BILL ANALYSIS
AB 689
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Date of Hearing: April 20, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 689 (Charles Calderon) - As Introduced: February 26, 2009
4/5 vote. Fiscal committee.
SUBJECT : Cigarette and Tobacco Products Tax Law: tobacco
products
SUMMARY : Expands the definition of "tobacco products" contained
in both the Tobacco Tax and Health Protection Act of 1988
(Proposition 99) and the California Children and Families First
Act of 1998 (Proposition 10) to include any articles or products
made of or containing tobacco. Specifically, this bill :
1)Contains legislative findings noting that its provisions are
in furtherance of, and consistent with the purposes of, both
Proposition 99 and Proposition 10.
2)Specifies that it does not require the reimbursement of any
local government costs under the California Constitution
because the only costs that may be incurred by a local agency
or school district are associated with creating a new crime or
changing the definition of a crime.
EXISTING LAW :
1)Provides, under both Proposition 99 and Proposition 10, that
the term "tobacco products" includes, but is not limited to,
"all forms of cigars, smoking tobacco, chewing tobacco, snuff,
and any other articles or products made of, or containing at
least 50 percent, tobacco" excluding cigarettes.
2)Defines the term "cigarette" as "any roll for smoking, made
wholly or in part of tobacco, irrespective of size or shape
and irrespective of whether the tobacco is flavored,
adulterated or mixed with any other ingredient, where such
roll has a wrapper or cover made of paper or any other
material, except where such wrapper is wholly or in the
greater part made of tobacco and such roll weighs over three
pounds per thousand."
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3)Imposes a tax, under Proposition 99, upon the distribution of
tobacco products, based on the wholesale cost of these
products, at a tax rate equivalent to the combined rate of tax
imposed on cigarettes.
4)Provides that Proposition 99 revenues are to be deposited in
the Cigarette and Tobacco Products Surtax Fund and used only
for specified purposes, including health education programs,
disease research, and medical care for specified patients.
5)Specifies that the provisions of Proposition 99 may only be
amended by a vote of four-fifths of the membership of both
houses of the Legislature.
6)Imposes an additional tax, under Proposition 10, on tobacco
products based on the wholesale cost of these products, at a
rate equivalent to the $0.50 per pack rate Proposition 10
imposes on cigarettes.
7)Provides, under the California Constitution, that whenever the
Legislature or any state agency mandates a new program or
higher level of service on any local government, the State
shall provide a subvention of funds to reimburse that local
government for the costs of the program or increased level of
service. No reimbursement, however, is required when the
costs are associated with legislation defining a new crime or
changing the existing definition of a crime.
FISCAL EFFECT : The Board of Equalization (BOE) estimates that
this bill will increase tobacco products revenues by roughly
$100,000 per year. To the extent that new dissolvable tobacco
products enter the California market, revenue gains will be
higher by an unknown amount.
COMMENTS :
1)The author states:
Current law defines the term "tobacco products" to include
any product that contains at least 50% tobacco. In
today's marketplace, more products are being produced that
contain varying levels of tobacco. Moreover, the state
must generally rely on manufacturer representations
regarding the percentage of tobacco in each product.
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AB 689 addresses this concern by creating a bright line
rule for purposes of imposing the tobacco tax.
Specifically, this bill revises the definition of tobacco
products to include any product that contains tobacco,
irrespective of the amount. By eliminating an arbitrary
content threshold, this bill ensures that no tobacco
product will escape taxation.
2)Proponents state, "AB 689 seeks to clarify existing law with
regard to application of some California taxes on tobacco
products. Specifically, the bill would impose taxes
authorized by the Tobacco Tax and Health Protection Act of
1988 (Proposition 99) and the California Children and Families
First Act of 1998 (Proposition 10) on all products that
contain any amount of tobacco." Specifically, proponents
state, "AB 689 will help provide certainty for tobacco
licensees, who are responsible for collecting the taxes and
remitting them to the State."
3)Opponents state, "[T]ax increases that single out a specific
industry or group to shoulder new taxes will kill good jobs
and harm industries essential to California's economy."
Opponents also state, "Of 57 state excise tax increases that
were implemented between 2003 and 2007, only 16 of them met or
exceeded the projected revenues." Finally, opponents state
that, "AB 689 may result in new government programs and
spending that may become locked into the state budget."
4)Committee Staff Comments:
a) The current definition of tobacco products :
i) In 1988, California voters passed Proposition 99,
which imposes a tax upon the distribution of tobacco
products, based on the wholesale cost of these products,
at a tax rate equivalent to the combined rate of tax
imposed on cigarettes. Proposition 99 provides that the
term "tobacco products" includes, but is not limited to,
"all forms of cigars, smoking tobacco, chewing tobacco,
snuff, and any other articles or products made of, or
containing at least 50 percent, tobacco, but does not
include cigarettes".
ii) The very same definition was later included in
Proposition 10, which California voters passed in 1998.
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iii) This definition can be interpreted in at least one
of two ways, depending upon whether the clause "made of,
or containing at least 50 percent, tobacco" is read to
qualify all items listed in the definition or only "any
other articles or products".
iv) Based on its interpretation of federal statutes
defining "tobacco products", BOE has taken the second
approach and concluded that the term "tobacco products"
includes all forms of cigars, smoking tobacco, chewing
tobacco, and snuff, irrespective of the amount of pure
tobacco they contain. By the same token, BOE has
determined that the 50% tobacco threshold only applies to
"other articles or products".
v) This seems to be a reasonable interpretation given
the underlying purpose of Propositions 99 and 10, and the
fact that the definition specifically provides that the
term "tobacco products" includes, but is not limited to ,
the specified product categories, suggesting the
definition should be given broad application.
vi) In addition, Committee staff are not aware of any
other state that has a 50% tobacco content threshold.
Therefore, it would appear that this bill would make
California's definition of tobacco products similar to
the definition used by other states for tax purposes.
b) What exactly are "other articles or products"?
i) In response to increased restrictions on public
smoking, the tobacco industry has been actively
developing new smokeless products. For example, R.J.
Reynolds Tobacco Co. is currently introducing three
dissolvable smokeless products - Camel Orbs (a
lozenge-like pellet), Camel Sticks (a twisted
toothpick-size stick), and Camel Strips (a film strip for
the tongue).
ii) If these or similar products are represented to
contain less than 50% tobacco, and are subsequently found
to contain more than 50% tobacco, distributors are
concerned that they will be held responsible for payment
of back taxes on these products. This bill seeks to
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alleviate this concern by creating a bright line rule
that all products containing tobacco will be treated as
tobacco products for purposes of taxation, irrespective
of the tobacco content.
c) Related Bills in the Current Legislative Session :
i) AB 89 (Torlakson) would impose an additional excise
tax on cigarettes of $2.10 per pack. The proceeds would
fund various education, health, and research programs.
This bill is scheduled to be heard by the Committee on
Governmental Organization on April 22, 2009.
ii) SB 600 (Padilla) would impose an additional excise
tax on cigarettes of $1.50 per pack, with the amount
adjusted annually for inflation. Funds would be
deposited in the Tobacco Tax and Health Protection Fund
and the General Fund.
d) Technical amendment : Committee staff suggest a
technical amendment to insert the word "the" before
"provisions" on page 2, line 23.
REGISTERED SUPPORT / OPPOSITION :
Support
California Distributors Association (sponsor)
California Grocers Association
Opposition
California Chamber of Commerce
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098