BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2770


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          (Without Reference to File)

          CONCURRENCE IN SENATE AMENDMENTS
          AB  
          2770 (Nazarian)


          As Amended  August 15, 2016


          Majority vote


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          |COMMITTEE VOTE: |     | (August 30,    |RECOMMENDATION:   |concur     |
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           (G.O.)




          Original Committee Reference:  G.O.










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          SUMMARY:  Restates that the Board of Equalization (BOE) is  
          required to report back to the Legislature no later than January  
          1, 2019, regarding the adequacy of funding for the Cigarette and  
          Tobacco Products Licensing Act of 2003 (Licensing Act).  Imposes  
          restrictions on the use of revenues derived from the taxes  
          imposed upon the distribution of cigarettes and tobacco  
          products; makes additional changes to the Licensing Act.   
          Specifically, this bill:  


          1)Requires BOE to report back to the Legislature, Governor, and  
            Department of Finance (DOF) 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. 
          2)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.


          3)Requires a tobacco 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.


          4)Prohibits any license fee or renewal fee from being prorated.


          The Senate amendments:


          1)Prohibit 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.
          2)Require a tobacco retailer that adds an additional retail  








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            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.


          3)Prohibit any license fee or renewal fee from being prorated.


          4)Add the Governor and DOF as entities who must receive report  
            from BOE regarding the adequacy of funding for the Licensing  
            Act.


          5)Strike requirement that the report shall also include  
            information on the board'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:  


          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 $265 is required for each new retail location.


          3)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.   










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          4)Requires that the wholesaler and distributor license be valid  
            for a calendar year upon payment of a license fee of $1,200  
            for each new location where cigarettes and tobacco products  
            are sold. 


          5)Requires distributors and wholesalers to file an application  
            for license renewal accompanied with a $1,200 fee beginning on  
            and after January 1, 2017. 


          6)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.  


          7)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.


          8)Imposes an excise tax of $0.87 cents 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 cents to the General Fund  
            (GF); $0.50 cents of the per pack tax and an equivalent rate  
            levied on non-cigarette tobacco products to the California  
            Children and Families First Trust Fund (Proposition 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 cents to the Breast  
            Cancer Fund.


          9)Establishes the Stop Tobacco Access to Kids Enforcement  








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            (STAKE) Act, which charges the Department of Public Health  
            (DPH) with developing a program to reduce the availability of  
            tobacco products to persons less than 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  
            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 Senate Appropriations Committee the  
          bill will result in unknown cost pressures to provide General  
          Fund monies to support the Cigarette and Tobacco Products  
          Licensing Program (Licensing Program).  


          In addition, Senate Appropriations Committee states, the  
          licensing fee levels are set in statute.  As the costs to  
          implement the licensing program grow over time due to cost  
          inflation, the BOE 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.


          COMMENTS:  


          Purpose of the bill:  According to the author:  "Since 2003, BOE  
          has administered the Tobacco Licensing Program, which oversees  
          businesses that sell and distribute tobacco products in the  
          State.  The fee levied on tobacco retailers, wholesalers and  
          distributors has not been sufficient to maintain the program.   
          As a result, BOE required payments from First 5, tobacco  
          education prevention programs, the breast cancer research fund  
          and the general fund, which receive cigarette and tobacco excise  
          tax proceeds, to cover the administration cost of the licensing  
          program.  It was evident that the lifetime retailor fee was not  
          adequate to maintain a viable enforcement program; therefore the  








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          fee structure was modernized earlier this year.  The additional  
          revenue eliminates the need to divert tobacco excise taxes from  
          their intended purposes.  Therefore, AB 2770 prohibits funding  
          from being diverted from special funds that receive cigarette  
          and tobacco excise tax revenue to cover the administration of  
          the tobacco licensing program.  Additionally, the bill make  
          technical changes to allow the BOE to implement ABx2-11  
          [(Nazarian), Chapter 6, Statutes of 2015-16 Second Extraordinary  
          Session] effectively by allowing the tobacco licenses to be  
          issued for a 12-month period, with renewal date set as when the  
          original master account was opened."


          Background:  Master Settlement Agreement (MSA) is an accord  
          reached in November 1998 between the state Attorneys General of  
          forty-six states (including California), five United States  
          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 (J. Horton, Chapter 890)  
          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  








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          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  
          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  








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          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 ($0.25) is  
          deposited into the Cigarette and Tobacco Products Surtax Fund  
          and may only be used for the following purposes:


          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 ($0.50) 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








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          4)California Children and Families Trust Fund - $461 million  


          State Auditor Report:  In March 2016, the California State  
          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  








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          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.


          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 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.


          2015-2016 Special Session:  On May 4, 2016, the Governor signed  
          into law a package of special session bills related to tobacco,  
          two of which were AB 11 X2 (Nazarian) and SB 5 X2 (Leno) Chapter  








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          7, Statutes of 2015-16 Second Extraordinary Session).  


          AB 11 X2 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.  It is estimated that the ongoing annual  
          revenue increases resulting from this fee increase will be $11.1  
          million.  As mentioned above, the State Auditor report found  
          that there was an $8 million shortfall in covering all of the  
          BOE's licensing program's costs.  


          SB 5 X2 requires retailers of electronic cigarettes to be  
          licensed by the BOE, 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 BOE that must now be licensed, which  
          will further assist BOE in funding licensing programs moving  
          forward. Changes for both bills go into effect on January 1,  
          2017.


          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) 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 2015-16 Second Extraordinary Session.   
          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.  


          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  








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          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 that 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: 0005013