BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 2770|
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                                   THIRD READING 


          Bill No:  AB 2770
          Author:   Nazarian (D) 
          Amended:  8/15/16 in Senate
          Vote:     21 

           SENATE BUS., PROF. & ECON. DEV. COMMITTEE:  8-0, 6/27/16
           AYES:  Hill, Block, Gaines, Galgiani, Hernandez, Jackson,  
            Mendoza, Wieckowski
           NO VOTE RECORDED:  Bates

           SENATE APPROPRIATIONS COMMITTEE:  5-2, 8/11/16
           AYES:  Lara, Beall, Hill, McGuire, Mendoza
           NOES:  Bates, Nielsen

           ASSEMBLY FLOOR:  44-26, 5/27/16 - See last page for vote

           SUBJECT:   Cigarette and tobacco product licensing:  fees and  
                     funding


          SOURCE:    Author


          DIGEST:  This bill prohibits revenues, on or after July 1, 2019,  
          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); and requires BOE  
          to report back to the Legislature, no later than January 1,  
          2019, regarding the funding adequacy of the Licensing Act.










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          ANALYSIS:  

          Existing law:

          1) The Licensing Act (AB 71, Horton, Chapter 890, Statutes of  
             2003) 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  
             cigarettes and tobacco products. (BPC § 22972)


          3) Requires retailers to pay an annual fee of $265 for each new  
             retail location, beginning June 9, 2016.  (BPC § 22973 (d)) 


          4) 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))
          5) 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);





             b)   $0.50 of the per pack tax and an equivalent rate levied  







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               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) Requires a retailer that adds an additional retail location  
             to renew the license for that location based on a 12-month  
             period beginning in the month the retailer obtained its  
             license for its first retail location.  

          2) Requires that the $265 application fee for a retail location  
             for the period provided, as specified, and not be prorated.  








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          3) Prohibits revenues, on or after July 1, 2019, 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.

          4) Specifies what information is required to be provided, on a  
             form, to the BOE when applying for a license for the sale of  
             a tobacco product.

          5) Restates that BOE is required to report back to the  
             Legislature, Governor, and Department of Finance 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. 


          Background



          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 (Revenue and Taxation Code § 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  







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          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.





          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 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  







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          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.




          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          According to the Senate Appropriations analysis dated August 11,  
          2016, this bill would incur unknown cost pressure to provide  
          General Fund monies to support the Cigarette and Tobacco  
          Products Licensing Program.




          SUPPORT:   (Verified8/11/16)


          First 5 California


          OPPOSITION:   (Verified8/11/16)


          None received


          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  







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          the BOE to report to the Legislature annually regarding the  
          adequacy of funding for the licensing program."

          ASSEMBLY FLOOR:  44-26, 5/27/16
          AYES:  Alejo, Arambula, Atkins, Bloom, Bonilla, Bonta, Burke,  
            Calderon, Campos, Chau, Chu, Cooley, Cooper, Dababneh, Daly,  
            Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson,  
            Gomez, Gonzalez, Gordon, Gray, Holden, Jones-Sawyer, Levine,  
            Lopez, Low, McCarty, Medina, Mullin, Nazarian, Quirk,  
            Ridley-Thomas, Rodriguez, Santiago, Mark Stone, Thurmond,  
            Ting, Weber, Williams, Wood, Rendon
          NOES:  Achadjian, Travis Allen, Baker, Bigelow, Chang, Chávez,  
            Dahle, Beth Gaines, Gallagher, Harper, Irwin, Jones, Kim,  
            Lackey, Linder, Maienschein, Mathis, Mayes, Obernolte, Olsen,  
            Patterson, Salas, Steinorth, Wagner, Waldron, Wilk
          NO VOTE RECORDED:  Brough, Brown, Chiu, Dodd, Eggman, Grove,  
            Hadley, Roger Hernández, Melendez, O'Donnell

          Prepared by:Mark Mendoza / B., P. & E.D. / (916) 651-4104
          8/15/16 19:39:57


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