BILL ANALYSIS
AB 2496
Page 1
Date of Hearing: April 20, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2496 (Nava) - As Amended: April 14, 2010
SUBJECT : CIGARETTE AND TOBACCO PRODUCTS
KEY ISSUE : Should California amend the laws implementing the
1998 Master Settlement Agreement (MSA) with the major tobacco
companies, in order to strengthen enforcement against
"non-participating manufacturers" and thereby ensure continued
MSA payments from participating manufacturers?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
Sponsored by the California Department of Justice, this bill
amends several existing laws relating to the sale, taxation, and
licensing of cigarettes and tobacco products. Specifically,
this bill seeks to expand and clarify obligations relating to
the 1998 Master Settlement Agreement (MSA) between several
states and four major tobacco companies. The 1998 MSA settled
dozens of lawsuits that had been brought by more than forty
states, each one seeking to recover the public costs stemming
from smoking-related illnesses. In brief, the MSA relieved the
tobacco companies from past, present, and certain future legal
actions brought by the states for recovery of smoking-related
public health expenses. In exchange for this immunity from
state actions, the tobacco companies agreed to make payments to
the states in perpetuity and to make changes in their
advertising and marketing practices. However, because several
smaller tobacco manufacturers were not signatories or did not
subsequently agree to the terms of the settlement, the MSA also
called upon each state to enact a "Model Reserve Fund Statute."
The model statutes would impose similar obligations on
"non-participating manufacturers" (or NPMs) so that they would
not enjoy a competitive advantage. California's version of
"Model Reserve Fund Statute," much like ones adopted in all
other states, required the NPMs, as a condition of operating in
the state, to deposit funds into a qualified escrow account.
The amount of the required deposit would approximate the MSA
payments required of the participating manufacturers (or PMs).
Escrow funds could be used to secure judgments or settlements
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that might result from future actions brought by the state
against the NPM. The MSA included another provision requiring
states to "diligently enforce" provisions against the NPMs or
face the prospect of having MSA payments reduced. The author
and sponsor contend that, in addition to enhancing the
enforcement of existing laws against the NPMs, this bill will
also ensure that PMs do not attempt to reduce MSA payments or
contend in possible future litigation that California has failed
to "diligently enforce" provisions against the NPMs. This
relatively non-controversial measure passed out of the Assembly
Government Organization Committee on a 17-1 vote. There is no
known opposition.
SUMMARY : Amends provisions of California's Cigarette and
Tobacco Products Licensing Act (Tobacco Licensing Act),
Cigarette and Tobacco Products Tax Law (Tobacco Tax Law), and
other statutes as they relate to the obligations of
participating tobacco manufacturers who were not original
signatories or did not elect to agree to the terms of the Master
Settlement Agreement (MSA) between the State and the major
tobacco manufacturers. Specifically, this bill :
1)Requires a manufacturer or importer of tobacco products, as a
condition of obtaining and maintaining a license to operate in
California, to do all of the following:
a) Consent to jurisdiction of the California courts for the
purpose of enforcement of the Tobacco Licensing Act, the
MSA and the Tobacco Tax Law.
b) Waive any sovereign immunity defense that may apply to
any action brought by the state Attorney General or Board
of Equalization (BOE) to enforce the Tobacco Licensing Act,
the Tobacco Tax Law, or the MSA.
c) Provide a copy of any valid, corresponding federal
permit issued by the United States Treasury, Alcohol and
Tobacco Tax and Trade Bureau.
d) Certify that it is either a "participating manufacturer"
(PM) in the Master Settlement Agreement or that it is in
full compliance with escrow fund requirements for
non-participating manufacturers (NPM) and related
provisions of state tobacco laws.
2)Authorizes a peace officer or a BOE employee that has been
granted limited peace officer status to inspect any site with
respect to certification, cigarette tax stamp and meter
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requirements, and disclosures under the Tobacco Tax Law.
