SENATE BILL REPORT

3E2SHB 2565

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As of Second Reading

Title: An act relating to persons who operate a roll-your-own cigarette machine at retail establishments.

Brief Description: Concerning persons who operate a roll-your-own cigarette machine at retail establishments.

Sponsors: House Committee on Ways & Means (originally sponsored by Representatives Kirby, Harris, Dammeier, Walsh, Orwall, Kelley, Moscoso and Zeiger).

Brief History: Passed House: 3/06/12, 67-30; 4/05/12, 65-32; 4/11/12, 66-32.

Committee Activity: Ways & Means: 4/06/12.

SENATE COMMITTEE ON WAYS & MEANS

Staff: Dean Carlson (786-7305)

Background: Tobacco products are subject to various taxes, including state retail sales and use taxes and tobacco taxes that are paid by wholesalers or distributors of the products in the state. Since July 1, 2009, all collected tobacco taxes have been deposited in the state General Fund, except for approximately 21 percent of cigarette taxes that are deposited in the Education Legacy Trust Account ($83 million in 2009).

Cigarette Taxes. The cigarette tax is added directly to the price of cigarettes before the sales tax is applied. The cigarette tax is due from the first person who sells, uses, consumes, handles, possesses, or distributes the cigarettes in the state. The taxpayer pays the cigarette tax by purchasing cigarette tax stamps that are placed on cigarette packs. On May 1, 2010, the cigarette tax rate was increased from $0.10125 to $0.15125 per cigarette (from $2.025 to $3.025 per pack of 20 cigarettes). The additional cigarette tax is deposited in the state General Fund. The amount of cigarette tax deposited into the Education Legacy Trust Account is adjusted to 14 percent of the total cigarette tax to reflect its approximate share of the new total cigarette tax.

Taxpayers pay the tax by purchasing cigarette tax stamps from banks authorized by the Department of Revenue (Department). The stamps are placed on cigarette packs. A licensed wholesaler may possess cigarettes for a reasonable period before affixing stamps. Except for licensed wholesalers, it is unlawful to possess unstamped cigarettes unless the possessor files a notice of intent to possess with the Department before receiving the cigarettes. It is unlawful for any person to place a cigarette tax stamp on a package of cigarettes unless the brand family is listed on the Attorney General's website. Cigarettes without tax stamps are contraband and subject to seizure if in the possession of anyone other than a licensed wholesaler or a person who filed a notice of intent to possess.

Tobacco Products Taxes. The tobacco products tax applies to all tobacco products, except cigarettes, which are taxed separately. Examples of tobacco products include cigars, pipe tobacco, snuff, and chewing tobacco. The tobacco products tax is due from the distributor when the distributor brings tobacco products into the state, manufactures tobacco products in the state, or ships tobacco products to retailers in the state.

Beginning May 1, 2010, the tobacco products tax was increased from 75 percent to 95 percent of the wholesale sales price, with some exceptions (cigars and snuff). The wholesale price is, generally, the actual purchase or selling price charged by the manufacturer or distributor. These tobacco products are not subject to any stamp requirement.

Tobacco Master Settlement Agreement (Master Settlement). The Master Settlement is an agreement between 46 states, the District of Columbia, six territories, and a number of tobacco product manufacturers (participating manufacturers). Under the agreement, participating manufacturers agree to make specified payments to the states and agree to abide by extensive public health restrictions on the advertising, promotion, and marketing of cigarettes. In exchange, the states agreed to release the participating manufacturers from claims by the states. Tobacco product manufacturers that did not sign the agreement (non-participating manufacturers) were not released from potential state claims and did not undertake any of the payment obligations or agree to abide by the public health restrictions. In order to ensure that any state that successfully sues a non-participating manufacturer in the future has a fund against which they can recover any judgment or settlement monies, the agreement included a proposed statute (Model Statute) which requires non-participating manufacturers to make annual payments into an escrow fund based on the number of cigarettes sold in the state. The Model Statute is also intended to prevent non-participating manufacturers from reaping a windfall benefit by selling cigarettes in a state without bearing the costs that cigarette smoking imposes on the state. Washington enacted the Model Statute in 1999.

Tobacco Manufacturers. Every tobacco manufacturer must provide an annual certification to the Attorney General. For participating manufacturers, the certification must include a list of brand families. A brand family means all styles of cigarette sold under a particular brand name. For non-participating manufacturer's, the certification must include additional information about the number of units sold under each brand family. The Attorney General must publish on its website a list of the brand families of tobacco manufacturers who have complied with the certification and escrow requirements.

Tobacco Tracking Code. Within one year of the date that the federal government requires a tobacco code to track tobacco products, all individual packages must contain the code that would verify if taxes have been paid on the product. If the federal government does not implement a tobacco code by July 1, 2011, the Department must, by July 1, 2014, recommend to the Legislature a method of determining whether tax has been paid on a product.

Tobacco Sales Regulation. A retailer that sells tobacco products must be licensed and must comply with laws that:

The Liquor Control Board (Board) may impose sanctions for statutory violations.

Enforcement. The Board may revoke or suspend the license of any wholesaler who violates tax and stamping provisions. The Board or Department may impose civil penalties for a violation, not to exceed the greater of 500 percent of the retail value of the cigarettes or $5,000. The Attorney General may seek a court injunction to restrain a threatened or actual violation. It is a gross misdemeanor to sell, distribute, or possess cigarettes with tax stamps that have been affixed in violation of the requirements. Cigarettes not in compliance with the tax stamp requirements may be seized as contraband.

Summary of Bill: The definition of cigarette used for excise taxation is modified to explicitly include roll-your-own (RYO) cigarettes. Several new definitions are created including cigarette paper, cigarette tube, commercial cigarette-making machine, and roll-your-own cigarettes.

A tax enforcement and regulatory system for RYO cigarettes is established that requires RYO retailers to:

Retailers that purchase RYO cigarette stamps are provided with compensation to offset the tobacco products tax. The amount is equal to $0.05 per cigarette.

Appropriation: None.

Fiscal Note: Available.

[OFM requested ten-year cost projection pursuant to I-960.]

Committee/Commission/Task Force Created: No.

Effective Date: The bill takes effect on July 1, 2012

Staff Summary of Public Testimony: PRO: This bill is a matter of fairness and we urge you to keep it moving. This makes all cigarettes taxed at the same rate. After many policies that have negatively affected convenience stores, this bill helps stop the bleeding. Many people are buying these lower taxed roll your own (RYO) cigarettes at the detriment to the convenience stores.

CON: RYO machines have had little impact on convenience stores, where this bill will put us out of business. RYO products are not half price of all cigarettes. Some products just cost a little more. The people that buy these are looking for the cheaper cigarettes and will continue to do so after we are forced to close. People will go back to the reservations to buy cigarettes. This will put 65 businesses out of business that employ 250 people. Voting for this bill will be a death sentence on these businesses.

Persons Testifying: PRO: Mark Johnson, Washington Retail Association; T.k. Bentler, Washington Association of Neighborhood Stores.

CON: Lisa Sauve, Maxx Tobacco; Wayne Brown, U Count Tobacco; Ron Main, RYO Machine Rental.