HBA-ALS S.B. 1122 76(R)BILL ANALYSIS Office of House Bill AnalysisS.B. 1122 By: Armbrister State Affairs 5/5/1999 Committee Report (Amended) BACKGROUND AND PURPOSE The price of American manufactured cigarettes intended for export is significantly less than that of American manufactured cigarettes designated for domestic consumption. This large price discrepancy has given rise to a gray market in cigarettes. Cigarettes intended for international consumption are shipped to independent brokers in foreign ports. These brokers sell them to distributors in foreign countries. However, the same brokers often ship these cigarettes to importers back in United States. These gray market cigarettes are then sold to American distributors at a cheaper price since state and federal cigarette taxes are not paid. Currently, the gray market cigarettes are legal if all federal import taxes have been paid and federal cigarette labeling regulations are followed. In addition to lost state and federal taxes, gray market cigarettes also cost the state money from the Tobacco Settlement. The formula that determines how much Texas receives from tobacco manufacturers is based on the number of domestic cigarettes sold in the state. Every package of gray market cigarettes bought takes away from domestic sales and a portion of the settlement. S.B.1122 prohibits the placement of tax stamps on cigarettes that were manufactured for export to foreign markets and defines the selling of improperly stamped cigarettes as a deceptive trade practice. This bill creates an offense for affixing a stamp to cigarettes in violation of this code. This bill also provides for the return of seized illegal cigarettes to the manufacturer by the comptroller. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subchapter C, Chapter 154, Tax Code, by adding Section 154.0415, as follows: Sec. 154.0415. CIGARETTES TO WHICH STAMPS MAY NOT BE AFFIXED. Prohibits a person from affixing a stamp to a package of cigarettes if the package does not comply with the Cigarette Labeling and Advertising Act (15 U.S.C. Section 1331 et seq.) for the placement of labels, warnings, or any other information for a package of cigarettes to be sold within the United States; is labeled "For Export Only," "U.S. Tax Exempt," "For Use Outside U.S.," or other wording indicating that the manufacturer did not intend that the product be sold in the United States; has been altered by adding or deleting wording, labels, or warnings; has been imported into the United States after January 1, 2000; or in any way violates federal trademark or copyright laws. SECTION 2. Amends Section 154.4045(b), Tax Code, to prohibit the comptroller from selling the cigarettes and authorize the comptroller to destroy or dispose of the cigarettes or return the cigarettes, solely for the purpose of export, to the manufacturer for credit, if the seized cigarettes are in a salable condition and in packages described by Section 154.0415 or stamped in violation of that section. SECTION 3. Amends Subchapter H, Chapter 154, Tax Code, by adding Section 154.4095, to establish selling a package of cigarettes described by Section 154.0415, with or without a stamp, as a deceptive trade practice for the purpose of Subchapter E, Chapter 17 (Deceptive Trade Practices), Business & Commerce Code. SECTION 4. Amends Subchapter I, Chapter 154, Tax Code, by adding Section 154.5025, to provide that a person commits an offense if the person affixes stamps to cigarettes in violation of Section 154.0415. SECTION 5. Emergency clause. Effective date: upon passage. EXPLANATION OF AMENDMENTS Committee Amendment #1 deletes SECTION 5 (long emergency clause) of the original bill and replaces it, as follows: SECTION 5. Effective date: January 1, 2000. SECTION 6. Emergency clause.