New 2006 Tobacco Tax Legislation (Senate Bill 1066)

Luxury Tax Notice 06-1

On November 23, 1998, leading United States tobacco product manufacturers entered into a settlement agreement entitled the master settlement agreement with the state of Arizona. The master settlement agreement obligates the participating manufacturers, in return for a release of past, present and certain future claims against them, to pay substantial sums to the state (tied in part to their volume of sales); to fund a national foundation devoted to the interests of public health; and to make substantial changes in their advertising and marketing practices and corporate culture, with the intention of reducing underage smoking.

In order to ensure that tobacco product manufacturers who determine not to enter into such a settlement do not use a resulting cost advantage to derive large short-term profits in the years before liability may arise without ensuring that the state will have an eventual source of recovery from them if they are proven to have acted culpably, the Arizona Legislators enacted ARS §44-7101. ARS §44-7101 requires that such non-participating manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such non-participating manufacturers from deriving large, short-term profits and then becoming judgement-proof before liability may arise.

Provides new licensing guidelines for cigarette manufacturers, importers, and distributors; creates new civil and criminal penalties relating to the use or possession of unstamped, or unlawfully stamped cigarettes; specifies when cigarettes are either tax-exempt or are not required to be stamped; and changes the requirements for licensed distributors of tobacco products.

To assist in the enforcement of ARS §44-7101 and make certain that only non-participating manufacturers who abide by the reserve fund requirements are permitted to have their cigarettes sold in the state of Arizona, the Arizona Legislators enacted Senate Bill 1310 (SB1310) which was signed into law by the Governor on May 19, 2003. SB1310 establishes ARS §44-7111 which prohibits the stamping, sale, or possession for sale, any and all cigarettes (including roll-your-own tobacco) not listed in a directory of cigarettes approved for stamping and sale, which shall be established and maintained by the Office of the Attorney General.

In November 1994 an initiative, proposition 200, was voted on and passed by the voters of Arizona. This initiative created the Health Care Tax (ARS §42-3251) and the Indian Reservation Tax (ARS §42-3301). In November 2002 another initiative, proposition 303, was put before the voters of Arizona, and passed. Proposition 303 created an additional Health Care Tax (ARS §42-3251.01) equal to one and one-half times the prescribed amounts of ARS §42-3251. It also increased the Indian Reservation Tax by the same amount.