BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 2770 (Nazarian) - Cigarette and tobacco product licensing: fees and funding ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: June 16, 2016 |Policy Vote: B., P. & E.D. 8 - | | | 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 1, 2016 |Consultant: Brendan McCarthy | | | | ----------------------------------------------------------------- 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 ? 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 ? 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 -- END --