3)Prohibits any importer, distributor, wholesaler, or retailer
from acquiring a package of cigarettes to which a stamp or
meter impression may not be affixed in accordance with the
requirements of the Tobacco Tax Law.
4)Authorizes a tobacco product manufacturer that elects to place
funds into a qualified escrow fund to make an irrevocable
assignment of its interest in the funds to the State of
California. Requires any funds assigned to the state that are
withdrawn to be deposited into the General Fund as a credit
against any judgment or settlement which may be obtained
against the tobacco product manufacturer who has assigned the
funds.
5)Expands the definition of tobacco products commonly known as
"bidis" and "beedies" (tobacco products wrapped in temburni or
tendu leaves) to include any product that is marketed and sold
as "bidis" or "beedies."
6)Amends provisions of the Tobacco Tax Law relating to
certification of tobacco product manufacturers, including
expanding the information that a non-participating
manufacturer (NPM) must certify, including, in the case of a
NPM located outside of the United States, a declaration from
each of the NPM's importers, as specified, that the importer
accepts joint and several liability with the NPM for all
required escrow fund deposits and related penalties and fees.
7)Sets forth the circumstances under which (and the procedures
by which) a PM, NPM, or "brand family," as defined, shall be
included or excluded on, or restored to, the Attorney
General's directory of manufacturers and distributors that are
in compliance with the Tobacco Licensing Act, Tobacco Tax Law,
and MSA. Specifies that a person is prohibited from shipping
or distributing into or within this state, for consumption in
California, the products of any manufacturer or brand family
not included in the directory.
8)Sets forth the circumstances by which a licensed distributor
or wholesaler shall be entitled to a refund from a tobacco
manufacturer or importer for any money paid by the licensed
distributor or wholesaler for tobacco products in the event
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that the manufacturer or importer is removed from the Attorney
General's directory. Similarly sets forth the circumstances
by which a licensed retailer shall be entitled to a refund
from a licensed distributor or wholesaler when a manufacturer
or importer has been removed from the directory.
9)Gives the Attorney General additional authority to conduct
audits and investigations in order to enforce the MSA, Tobacco
Licensing Act, and Tobacco Tax Law, and, as necessary, to
issue subpoenas, compel attendance of witnesses, administer
oaths, take depositions, and compel the production of books,
records, and other documents relevant to an audit or
investigation.
10)Requires, as a condition of selling cigarettes in California,
a tobacco manufacturer to provide certain federal tax returns
and forms. Makes failure to file forms, or the submission of
false forms, subject to civil penalties and removal from the
Attorney General's directory.
11)Amends Tobacco Tax Law so that it conforms to recently
enacted federal legislation regulating the sale and
distribution of tobacco products over the Internet or in any
other non-face-to-face manner. Clarifies that provisions of
federal law that require Internet sellers to comply with state
laws would also require compliance with state laws governing
escrow fund obligations and specified provisions of the
Tobacco Licensing Act and Tobacco Tax Law.
12)Specifies that existing provisions of the Tobacco Tax Law
that permit the BOE to seize tobacco products for certain
violations of the law will also permit seizure for violation
of the provisions in this bill.
EXISTING LAW :
1)Provides, under the California and Tobacco Products Licensing
Act of 2003, for the licensure of manufacturers, importers,
distributors, wholesalers, and retailers of cigarettes or
tobacco products; imposes certain fees, reporting
requirements, and practices on the part of licensees; and
authorizes the imposition of civil and criminal penalties on
individuals who violate provisions of the act or other
tobacco-related laws, including prohibitions on the sale of
tobacco products without a license or to minors. (Business &
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Professions Code Section 22970 et seq.)
2)Requires a manufacturer or importer of tobacco products, as a
condition of obtaining and maintaining a license to operate in
this state, to do all of the following:
a) Submit to the BOE a list of all "brand families," as
defined, that they manufacture or import and to update that
list when a new brand family is added.
b) Consent to the jurisdiction of the California courts for
the purpose of enforcing the Tobacco Licensing Act and to
appoint a registered agent for service of process in this
state.
c) Certify that it is either a "participating manufacturer"
(PM) in the Master Settlement Agreement, or that it is in
full compliance with escrow fund requirements for
non-participating manufacturers (NPM). (Business &
Professions Code Section 22979.)
