BILL ANALYSIS Ó
AB 2770
Page 1
(Without Reference to File)
CONCURRENCE IN SENATE AMENDMENTS
AB
2770 (Nazarian)
As Amended August 15, 2016
Majority vote
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|ASSEMBLY: |44-26 |(May 27, 2016) |SENATE: |27-11 |(August 17, |
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|COMMITTEE VOTE: | | (August 30, |RECOMMENDATION: |concur |
| |11-6 |2016) | | |
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(G.O.)
Original Committee Reference: G.O.
AB 2770
Page 2
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
AB 2770
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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
AB 2770
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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