BILL ANALYSIS �
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 680|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: SB 680
Author: Wolk (D)
Amended: 5/14/13
Vote: 21
SENATE JUDICIARY COMMITTEE : 6-0, 5/7/13
AYES: Evans, Anderson, Corbett, Jackson, Leno, Monning
NO VOTE RECORDED: Walters
SUBJECT : Tobacco Settlement Fund
SOURCE : Office of the Attorney General
DIGEST : This bill, for the purposes of calculating the amount
a tobacco product manufacturer is required to place in the
qualified escrow account under the Master Settlement Agreement
(MSA), revises the definition of "units sold" to specify that it
is the number of cigarettes sold to a consumer, regardless of
whether the state excise tax was collected, but excludes, among
other things, cigarettes sold at federal military installations.
ANALYSIS :
Existing law:
1.Implements the terms of the tobacco litigation MSA, which
grants legal immunity for past deceptive business practices to
major tobacco manufacturers in exchange for certain voluntary
advertising restrictions and annual settlement payments to
states. (Health & Safety Code Sec. 104555 et. seq.)
CONTINUED
SB 680
Page
2
2.Requires a tobacco product manufacturer that sells cigarettes
to consumers within the state to either, become a
participating manufacturer under the terms of the MSA and
perform certain financial obligations pursuant to that
agreement, or to pay specified annual amounts into a qualified
escrow account based on the number of individual cigarette
units they sold in the state. (Health & Safety Code Sec.
104557(a).)
3.Defines "units sold" as the number of individual cigarettes
sold in the state by the applicable tobacco product
manufacturer, whether directly or through a distributor,
retailer, or similar intermediary or intermediaries, during
the year in question, as measured by excise taxes collected by
the state. (Health & Safety Code Sec. 104556(j).)
4.Provides that funds contributed to the escrow account may be
used to pay a judgment or settlement on any released claim
brought against a non-signatory tobacco product manufacturer
by the state or any releasing party located or residing in the
state, or may revert back to the tobacco product manufacturer
under certain circumstances. (Health & Safety Code Sec.
104557(b).)
5.Requires tobacco product manufacturers to annually certify to
the Attorney General that the manufacturer has complied with
existing law, and provides that the failure to place all
required funds into escrow subjects the manufacturer to civil
penalties, as specified. (Health & Safety Code Sec.
104557(c).)
This bill:
1.Revises, for the purposes of calculating the amount a tobacco
product a manufacturer is required to place in the qualified
escrow account, the definition of "units sold" to specify that
it is the number of cigarettes sold to a consumer in the state
by the applicable manufacturer, regardless of whether the
state excise tax was collected.
2.Excludes from the definition of "units sold" any cigarettes
sold on federal military installations, sold by a Native
American tribe to a member of that tribe on that tribe's land,
CONTINUED
SB 680
Page
3
or that are otherwise exempt from state excise tax pursuant to
federal law.
Background
On November 23, 1998, a $206 billion settlement was reached
between California and 45 other states, Puerto Rico, the
District of Columbia, three territories, and five major
cigarette manufacturers in the United States, concerning
antitrust, consumer protection, and health-related litigation
claims that were pending against the major tobacco companies at
the time. The resulting MSA placed significant limitations on
tobacco-related advertisements by tobacco companies and promised
multi-billion dollar annual payments to the states. At the time
of settlement, California was projected to receive approximately
$25 billion in settlement funding through 2025. As part of the
agreement, the states dropped their lawsuits against the named
tobacco companies and agreed to impose similar settlement terms
via state law on those tobacco companies that elected not to
join the MSA.
California implemented the relevant terms of the MSA against
non-signatory tobacco companies, in part, by enacting the Model
Escrow Statute, which required these non-signatories to make
annual payments into a state-held escrow account based on the
total number of cigarettes sold to California consumers as
measured by state excise taxes collected on the sales. (SB 822
[Escutia, Chapter 780, Statutes of 1999], codified at Health and
Safety Code Sec. 104555 et. seq.) The implementing statute
specified that funds held in the escrow account would be used to
pay judgments or settlements on any claim released by the state
against the non-signatory tobacco manufacturers, or would be
released back to the manufacturers under certain circumstances.
The statute also authorized the California Attorney General to
enforce its terms, and to bring a civil action on behalf of the
state against any tobacco product manufacturer that failed to
place the mandated funds into the escrow account.
Through its enforcement activities, the Attorney General's
office has found that certain manufacturers are avoiding their
obligation to contribute to the tobacco settlement escrow
account by selling tax-evaded cigarettes in the state.
