Report 2021-046 Recommendation 8 Responses

Report 2021-046: Proposition 56 Tobacco Tax: The Department of Health Care Services Is Not Adequately Monitoring Provider Payments Funded by Tobacco Taxes (Release Date: November 2022)

Recommendation #8 To: Tax and Fee Administration, California Department of

To ensure that other tobacco product manufacturer-distributors pay the appropriate amount of OTP taxes, CDTFA should obtain sufficient documentation to verify the accuracy of those entities' wholesale costs. If these manufacturer-distributors refuse to provide necessary documentation, CDTFA should compel them to do so using the mechanisms existing in state law, such as administrative subpoenas, and it should consider referring them for criminal prosecution.

6-Month Agency Response

Audit selection for fiscal year 2022/2023 focusing on CDTFA tobacco manufacturer and importer accounts is now complete. Three audits are in process and are anticipated to be completed by December 31, 2023.

Detailed training was provided to our Audit Examination Branch team members on January 18, 2023. This training covered items such as, but not limited to, other tobacco products (OTP) wholesale cost calculation methods, methods for obtaining records (including criminal prosecutions), and a review of Regulation 4076, Wholesale Cost of Tobacco Products , for alternative methods to assign wholesale costs when records are inadequate and/or nonexistent.

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

We have requested copies of the training that CDTFA provided to determine whether it addresses the concerns described in our recommendation. We look forward to reviewing those documents, the procedures CDTFA established for performing the audits currently in progress, CDTFA's audits of manufacturer-distributors' wholesale costs, and the supporting documentation CDTFA used to verify the accuracy of the amounts manufacturer-distributors used to calculate their wholesale costs.

60-Day Agency Response

A supplemental audit selection for fiscal year 2022/2023 which focuses on CDTFA tobacco manufacturer and importer accounts, is in process and is anticipated to be completed by the end of January 2023. Three audits are currently in progress and should be completed by December 2023.

Refresher training covering Requests for Records and the Subpoena Process was provided to team members on December 13, 2022. Additional detailed training covering OTP wholesale cost calculation methods, methods for obtaining records (including the subpoena process, obtaining third-party records, and criminal prosecution), proper comment writing for documenting the

request(s) for records, and review of Regulation 4076, Wholesale Cost of Tobacco Products, for alternative methods to assign wholesale costs when records are inadequate and/or nonexistent, is scheduled for January 18, 2023.

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

We will look forward to reviewing the results of CDTFA's audits of manufacturer-distributors' wholesale costs and the supporting documentation that CDTFA uses to verify the accuracy of the amounts manufacturer-distributors use to calculate their wholesale costs.

In addition, we will request CDTFA's training materials to confirm the nature of the training it provides.

All Recommendations in 2021-046

Agency responses received are posted verbatim.