BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 2496 -Nava
Amended: May 20, 2010
Hearing: June 23, 2010 Fiscal: Yes
SUMMARY: Amends provisions of California's Cigarette and
Tobacco Products Licensing Act, and Tobacco Products
Tax Law, and Other Statutes as They Relate to the
Obligations of Tobacco Manufacturers Who Were Not
Original Signatories to the Agreement or Who Have Not
Agreed to the Terms of the Master Settlement
Agreement (MSA) Between the State and the Major
Tobacco Manufacturers.
EXISTING LAW 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.
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:
Submit to the Board of Equalization (BOE) a list
of all brand families, as defined, that they
manufacture or import and to update that list when a
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new brand family is added.
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.
Certify that it is either a participating
manufacturer in the Master Settlement Agreement, or
that it is in full compliance with escrow fund
requirements for non-participating manufacturers
(NPM).
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.
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.
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.
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.
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 (AG) a prescribed form
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certifying that it is either a participating manufacturer
in the MSA or a NPM that is in full compliance with the
escrow fund deposit requirements. Requires the AG to
maintain a directory of persons or entities that have
complied with the certification requirements
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.
Provides, under the MSA entered into by 46 states
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.
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 specified amounts based on the volume of
products sold within the state.
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; 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 and
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identification of customers both at the point of sale and
at the point of delivery.
THIS BILL requires a manufacturer or importer to
consent to jurisdiction of the California courts for the
purpose of enforcement of the MSA and a specified provision
of the Cigarette and Tobacco Products Tax Law.
Requires the manufacturer or importer to identify the
registered agent to the Department of Justice (DOJ).
Authorizes a peace officer or board employee that is
granted limited peace officer status to inspect any site
with respect to specified violations of state tax law.
Prohibits a manufacturer or importer from acquiring a
package of cigarettes unless the brand family or product
manufacturer of the cigarettes is included on a directory
posted by the DOJ, as specified. Deletes the DOJ's fee on
manufacturers for implementing and maintaining the
directory.
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 benefit of 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 that may be obtained against the tobacco product
manufacturer who has assigned the funds.
Requires a stamp or meter impression to be made on rolls
of tobacco, as specified, and makes conforming changes to
related provisions:
Requires certification of additional information,
as specified;
Establishes circumstances under which a
manufacturer and brand families are to be excluded
from the directory of tobacco product manufacturers
that are participating manufacturers and brand
families under the MSA, and would require those
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distributors, after receiving notice from the DOJ, to
provide notice to specified customers.
Deletes provisions referring to cigarettes or
tobacco products from a NPM located outside the United
States that is removed from the directory.
Requires a newly qualified NPM or a NPM that poses
an elevated risk of noncompliance, as defined, with Tobacco
Products Tax law or the MSA, to post a surety bond, as
specified before inclusion onto the DOJ's directory of
tobacco product manufacturers that are participating
manufacturers under the MSA.
Specifies that a person is prohibited from shipping
or distributing into or within this state for personal
consumption in California, cigarettes of a tobacco
manufacturer or brand family not included in the directory,
and would provide that this specification is declaratory of
existing law.
Requires any NPM not located in the United States,
as an additional condition precedent to having its brand
families listed or retained in the directory, to cause its
importers to appoint an agent, as specified, and would
impose additional specified responsibilities upon such
manufacturer.
Requires, as a condition of selling cigarettes in
California, a tobacco product manufacturer, as specified,
to submit, or authorize to disclose, a copy of its
applicable return. Provides that a failure to comply with
that provision would subject the manufacturer and its brand
companies to removal from the directory and, imposes a
civil penalty on any manufacturer that intentionally
provides an applicable return with materially false
information.
Adds to the forfeiture list cigarette and tobacco
products that do not meet requirements specified by BOE or
the AG. Requires the BOE and the DOJ to share the data,
including e-mail addresses, for distributors, importers,
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manufacturers, and wholesalers. Eliminates the reference
to the track and trace provisions under state law that is
applicable to delivery sales.
Amends the definition of bidis or beedies, as
defined, to include any product that is marked as sold as
"bidis" or "beedies", and clarifies that persons who
violate the prohibition prescribed under existing law are
subject to both criminal and civil liability.
Provides that the provisions of this bill are
severable.
FISCAL EFFECT:
According to the BOE, the delivery sale provisions of
this bill may have a positive impact on the state excise
tax collected on sales of cigarettes and tobacco products
and also on use tax collected on cigarettes and tobacco
products purchased from out-of-state retailers. However,
the BOE has no way of measuring the potential impact these
provisions may have, and therefore, cannot provide an
estimate at this time.
