Unless the Legislature directs the board to eliminate the compliance fund's excess fund balance within a time frame of more than a year, the board should eliminate the excess fund balance by June 30, 2017 by using it to offset the licensing program's annual funding shortfall. The board should also limit the fund's future balance to no more than two months' worth of licensing program expenditures.
The California Department of Tax and Fee Administration (CDTFA) and the Department of Finance are in the process of eliminating all funding for the Cigarette Licensing Program that comes from the cigarette tax revenues through the annual budget process. This will result in the program being funded solely from the fees generated by the program in the 2018-19 fiscal year. It will also bring the CDTFA into compliance of AB 2770, which prohibits the use of cigarette tax revenue to fund the administration of the Licensing Program by July 1, 2019, one year earlier than required.
Limiting the Balance of the Compliance Fund
The Department of Finance and the Legislature control how much is appropriated from the Compliance Fund. The amount appropriated to CDTFA, other state departments, and for Statewide General Administrative Expenditures (pro rata) versus the revenue collected from license fees influence the fund balance every year. The completion date of the recommendation is dependent on these factors.
Pursuant to AB 2770, the CDTFA is required to report "on or before January 1, 2019, and on and before January 1 annually thereafter," on the adequacy of funding for the Licensing Program. The annual report, as required by Business and Professional Code 22990.5, will provide a monitoring mechanism. It will report data, maintain an effective enforcement program, and can make recommendations to limit the fund balance to an appropriate level limit the fund balance.
The CDTFA will fully implement "a practice of limiting its balance to no more than two months' worth of expenditures," as is stated in the recommendation, when it assesses a full year's worth of data on the impact of the legislation and the tax change. A recommendation will be made when the CDTFA reports this information to the Legislature, which is due by January 1, 2019.
In the 2016-17 Budget Act, the Legislature shifted funding of the Cigarette and Tobacco Products Licensing Program (Licensing Program) from the four funds that receive Cigarette and Tobacco Products Surtax revenue to the Cigarette and Tobacco Products Compliance (Compliance) Fund. This funding shift will decrease the Compliance Fund by $5.2 million annually. In 2016, the Legislature also enacted ABx2-11, which changed the retailer licensing fee from a $100 one-time fee to an annual $265 fee and increased the annual fee for wholesalers and distributors from $1,000 to $1,200. Combined, these legislative changes will both reduce the Compliance Fund's balance and make the Licensing Program self-funded. In addition the Legislature enacted AB 2770, which prohibits the BOE from using revenues derived from the Cigarette and Tobacco Products Surtax to fund the Licensing Program by July 1, 2019. This Legislation also requires the BOE to report to the Legislature no later than January 1, 2019, and annually thereafter, regarding whether the Licensing Program is adequately funded.
Although there have been several law changes, the status of this recommendation is pending the outcome of fiscal year 2016-17 to determine if the excess balance in the compliance fund has been eliminated. Additionally, in its follow-up communications with us, the board indicates that it will implement a practice of limiting the compliance fund's balance to no more than two months worth of expenditures, after it assesses a full fiscal year of data on the impact of these law changes.
The Legislature approved an action that reallocated $5.2 million of BOE's appropriation for the Cigarette and Tobacco Licensing Program in the spring of 2016. This reallocation will shift expenditures to the Cigarette and Tobacco Tax Compliance (Compliance) fund from the four funds that receive revenue from the Cigarette and Tobacco Products Surtax. This action will reduce the Compliance fund in the 2016-17 fiscal year by increasing BOE's appropriation to $7.5 million.
Additionally, two pieces of legislation were signed into law in May 2016 that changed the requirements of the Cigarette and Tobacco Licensing program. ABx2 11 increased the cost of the license and changed it from a one-time fee to an annual fee. SBx2 5 added to the definition of "tobacco products" any electronic nicotine delivery device, including, but not limited to, an electronic cigarette, cigar, pipe, or hookah; any component, part, or accessory of a tobacco product, whether or not sold separately. These law changes will change the revenue of the Compliance fund. BOE will continue to work with the Department of Finance and the Legislature to ensure the fund balance is at appropriate levels.
Ultimately, the excess of the fund balance depends on the affect of the recent legislation.
The Board of Equalization is in active discussions with the Department of Finance as to the best way to reduce the fund balance in the recommended time frame. Any adjustment to the appropriation of the Cigarette Licensing Program would require the approval of the Department of Finance and notification to the Legislature.
Agency responses received are posted verbatim.