FINAL BILL REPORT

                 ESHB 2272

PARTIAL VETO

                         C 420 L 97

                     Synopsis as Enacted

Brief Description:  Transferring enforcement of cigarette and tobacco taxes to the liquor control board.

Sponsors:  By House Committee on Appropriations (originally sponsored by  Representatives Huff, Clements, Alexander, Wensman, Sehlin and Mitchell).

House Committee on Appropriations

Background:  Washington imposes a tax on the sale, use, consumption, handling, possession and distribution of cigarettes and tobacco products.  Cigarettes are taxed at the rate of $0.825 per pack.  Tobacco products are taxed at the rate of 74.9 percent of the wholesale price.  In addition to the cigarette and tobacco tax, sales tax and business and occupation tax are also applicable to the sale of cigarettes and tobacco products.

According to an estimate from the Department of Revenue (DOR), the state will lose $109 million in tax revenue in fiscal year 1997 from the illegal sale of untaxed cigarettes.  Revenue losses occur from casual smuggling from states with lower cigarette tax rates than Washington, and from cigarettes purchased from tax-free outlets such as military post exchanges and Indian smoke shops. 

Under federal law, the cigarette tax does not apply to cigarettes sold on an Indian reservation to an enrolled tribal member for personal consumption. Sales made by a tribal cigarette outlet to nontribal members, however, are subject to the tax.   The United States Supreme Court has affirmed that the state may impose a cigarette tax on sales made within reservations to nontribal members and have upheld the imposition of minimal burdens on the tribal seller to assist in collecting the tax.  Those burdens have included affixing the appropriate stamp to individual cigarette packages and keeping records that distinguish between exempt sales and taxable sales.  The ability of the state to take enforcement action on-reservation and off-reservation has been the subject of several lawsuits, leaving uncertain the extent of enforcement authority the state may exercise.

In 1996, the Legislature established the Cigarette Tax and Revenue Loss Advisory Committee to study and analyze cigarette tax revenues lost during 1992-95.  The study included an analysis of lost cigarette tax revenue and an analysis of the revenue losses attributable to cigarette tax increases.  The study also analyzed the feasibility of reducing lost revenue through negotiated agreements between the state and federally recognized Indian tribes in Washington.  The committee did not reach consensus.  The majority recommendation supported a cooperative approach that included negotiated agreements with the tribes.  The minority recommendation opposed any agreements with the tribes and suggested that more scrutiny should have been given to enforcing the law against the purchase of untaxed cigarettes by non-Indian consumers.

The DOR is charged with enforcing the cigarette and tobacco products tax laws and administering and collecting the taxes.  Department employees do not have general police powers and must appoint local law enforcement officers or state patrol officers as agents for certain enforcement actions such as search and seizure activity.

The Liquor Control Board enforces laws relating to minors' access to tobacco and may suspend or revoke retail or wholesale licenses of licensees who violate these laws.  The board does not enforce cigarette or tobacco product tax laws.  Liquor enforcement officers have general police powers to enforce the state=s liquor laws.

Summary:   Primary enforcement authority for cigarette and tobacco tax laws is transferred from the Department of Revenue (DOR) to the Liquor Control Board (LCB).   It is the intent of the Legislature that the cigarette and tobacco tax laws of Washington be actively enforced.  The DOR will continue to administer and collect cigarette and tobacco taxes.  The DOR must appoint enforcement officers of the LCB as the department=s authorized agents to allow both the department and the board to engage in certain enforcement activities.  These officers are not considered employees of the DOR.  The LCB must adopt rules necessary to enforce cigarette and tobacco tax laws.

A schedule is established to require the LCB to reduce lost revenue from cigarette and tobacco tax evasion by 50 percent within five years.

The Governor is given authority to execute cooperative agreements with federally recognized Indian tribes or nations concerning the sale of cigarettes and tobacco.  The LCB is required to negotiate the cooperative agreements.  The rate of tax imposed on tobacco and cigarette products under the cooperative agreement must be at the rate currently applied to these products, but the amount of taxes that may be retained by the Indian tribe or nation may be negotiated.

Fifty percent of the cigarette and tobacco tax revenue received by the state through cooperative agreements with Indian tribes or nations must be deposited into the violence reductions and drug enforcement account and fifty percent shall be deposited into the health services account.  The sales and use tax, cigarette tax, and tobacco products tax do not apply to the sale, use, consumption, handling, possession, or distribution of cigarettes or tobacco by Indian nations or tribes during the effective period of the cooperative agreements.

Votes on Final Passage:

House  58 37

House  63 33 (House reconsidered)

Senate 32 16 (Senate amended)

House  54 43 (House concurred)

Effective:July 27,  1997

Partial Veto Summary:  The governor vetoed the intent section and other sections that:  (1) prescribe a collection schedule for lost cigarette and tobacco tax revenue due to tax evasion; (2) allow the governor to execute cooperative agreements with federally recognized tribes concerning the sale of cigarettes and tobacco; and (3) distribute revenues received under cooperative agreements to the Violence Reduction/Drug Enforcement and Health Services accounts.