Report 2015-119 Recommendation 5 Responses

Report 2015-119: State Board of Equalization: Its Tobacco Tax Enforcement Efforts Are Effective and Properly Funded, but Other Funding Options and Cost Savings Are Possible (Release Date: March 2016)

Recommendation #5 To: Equalization, Board of

To reduce the licensing program's enforcement cost without compromising the level of increased compliance with the cigarette and tobacco products tax law that the inspection program has produced, the board should reduce the number of annual inspections and reinspections of retailers, distributors, and wholesalers that it conducts each year to reflect changes in the number of licensees that sell cigarette and tobacco products in California. This adjustment should align with the same frequency of inspections that the board followed when it implemented the inspection program, which is 26 percent—or approximately one inspection every four years—of these licensed locations.

Annual Follow-Up Agency Response From November 2017

This recommendation was fully implemented with the passage of Proposition 56, the Cigarette Tax to Fund Healthcare, Tobacco Use Prevention, Research, and Law Enforcement Act, and the passage of the California 2017/18 budget act. The California Department of Tax and Fee Administration, formally the Board of Equalization, Investigations Division worked with the Department of Finance to establish an appropriate level of enforcement to efficiently address anticipated evasion levels resulting from the 230 percent increase in Cigarette Excise Taxes, and 37 percent ad-valorem increase in other tobacco product taxes. Revised staffing levels were incorporated into the FY 17/18 budget.

California State Auditor's Assessment of Annual Follow-Up Status: Resolved

Citing the need for additional enforcement due to the passage of Proposition 56, the department received funding for additional positions and a continuation of its current inspection frequencies. Although we recommended an inspection frequency of once every four years, the passage of Proposition 56 increased the taxes on cigarette and tobacco products, which the department believes will increase retailers' attempts to evade payment of these taxes.

1-Year Agency Response

To date, one PY position has been redirected (one PY redirection = 250 license verification inspections) to absorb new inspection workload generated from SB x 2-5 Electronic Cigarettes. SB x 2-5 added approximately 1,100 new licensees for e-cigarette and vaping shops (Budget Request 0860-002—BCP-2017-GB). This workload was a very conservative estimate as education and compliance efforts are expected to extend the time required for a typical inspection due to the variety of vaping and e-cigarette products available in the market place. Analysis of inspection zone data was completed to address the recommended reduction, while maintaining the safety of staff and improving existing team efficiencies, whether fully staffed or not. This analysis included use of GIS software to better balance inspection zones within Board districts.

The CSA recommendation, made prior to the passage of Proposition 56, was for a reduced number of inspections due to improved compliance and a reduced number of retailers. This recommendation resulted in a further reduction of two (2) additional personnel years, beyond the already redirected personnel. With the passage of Proposition 56, Investigations Division (ID) Management submitted a Budget Change Proposal (BCP), approved by the Board, which used the current ID budgeted tobacco program baseline to address anticipated evasion growth resulting from the 230 percent increase in cigarette taxes and projected increase of 38.7 percent in other tobacco products taxes. Within the BCP, ID recalibrated the frequency and annual number of inspections and anticipated enforcement activities necessary to mitigate and address anticipated elevated levels of evasion, while maintaining diligent levels of boots-on-the-ground enforcement related to the Master Settlement Agreement (MSA). As a result, CSA's recommendation 5 will be fully implemented following the implementation of Proposition 56.

California State Auditor's Assessment of 1-Year Status: Pending

6-Month Agency Response

To date, one PY position has been redirected (one PY redirection = 250 license verification inspections) to absorb new inspection workload generated from SB x 2-5 Electronic Cigarettes. SBx 2-5 adds approximately 1,100 new licensees for e-cigarette and vaping shops (Budget Request 0860-002—BCP-2017-GB). The analysis of the inspection zone data is in progress to ensure that issues related to the recommended reduction are addressed appropriately, while maintaining the safety of staff and improving existing team efficiencies, whether fully staffed or not.

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

The analysis of a potential reduction of inspection teams from ten to nine teams is being completed to address the recommended reduction of enforcement activity (inspections) proportionate to the overall decrease in licensed retailers. After working with available data, the inspection zone data was summarized into a workable format. With the proposed reduction of inspectors, the assigned geographical area and associated distributor, wholesaler and retailer permits will require a re-allocation from the current designated zones to a reduced number of inspection zones. ID is starting to work with the summarized inspection zone data to develop option(s) for potential inspection zones with reduced staffing levels. ID's analysis and recommended option(s) will be submitted to the Board Members for further direction.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2015-119

Agency responses received are posted verbatim.