BILL ANALYSIS �
SB 680
Page 1
SENATE THIRD READING
SB 680 (Wolk)
As Amended May 14, 2013
Majority vote
SENATE VOTE :36-0
JUDICIARY 10-0
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|Ayes:|Wieckowski, Wagner, | | |
| |Alejo, Chau, Dickinson, | | |
| |Garcia, Gorell, | | |
| |Maienschein, Muratsuchi, | | |
| |Stone | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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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)Revises, for the purpose of calculating the amount a tobacco
product 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 due or 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 implements the terms of the tobacco litigation MSA,
which grants legal immunity for past deceptive business
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practices to major tobacco manufacturers in exchange for certain
voluntary advertising restrictions and annual settlement
payments to states.
FISCAL EFFECT : None
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, 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
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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.
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
multi-billion dollar annual payments to the states. At the time
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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, Statutes of 1999), codified at Health
and Safety Code Section 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 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
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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 Supreme Court 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.
Analysis Prepared by : Drew Liebert / JUD. / (916) 319-2334
FN: 0001288