3)Authorizes any peace officer, or BOE employee granted limited
peace officer status, to conduct on-site inspections to ensure
compliance with the Tobacco Licensing Act and other
tobacco-related laws and regulations. (Business & Professions
Code Section 22980.)
4)Prohibits a tobacco manufacturer, importer, distributor, or
wholesaler from selling tobacco products to another
distributor, wholesaler, retailer, or other person who is not
licensed in the state, except as specified. Provides further
that no retailer, distributor, or wholesaler shall purchase
tobacco products from a manufacturer or importer that is not
licensed in this state. (Business & Professions Code Section
22980.1.)
5)Prohibits an importer, distributor, wholesaler, or retailer
from purchasing or otherwise acquiring any package of
cigarettes to which a stamp or meter impression may not be
affixed in accordance with provisions of the Tobacco Tax Law.
(Id.)
6)Prohibits the sale, distribution, or import of "bidis" or
"beedies" (defined as a product containing tobacco that is
wrapped in temburni leaf or tendu leaf) unless it is sold or
intended for sale in business establishments that exclude
minors. (Penal Code Section 308.1.)
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7)Requires every tobacco manufacturer whose cigarettes are sold
in this state, whether directly or through a distributor,
retailer, or similar intermediary, to execute and deliver to
the Attorney General a prescribed form certifying that it is
either a PM in the MSA or a NPM that is in full compliance
with the escrow fund deposit requirements. Prescribes the
information that must be included in the certification form.
Requires the Attorney General to maintain a directory of
persons or entities that have complied with the certification
requirements. (Revenue & Taxation Code Section 30165.1.)
8)Requires, under the Tobacco Tax Law, a tax on cigarettes and
tobacco products, paid by distributors, through the use of
stamp or meter impressions, and generally prohibits the sale
or distribution of products that lack the required stamp or
meter impressions. Further authorizes the BOE to conduct
on-site inspections to ensure compliance and to seize any
non-complying property, as specified. (Revenue & Taxation
Code Sections 30163, 30165.1, and 30431 through 30436.)
9)Provides, under the Master Settlement Agreement (MSA) entered
into by the several state attorneys general and various
tobacco companies, that, in return for a release from certain
claims brought against them, the tobacco companies agree to
pay substantial sums to the states based on volume of sales;
fund a national foundation devoted to the interests of public
health; and make substantial changes in their advertising and
marketing practices, especially with the intention of reducing
underage smoking. (See description of MSA in Health & Safety
Code Section 104555 (e).)
10)Requires any tobacco product manufacturer selling cigarettes
to consumers within this state, whether directly or through a
distributor, retailer, or similar intermediary, to either
become a participating manufacturer as that term is used in
the MSA, or place into a qualified escrow account fund
specified amounts based on the volume of products sold within
the state. (Health & Safety Code Section 104557.)
11)Provides, under the federal Prevent All Cigarette Trafficking
Act of 2009 (PACT Act), that persons or businesses that sell
cigarettes and smokeless tobacco products via the Internet or
other non-face-to-face means must pay all applicable federal,
state, local, or Tribal taxes and affix appropriate stamps;
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comply with various state and local laws as if the Internet or
other non-face-to-face sellers were tobacco product retailers
in the same state as their customers; and check the age of
identification of customers both at the point of sale and at
the point of delivery.