According to the Attorney General:
CONTINUED
SB 680
Page
4
This is a significant problem as the market for tax-evaded
product is large and growing. In 2011, the most recent
year for which data is available, more than 11.6 billion
cigarettes were sold in the United States without state
excise tax being paid. Many of those tax-evaded cigarettes
are sold by tribal manufacturers through tribal
distribution channels operating outside the reach of State
taxing authorities. In recent years, the Attorney
General's Office has been involved in a number of lawsuits
against tribal retailers and distributors purchasing
cigarettes through these tribal distribution channels. In
one recent case, the Attorney General found that over the
course of four years, more than 300 million tax-evaded
cigarettes had been sold by a single tribal distributor.
People v. Huber, DR 110232 (Humboldt County Sup. Ct. 2011).
Had those cigarette sales been subject to the State's
Escrow Statute, more than $5.5 million dollars in escrow
would have been owed on those sales alone.
The MSA includes provisions that require signatory states to
diligently enforce the terms of the agreement, and to fund
tobacco settlement escrow accounts at a rate roughly equivalent
to the level of settlement payments received from signatory
manufacturers under the MSA. Failure to diligently enforce the
agreement and any related implementing statute exposes
non-compliant states to substantial reductions in their MSA
settlement payments. The Attorney General's Office has been
party to a protracted dispute with signatory tobacco
manufacturers over California's compliance with the MSA
concerning these tax-evaded in-state cigarette sales. To
resolve this dispute, and to ensure California's continued
compliance with the MSA, this bill, sponsored by the California
Department of Justice, re-defines the phrase "units sold" in the
implementing statute so that annual contributions owed to the
escrow account by non-signatory manufacturers are no longer
measured by the receipt of state excise taxes, but instead by
the actual number of cigarettes sold in-state in a given year.
Prior Legislation
AB 71 (Horton, Chapter 890, Statutes of 2003), required the
licensure of manufacturers, distributors, wholesalers,
importers, and retailers of cigarette or tobacco products that
are engaged in business in California by the State Board of
CONTINUED
SB 680
Page
5
Equalization. The bill prohibited retailers, manufacturers,
distributors, and wholesalers from distributing or selling
cigarette and tobacco products in the state unless they are
licensed, and authorized the board to suspend or revoke the
license of any manufacturer, distributor, wholesaler, importer,
or retailer of tobacco products that is in violation of the
bill's provisions. The bill also prohibited a manufacturer,
distributor, wholesaler, importer, retailer, or any other person
from selling counterfeit cigarette and tobacco products, and
provided that a violation of that prohibition is a crime.
SB 822 (Escutia, Chapter 780, Statutes of 1999), required any
tobacco product manufacturer selling cigarettes to consumers
within the state to either become a participating manufacturer
under the terms of the MSA entered into between California and
leading United States tobacco product manufacturers and perform
certain financial obligations under the settlement, or place an
amount of funds, calculated on the basis of units of tobacco
products sold in the state, into an escrow fund. The bill
specified that the funds in the escrow fund shall be used to pay
a judgment or settlement on any released claim against the
tobacco product manufacturer by the state or be released to the
tobacco product manufacturer in certain circumstances. The bill
authorized the Attorney General to bring a civil action on
behalf of the state against any tobacco product manufacturer
that fails to place the funds into the escrow account, and
specified penalties for any knowing violation of the requirement
to place funds into the account.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 5/13/13)
Office of the Attorney General (source)
ARGUMENTS IN SUPPORT : According to the author's office:
Some non-signatory manufacturers are selling large
quantities of cigarettes through channels such as tribal
smoke shops and the internet where state tax evasion is
prevalent. This practice reduces the amount of funds
available to satisfy potential liabilities, fuels the sale
of cheap cigarettes which harm public health, and gives the
CONTINUED
SB 680
Page
6
non-signatory manufacturers an unfair cost advantage over
non-signatory manufacturers that do not rely on these
distribution channels and over signatories to the MSA which
make settlement payments in lieu of escrow deposits.
The solution to this problem [is to amend] existing law to
require non-signatory manufacturers to make escrow deposits
on all cigarettes sold in California that are not exempt
from state tax pursuant to federal law. Non-signatory
manufacturers would not be required to make escrow deposits
for sales which federal law prohibits California from
taxing, such as sales to federal military installations and
tribal sales to tribal members. The Attorney General's
Office would be responsible for assuring that the
non-signatory manufacturers make escrow deposits on the
larger volume of their sales through administrative action
and/or litigation against non-compliant manufacturers.
Closing the tax evasion loophole in existing law would
afford California greater security for unreleased tobacco
liabilities, promote public health, and eliminate unfair
competition.
AL:ej 5/14/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED