BILL ANALYSIS

C.S.H.B. 4865

By: Harris, Cody

Ways & Means

Committee Report (Substituted)

BACKGROUND AND PURPOSE

The Cigar Association of America and the Premium Cigar Coalition have been working with the Federation of Tax Administrators Uniformity Committee to create and implement a uniform approach to taxation on remote sales to consumers of cigars and pipe tobacco across the country. Similar legislation has already passed into law in Indiana, Maryland, Michigan, North Carolina, and Virginia, and legislatures in Colorado, Maine, Illinois, and Wisconsin are or will soon be considering such legislation. C.S.H.B. 4865 seeks to remove the barriers from Texas statute that prevent the collection of these taxes on the first sale of cigars and pipe tobacco to a consumer in Texas by a remote retail seller and provide for the regulation of such sales by requiring such a seller to obtain a remote retail seller permit.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the comptroller of public accounts in SECTION 14 of this bill.

ANALYSIS

C.S.H.B. 4865 amends the Tax Code to establish that a tax is imposed and becomes due and payable when a remote retail seller located outside of Texas, not including a delivery seller as defined under the federal Prevent All Cigarette Trafficking (PACT) Act, makes a first sale of cigars or pipe tobacco products to a consumer in Texas. The bill defines or revises the definition of the following terms for purposes of the taxation of cigars and tobacco products:

·         changes the definition of "cigar" from a roll of fermented tobacco that is wrapped in tobacco and the main stream of smoke from which produces an alkaline reaction to litmus paper to a roll of tobacco wrapped in tobacco or in another substance containing tobacco;

·         defines "pipe tobacco" as a tobacco product that, because of its appearance, type, packaging, or labeling, is suitable for use and is likely to be offered to or purchased by consumers as tobacco to be smoked in a pipe;

·         includes in the definition of "first sale" the first transfer of possession in connection with a remote retail sale of cigars or pipe tobacco by a remote retail seller outside Texas to a consumer in Texas;

·         defines "remote retail sale" as any sale of cigars or pipe tobacco, not including a delivery sale as defined under the PACT Act with respect to the sale of cigarettes and smokeless tobacco, by a person located outside Texas to a consumer in Texas if:

o   the consumer submits the order by means of a telephone or another method of voice transmission, the mail, the Internet or another online service, or by other means where the seller is otherwise not in the physical presence of the consumer when the order is made; and

o   the cigars or pipe tobacco is delivered to the consumer by common carrier, private delivery service, or other method of remote delivery or the seller is otherwise not in the physical presence of the consumer when the consumer obtains possession of the cigar or pipe tobacco; and

·         defines "sale" as any transfer, exchange, or barter for consideration and establishes that the term includes a sale or the solicitation of orders for future delivery and a gift by a person engaged in the business of selling tobacco products for advertising, as a means of evading the tax on cigars and tobacco products, or for any other purpose.

C.S.H.B. 4865 prohibits a person from making a remote retail sale of cigars or pipe tobacco to a consumer in Texas unless the person holds a remote retail seller permit. The bill requires the remote retail seller, unless it is exempt under a rule of the comptroller of public accounts from the requirement to obtain a sales tax permit based on annual revenue from sales to persons in Texas, to apply for and obtain such a permit and to collect and remit taxes on cigars and tobacco products and taxes under the Limited Sales, Excise, and Use Tax Act. The bill requires an application for a remote retail seller's permit to be accompanied by a $180 fee. The bill does the following with respect to the first sale of cigars and pipe tobacco products to consumers in Texas by a remote retail seller's permit holder:

·         establishes that the seller is liable for and must pay the tax on cigars and pipe tobacco;

·         requires the seller to keep records of the sale or other disposition of cigars and pipe tobacco as required by comptroller rule and file with the comptroller on or before the 25th day of each month a report for the preceding month that shows the date the report was made, the seller's name and address, the month the report covers, the amount of cigars and pipe tobacco sold to consumers in Texas, and any other information the comptroller requires relating to cigars and pipe tobacco and to the payment of taxes due on those items;

·         requires the comptroller to prescribe the form and content of that report;

·         requires the seller to pay the tax on cigars and pipe tobacco sold at the time the seller files that report and requires the payment to be made to the comptroller by cashier's check, electronic funds transfer, or another method the comptroller authorizes;

·         establishes that the seller may sell cigars and pipe tobacco only to a consumer in Texas;

·         requires the seller to verify the identity of an individual during the ordering process to ensure that an individual is of age by using an independent, third-party age verification service that meets certain criteria; and

·         if the seller prepares the distributor's report to the comptroller, requires the manufacturer and the seller to make the affidavit stating that specific cigars described in the report do not contain sheet wrapper, binder, or filler.

The bill subjects the remote retail seller to provisions relating to penalties for failure to pay tax, permits, the issuance of permits, revenue from the sale of permits, and penalties for violating provisions governing the cigars and tobacco products tax in the same manner as those provisions apply to a distributor, wholesaler, bonded agent, interstate warehouse, manufacturer, export warehouse, interstate warehouse, importer, or retailer, as applicable. The bill exempts a remote retail seller's permit holder from the requirement to display the permit at the place of business for which the permit was issued but requires the permit holder to keep records of all tobacco products purchased or received at the principal place of business location identified on the permit.

C.S.H.B. 4865 expands the conduct that constitutes the Class A misdemeanor offense involving selling tobacco products without having the applicable valid permit to include acting as a remote retail seller without having a valid permit. The bill establishes that provisions making it an offense to possess tobacco products on which a tax is required but has not been paid do not prohibit transportation of tobacco products by a common carrier as part of a remote retail sale made by a permit holder.

C.S.H.B. 4865 requires the comptroller to adopt rules necessary to implement the bill's provisions not later than January 1, 2024. The bill suspends the requirement for a person who makes remote retail sales of cigars or pipe tobacco to hold a permit as a remote retail seller until April 1, 2024. The bill establishes that its provisions do not affect tax liability accruing before the bill's effective date. The bill provides for the continuation of the law in effect before the bill's effective date for purposes of the collection of taxes due and for civil and criminal enforcement of the liability for those taxes that accrued before that date.

EFFECTIVE DATE

September 1, 2023.

COMPARISON OF INTRODUCED AND SUBSTITUTE

While C.S.H.B. 4865 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill.

The substitute omits provisions from the introduced providing for the regulation and taxation of the first sale of oral nicotine products with respect to products received on or after April 1, 2024.

The substitute omits provisions from the introduced that expanded the definition of "retailer" for purposes of the cigars and tobacco products tax to include a person located inside Texas who makes delivery sales of chewing tobacco, snuff, or roll-your-own tobacco and defined related terms. The substitute excludes delivery sales and delivery sellers, as those terms are defined by the PACT Act with respect to the sale of cigarettes or smokeless tobacco, from the bill's definitions of "remote retail sale" and "remote retail seller," respectively, whereas the introduced did not.

The substitute omits provisions from the introduced that changed the definition of "tobacco product" for purposes of the cigars and tobacco products tax and specified that the term "cigar" does not include a cigarette.

The introduced made the remote retailer seller permit requirement applicable to sellers located either inside or outside Texas but limited application of the bill provisions relating to taxation of remote retail sells to just sellers located outside Texas. The substitute does not apply the permit requirement to sellers located inside Texas and makes the following related changes to definitions established by the introduced:

·         omits from the definition of "remote retailer seller" a person located inside Texas who makes remote retail sales of cigars or pipe tobacco;

·         adds to the definition of "remote retail sale" the specification that the person making the applicable sale is a person located outside Texas; and

·         omits from the definition of "first sale" the first transfer or possession in connection with a remote retail sale of cigars or pipe tobacco in Texas.

Accordingly, the substitute omits a provision from the introduced that authorized a permitted remote retailer seller located in Texas to purchase cigars and pipe tobacco from a permitted distributor or wholesaler in Texas.