost inflation, the Board of Equalization will not be  
            able to raise the licensing fees to offset those cost  
            increases. Under this bill, there would be cost pressure on  
            the General Fund to offset cost increases or to raise  
            licensing fees.


          Background:  Current law requires the Board of Equalization to license  
          tobacco wholesalers and retailers. The purpose of this licensing  
          requirement is to facilitate the collection of state tobacco  
          taxes and prevent tax evasion. Tobacco products are subject to  
          both a specific excise tax on tobacco products as well as the  
          general Sales and Use Tax. Prior to this year, retailers of  
          tobacco products were required to pay a one-time, $100 fee to be  
          licensed and distributors and wholesalers were required to pay  
          an annual licensing fee of $1,000. In recent years, licensing  
          fees generated about $1.8 million per year, whereas the  
          Licensing Program cost the Board about $10 million per year. The  
          difference has been made up with revenues generated by tobacco  
          taxes. 
          AB X2 11 (Nazarian, Statutes of 2015) changed the retail  
          licensing fee from a one-time $100 fee to an annual $265 fee and  
          raised the annual fee paid by distributors to $1,200. Those  
          changes go into effect on January 1, 2017. SB X2 5 (Leno,  
          Statutes of 2015) would require retailers of electronic  
          cigarettes to be licensed by the Board of Equalization, amongst  
          other requirements. That bill is likely to increase license fee  
          revenues and licensing program expenditures, because there are  
          electronic cigarette retailers not currently licensed by the  
          Board that must now be licensed.











          AB 2770 (Nazarian)                                     Page 2 of  
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          Proposed Law:  
            AB 2770 would prohibit tobacco tax revenues from being  
          appropriated to the State Board of Equalization to support the  
          Cigarette and Tobacco Products Licensing Program.
          The bill would revise an existing reporting requirement on the  
          Board of Equalization regarding the funding for the Licensing  
          Program, to require the report annually, and to require the  
          report to address the existing fund balance in the Cigarette and  
          Tobacco Tax Compliance Fund.




          Staff  
          Comments:  In enacted, this bill would go into effect on January  
          1, 2017. Since the Board of Equalization has already been  
          appropriated funding from tobacco tax revenues for the current  
          year (2016-17) this bill would arguably not impact Board  
          operations in the current year. The Board of Equalization has  
          indicated that it may change its internal financial processes to  
          comply with the bill's requirements, by using appropriated  
          tobacco tax revenues as the first source of funding in the first  
          part of the current year, rather than relying on licensing fee  
          revenues first and backfilling any shortfall with appropriated  
          tobacco tax funds later in the current year. 


          Recommended  
          Amendments:  In order to simplify implementation for the Board,  
          the bill should be amended to delay implementation until July 1,  
          2017


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