COMMENTS:
A. Purpose of the Bill
The bill is sponsored by the DOJ and is intended to
allow for better enforcement of Internet and other delivery
sales of cigarettes and tobacco products in this state,
strengthen the AG's and BOE's ability to diligently enforce
the Model Statute and Tobacco Directory Law, and to provide
retailers relief of any financial hardship resulting from
cigarettes and tobacco product inventory that immediately
becomes illegal to sell upon removal from the Tobacco
Directory.
B. Background: The MSA
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The 1998 MSA settled dozens of lawsuits that had been
brought by states, each one seeking to recover the public
costs stemming from smoking-related illnesses. 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. 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.
Because 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 NPMs so that they would
not enjoy a competitive advantage.
All 50 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 "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
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C. What is BOE's role in enforcing the Model Statute?
The BOE has several responsibilities with respect to
"diligent enforcement" of the Model Statute, which protects
the state's approximately $900 million annual revenue
payment stream from the MSA. The BOE's enforcement role,
which coincides with administration of the Cigarette and
Tobacco Products Tax Law, is as follows:
The BOE is authorized to adopt any regulations necessary
to ascertain, based on the amount of state excise tax paid
on cigarettes, the number of tax paid cigarettes sold by
NPMs. As a result of this provision, the BOE provides the
AG with annual statistics of cigarettes sold in California
by NPMs.
The Tobacco Directory Law prohibits a distributor from
affixing a tax stamp to a package of cigarettes, or paying
the tax on a tobacco product defined as a cigarette, unless
the brand family of cigarettes or tobacco product, and the
tobacco product manufacturer that makes or sells the
cigarettes or tobacco product, are included on the Tobacco
Directory. A violation of this prohibition could result in
the revocation or suspension of the license or licenses of
the distributor and/or a civil penalty and subject such
products to seizure and forfeiture by the BOE.
The Licensing Act requires every manufacturer or importer
required to obtain and maintain a license to engage in the
sale of cigarettes. In order to be eligible to obtain and
maintain a license, a manufacturer or importer that is a
"tobacco products manufacturer" pursuant to the Model
Statute must (1) certify to the BOE that it is a
"participating manufacturer" or is in compliance with the
Model Statute, and (2) submit to the BOE a list of all its
brand families. BOE also has the authority to revoke or
suspend the license of a distributor for selling product
not listed on the California Tobacco Directory.
The Licensing Act allows an employee of the BOE to enter
into, and conduct an inspection of, any building, facility,
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site, or place, for which there is evidence of the failure
to comply with the requirements of the Model Statute or the
Tobacco Directory Law.
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D. BOE's Administrative Concerns
The BOE has several administrative concerns with
this bill. BOE contends that, in its current form, certain
sections of the bill are not compatible with the Licensing
Act or the Cigarette and Tobacco Products Tax Law with
respect to requirements, definitions, and administration.
According to the BOE, it has been working with the AG's
staff on amendments that will make the bill workable within
the existing structure of the tobacco tax laws the BOE
administers. More specifically, BOE would like the
following amendments:
An Unnecessary Licensing Act Requirement. Delete
the bill's additional requirement for every
manufacturer and every importer to provide to the BOE
a copy of federal permit issued by the federal Alcohol
and Tobacco Tax and Trade Bureau in order to be
eligible to obtain and maintain a license under the
Cigarette and Tobacco Products Licensing Act of 2003
(Licensing Act) because this requirement is
unnecessary for the BOE's tax administration.
Delivery Sales. BOE would like to delete the
proposed Tax Law Section 30165.3, which would add
provisions to implement the federal Prevent All
Cigarettes Trafficking Act of 2009 (PACT Act) that is
intended to address state excise tax losses on
non-face-to-face delivery sales to consumers, and
instead amend the implementing provisions into
existing Revenue and Taxation Code Section 30101.7.
Sell-Off Period. Revise the proposed Tobacco
Directory Law provision within the Tax Law that
requires notice to, and sell-off period for, a
distributor's customer so that they are workable, as
intended by the sponsor.
Seizure and Forfeiture. Delete the proposed
amendments to Tax Law Section 30436 in order to
maintain existing law.
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At the time this analysis was written, these amendments
were not yet available.
Support and Opposition
Support:Department of Justice (sponsor), American Lung
Association, County of Santa Barbara
Oppose: None on file.
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Consultant: Meg Svoboda