BILL ANALYSIS �
SB 680
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Date of Hearing: June 25, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
SB 680 (Wolk) - As Amended: May 14, 2013
SENATE VOTE : 36-0
SUBJECT : TOBACCO SETTLEMENT FUND
KEY ISSUE : Should the Health and Safety Code be amended to
close a loophole that INADVERTENTLY EXCUSES tobacco
manufacturers who sell tax-evaded products in California from
COMPLYING WITH an escrow deposit obligation paid by other
tobacco manufacturers selling in the state?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This non-controversial bill, sponsored by the Department of
Justice, logically seeks to close an inadvertent loophole in
existing law that requires tobacco manufacturers not party to
the Master Settlement Agreement (MSA) to make payments into
escrow for their sales in California. Existing law currently
inadvertently allows these manufacturers to avoid making such
payments for cigarettes that are unlawfully sold without payment
of state excise taxes. According to the sponsor, some
non-signatory tobacco manufacturers are selling large quantities
of cigarettes through unlicensed distributors and channels, such
as tribal smoke shops and over the internet, where state tax
evasion is prevalent and state-level monitoring difficult. This
practice reduces the amount of funds available to satisfy
potential liabilities, fuels the sale of cheap cigarettes which
harms public health, and gives these non-signatory manufacturers
an unfair cost advantage over the non-signatory manufacturers
that do not rely on these distribution channels and the tobacco
manufacturers that participate in the MSA. This bill therefore
appropriately revises the definition of "units sold" under �
104556 of the Health and Safety Code to eliminate this
unintended loophole. The bill is supported of course by its
sponsor the Department of Justice, and it has no known
opposition.
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SUMMARY : Sponsored by the Department of Justice, this
non-controversial bill logically seeks to close an inadvertent
loophole in existing law that requires tobacco manufacturers not
party to the Master Settlement Agreement (MSA) to make payments
into escrow for their sales in California. Specifically, this
bill :
1)For the purpose of calculating the amount a tobacco product
manufacturer is required to place in the qualified escrow
account, revises 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:
a) Sold on federal military installations;
b) Sold by a Native American tribe to a member of that
tribe on that tribe's land; or
c) That are otherwise exempt from state excise tax pursuant
to federal law.
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 Section 104555 et. seq. All
further references are to this code unless otherwise noted.)
2)Requires a tobacco product manufacturer selling 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 it sold in the
state. (Section 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. (Section 104556(j).)
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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. (Section 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. (Section 104557(c).)
COMMENTS : This non-controversial bill, sponsored by the
Department of Justice, logically seeks to close an inadvertent
loophole in existing law that requires tobacco manufacturers not
party to the Master Settlement Agreement (MSA) to make payments
into escrow for their sales in California. Existing law
currently inadvertently allows these manufacturers to avoid
making such payments for cigarettes that are unlawfully sold
without payment of state excise taxes. According to the
sponsor, some non-signatory tobacco manufacturers are selling
large quantities of cigarettes through unlicensed distributors
and channels, such as tribal smoke shops and over the internet,
where state tax evasion is prevalent and state-level monitoring
difficult. This practice reduces the amount of funds available
to satisfy potential liabilities, fuels the sale of cheap
cigarettes which harms public health, and gives these
non-signatory manufacturers an unfair cost advantage over the
non-signatory manufacturers that do not rely on these
distribution channels and the tobacco manufacturers that
participate in the MSA.
In support, the author states:
Existing law requires tobacco manufacturers that did not
join the tobacco Master Settlement Agreement (MSA) to make
deposits into an escrow account as security for certain
potential liabilities to the State (sections 104555 through
104558 of the Health and Safety Code). The amount of these
deposits is based on the non-signatory manufacturer's sales
in California, as measured by state excise taxes collected
on those sales. This method of measuring escrow
obligations exempts sales that evade state excise taxes,
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effectively rewarding the non-signatory manufacturers for
tax-evaded sales.
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 reduced the amount of funds
available to satisfy potential liabilities, fuels the sale
of cheap cigarettes which harm public health, and gives the
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 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.
This bill amends the Health and Safety Code to close this
tax-evaded sales loophole, requiring non-signatory tobacco
manufacturers to pay escrow on a broader base of sales in
the State, including all sales on which state excise tax
could be collected under federal law.
Background : On November 23, 1998, a $206 billion settlement was
reached between California, 45 other states, the District of
Columbia, Puerto Rico, and three territories, on the one hand,
and five major cigarette American cigarette manufacturers,
concerning antitrust, consumer protection, and health-related
litigation claims pending against the major tobacco companies at
the time. The resulting MSA placed significant limitations on
tobacco-related advertisements by tobacco companies and promised
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multi-billion dollar annual payments to the states. At the time
of the 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, Stat. 1999], codified at Health and
Safety Code � 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.
Need for Legislation : Through its enforcement activities, the
Attorney General's office has found that certain manufacturers
are avoiding this obligation to contribute to the tobacco
settlement escrow account by selling tax-evaded cigarettes in
the state. According to the Attorney General:
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.
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People v. Huber, DR 110232 (Humbold County Cup. Ct. 2011).
Had those cigarette sales been subject to the States'
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 Department
of Justice, simply and appropriately 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 RELATED LEGISLATION : AB 71 (Horton, Chapter 890, Stat.
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 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 Stat. 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
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American 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.
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Justice (sponsor)
Opposition
None on file
Analysis Prepared by : Drew Liebert and Alex Nowinski / JUD. /
(916) 319-2334