COMMENTS : In 1998 the Attorney General of California, along
with the attorneys general of 45 other states and five U.S.
territories, entered into a Master Settlement Agreement (MSA)
with four major tobacco companies. (Four other states reached
separate agreements with the tobacco companies.) The MSA
settled more than forty pending lawsuits that were brought on
behalf of the states or state entities to recover the public
costs of treating smoking-related illnesses. Under the terms of
the MSA, the tobacco companies were released from past, present,
and certain future actions brought by the states or state
entities for recovering costs associated with smoking-related
illnesses. (It did not release tobacco companies from private
civil actions.) In exchange for this release from state
actions, the tobacco companies agreed to make payments to each
state that was a party to settlement in amounts based on the
volume of sale in that state. For California, the amount is
likely to equal about $25 billion through the year 2025. Under
an implementing Memorandum of Understanding signed in
California, those funds are divided between the state and local
governments. In addition to the payments, the participating
tobacco companies agreed to fund a national public health
foundation and to change certain advertising and marketing
practices, especially with the intent of reducing underage
smoking.
However, the MSA did not apply to many smaller tobacco
manufactures that were not part of the agreement. These
"non-participating manufacturers" - or NPMs - are not subject to
the payment requirements or advertising changes. To ensure that
NPMs would not enjoy a competitive advantage, the MSA included a
"Model Reserve Fund Statute" that each state was encouraged to
adopt. These statutes would require NPMs to deposit funds in an
escrow account in amounts similar to those required under the
MSA. Not only would this equalize the playing field between the
PMs and NPMs, it would also create a reserve fund to pay
judgments or settlements on claims brought against the NPM by
the state. All fifty states have enacted such statutes. In
California, the model statute requires any tobacco manufacturer
selling products in this state to either (1) agree to become a
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"participating manufacturer" and be bound by the terms of the
MSA, or (2) place funds into a qualified escrow account, with
the amount to be determined by the volume of sales within the
state. The amount that a NPM must place in the escrow account
is supposed to approximate the amount that it would be required
to pay if it were a participating manufacturer in the MSA
agreement. Existing law provides that any funds not withdrawn
will be returned to the NPM after 25 years. (This bill would
amend this provision so as to authorize the NPM to make an
irrevocable assignment of its share of the funds to the State of
California, with any funds so assigned to the state to be
deposited in the General Fund as a credit against any future
judgment or settlement.)
State Has Duty to "Diligently Enforce" Provisions Against NPMs.
According to the author and sponsor, the California Department
of Justice, this bill is necessary in order to srtrengthen
enforcement against NPMs and follows the lead of other states
that have recently enhanced their NPM enforcement legislation.
This bill, in particular, seeks to ensure that NPMs are fully
compliant not only with the escrow funding requirement, but also
to ensure that they are fully compliant with certain provisions
of the state's Tobacco Licensing Act and Tobacco Tax Law. It is
particularly important that California update its statute in
light of these recent changes in other states because one term
of the MSA requires states to "diligently enforce" provisions
against NPMs or run the risk of having their MSA payments
reduced. The author and sponsor contend that bringing
California law into conformity with those other states will
prevent the signatory tobacco companies from reducing MSA
payments or arguing in possible future litigation that
California has failed to "diligently enforce" provisions against
the NPMs.
Because this is a long and complicated bill that amends several
different code sections, and therefore not easily summarized,
the reader is referred to the bill summary that appears at the
beginning of this analysis. However, some of the more important
provisions of the bill do the following:
Provide that as a condition of obtaining a license in
this state, a manufacturer (including an NPM) or importer
must consent to the jurisdiction of California courts for
the purpose of enforcing the MSA. (Existing law already
requires prospective licensees to consent to the
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jurisdiction of California courts for other matters
relating to provisions regulating tobacco.) In addition, a
prospective licensee would also need to waive any sovereign
immunity defense in any action brought by the Attorney
General or the BOE to enforce various tobacco regulations.
This provision was added to the bill because some of the
NPMs are owned in whole or in part by foreign nations.
Provide generally that full compliance with the MSA and
the model reserve fund statute is a pre-condition for
inclusion on the Attorney General's directory of
manufacturers and brand families that may legally sell or
distribute tobacco products in the state.
Specify that, consistent with federal law, tobacco
manufacturers, importers, and distributors that sell
products on-line to customers in California must comply
with California laws.
Ensure, generally, that regulations pertaining to the
sale or distribution of tobacco products, licensing and
certification requirements, and taxation and stamping
requirements shall apply to both PMs and NPMs. This bill
will also enhance the ability of peace officers and BOE
agents to investigate suspected violations of state tobacco
laws and seize property that is the subject of a violation.
Constitutional Questions Already Addressed . Many if not most of
the NPMs that would be affected by this bill are located outside
of California and, in some cases, outside of the United States.
Any state laws that prevent or unduly burden the ability of
businesses from outside the state from selling their products
within the state create a potential "dormant" commerce clause
issue. Generally, a state cannot impose burdens on interstate
commerce or discriminate against out-of-state businesses unless
the burdens on commerce are significantly outweighed by the
benefits to a legitimate state interest. However, the federal
courts have rejected such challenges in California and
elsewhere, holding that the California statute in particular
makes no distinction based on the tobacco products' origin - it
applies to both in-state and out-of-state businesses - and the
burden imposed on interstate commerce does not exceed its
putative local benefits. (PTI, Inc.v. Phillip Morris, Inc.
(2000) 100 F. Supp. 2d 1179) (This opinion held, additionally,
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that the statute did not violate the Import-Export, free speech,
due process, or equal protection clauses of the U.S.
Constitution.) While this bill modestly strengthens existing
regulations, the state's right to impose such regulations
appears to be on solid constitutional ground. More recently the
court held that California's statute implementing the MSA was
not preempted by the Sherman Anti-Trust Act. (Sanders v. Brown
(2007) 504 F.3d 903 (CA 9th); cert denied, 128 S. Ct. 2427.)
ARGUMENTS IN SUPPORT : The California Department of Justice, the
sponsor, argues that this bill will "enhance the department's
efforts to enforce existing provisions of state law related to
the Master Settlement Agreement between California and the major
tobacco manufacturers. The measure would protect against the
sale of cigarettes below market prices, and would help protect
the State's share of tobacco settlement payments [due] to it
under the Master Settlement Agreement."
The American Lung Association supports this bill because it will
"strengthen existing law regarding payments from
'non-participating manufacturers' under the Master Tobacco
Settlement Agreement." The American Lung Association believes
that this bill will "provide the state with additional tools to
ensure payment of NPMs, especially for new, foreign, and
elevated risk NPMs." The American Lung Association also
supports the provision in this bill that allows NPMs to assign
their interest in the funds to the State, so that such funds may
ultimately be directed toward tobacco prevention efforts.
Prior Related Legislation . SB 822 (Chapter 780, Stats. of 1999)
created California's version of the MSA model statute, requiring
tobacco manufacturers selling products within the state to
either become a participating manufacturer under the terms of
the Master Settlement Agreement, or, if a non-participating
member, to deposit specified funds in a qualified escrow fund
each year.
AB 71 (Chapter 890, Stats. of 2003) created the Cigarette and
Tobacco Products Licensing Act of 2003, which generally provides
for the licensing of tobacco manufacturers, importers,
distributors, wholesalers, and retailers, and prohibits any such
entity from operating in California without a license.
Authorizes BOE to suspend or revoke licenses for violations of
the Act and related provisions of law.
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Related Pending Legislation . AB 2733 (Ruskin) amends the
Tobacco Licensing Act to prohibit displaying or gifting of
cigarettes and tobacco products during any period of license
suspension and revocation. The bill also requires a person that
has received a notice of suspension or revocation to post a copy
of the notice at the primary entrance and near the cash
register. Passed out of Assembly Government Organization
Committee on a 17-0 vote and will be heard by the Assembly
Judiciary Committee on April 20.
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Justice (sponsor)
American Lung Association
Breathe California
Opposition
None on file
Analysis Prepared by : Thomas Clark/ JUD. / (916) 319-2334