Arizona Attorney General

Mark Brnovich

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Tobacco Laws

The purpose of this information is informative, and does not represent an exhaustive list of tobacco-related state or federal laws and regulations.

 

House Bill 2674:
On April 22, 2014, Governor Jan Brewer signed House Bill 2674 (“HB2674”), which will take effect on July 24, 2014. HB2674 makes several changes to A.R.S. §§ 44-7101 (the “Escrow Statute”) and 44-7111 (the “Directory Statute”).  

HB2674 Changes to the Escrow Statute:
HB2674 modified the definition of what constitutes “units sold” in Arizona. The new definition will classify as a unit sold “any cigarette that is sold to a consumer in [Arizona], regardless of whether state excise or tribal excise tax was owed or collected.” Pursuant to HB2674, the definition of “units sold” will still be found at subsection (2)(k) of the Escrow Statute, and will be redefined as follows:

Units sold means the number of individual cigarettes sold to a consumer in the state by the applicable tobacco product manufacturer (whether directly or through a distributor, retailer or similar intermediary or intermediaries) during the year in question, regardless of whether State excise taxes were due or collected. For cigarettes for which a state or tribal excise, luxury, or similar tax is collected or precollected or that have a Department of Revenue cigarette tax stamp affixed to the package, the sale occurs at the earlier of the time that any tax is collected or precollected or that the tax stamp is affixed. The department of revenue shall adopt such rules as are necessary to ascertain the units sold of such tobacco product manufacturer for each year. (emphasis added)

 

In short, while the payment of state or tribal excise remains a means for calculating “units sold”, the new definition also captures sales on which state or tribal excise tax was not paid. 

HB2674 Changes to the Directory Statute:
HB2674 clarifies, codifies, and modifies various parts of the Directory Statute. First, HB2674 amends the Directory Statute to require that all certifications submitted pursuant to the Directory Statute are to be submitted only to AGO.

Second, HB2674 amends Section 3(a) of the Directory Statute to clarify that, if a certification is rejected by AGO because of incompleteness or inaccuracy, the tobacco product manufacturer (“TPM”) cannot cure the defect by providing supplemental documentation. Instead, the defect can only be cured by the TPM submitting a new certification to AGO.

Third, HB2674 amends section 3(a)(2) of the Directory Statute to codify that each NPM shall include in its certification a list of all of Arizona’s residential and nonresidential distributors that the NPM sold its cigarettes to or that the NPM has reason to believe purchased or received any of its cigarettes. This requirement applies to the current calendar year and the preceding calendar year. Section 3(a)(2) is further amended to make expressly clear that an NPM must submit a supplemental certification to AGO if it wishes to request any additions or modifications to its brand families. Lastly, section 3(a)(2) is amended to clarify that NPMs must conform to sections 3(c) and 6(d) of the Directory Statute until after the Directory modification request is approved by AGO and the alteration is reflected on the Directory that is published on AGO’s website.

Fourth, HB2674 adds section 3(a)(3)(e) of the Directory Statute to codify that, unless the NPM or its affiliate is a licensed Arizona tobacco distributor, NPMs must certify that all sales or shipments made by the NPM or its affiliates within or into Arizona are made to a tobacco distributor that is licensed in Arizona.

Fifth, HB2674 adds section 3(a)(3)(f) to the Directory Statute. The new provision requires NPMs to submit all other information or materials that are specifically authorized by the Directory Statute or by AGO in the course of enforcing the Directory Statute.

Sixth, HB2674 adds section 3(a)(6) to the Directory Statute. The new provision clarifies that all TPMs that are not listed on the Directory must submit an initial certification that is governed by the same requirements and review process as its annual certification counterpart. Importantly, a TPM’s cigarettes cannot be legally stamped, sold or even possessed for sale in Arizona until after the request to be added to the Directory has been approved by AGO and the addition is reflected on the Directory itself. 

Seventh, HB2674 amends section 3(b)(1) of the Directory Statute to reinforce that AGO shall not include or retain in the Directory the name or brand family of any NPM that fails to comply with any provision of the Directory Statute, unless AGO determines that the noncompliance has been cured to the satisfaction of AGO.

Eighth, HB2674 amends section 3(c) of the Directory Statute to clarify that it is unlawful to possess for sale any cigarette not listed on the Directory, including cigarettes for sale within or outside of Arizona. In other words, irrespective of where the cigarettes will be sold, it is illegal to possess for sale in Arizona cigarettes not listed on the Directory.

Ninth, HB2674 amends section 3(d) of the Directory Statute to require that every NPM on the Directory post a bond for the benefit of Arizona. Section 3(e) also requires that NPMs post the bond ten days in advance of each quarter as a condition of being listed on the Directory. Furthermore, section 3(e) specifies that the amount of the bond will be the greater of (i) the greatest required escrow amount due from the NPM or its predecessor for any of the twelve preceding calendar quarters or (ii) fifty thousand dollars. Finally, section 3(e) is amended to require that NPMs submit its bond certifications as an attachment to an initial, annual, or supplemental certification as required by the Directory Statute.

Tenth, HB2674 amends section 3(h) of the Directory Statute to require that all NPMs submit the importer declaration required by section 3(h) as an attachment to an initial, annual, or supplemental certification as required by the Directory Statute.

Eleventh, HB2674 Section 5(a) of the Directory Statute to require that DOR review the monthly distributor tobacco reports for completeness and accuracy.

 

Twelfth, HB2674 amends section 5(g)(1-4) to codify that NPMs shall make quarterly escrow deposits according to the following schedule: 

Quarter and Corresponding Months

Quarterly Deposit Due Date

First Quarter (Jan. - March)

On or before May 31

Second Quarter (April - June)

On or before August 31

Third Quarter (July – Sept.)

On or before November 30

Fourth Quarter (Oct. – Dec.)

On or before February 28 (of the following year)

 

The above should be considered a summary of the HB2674 amendments to the Directory Statute. Please read HB2674 in its entirety for the specific language of each new law.

Senate Bill 1312:  
On June 19, 2013, Governor Jan Brewer signed Senate Bill 1312 (“SB1312”), effective September 13, 2013, which includes A.R.S. § 13-3711, a new law regarding the use of RYO machines, as well as several changes to A.R.S. §§ 44-7101 (the “Escrow Statute”) and 44-7111 (the “Directory Statute”).  

Senate Bill 1312 Change Regarding RYO Rolling Machines:
SB1312 creates a legal presumption that a RYO rolling machine is being used for commercial purposes if it is located in a nonresidential premise.  In order to possess or use the RYO machine, operators must receive a federal manufacturer’s license (See TTB.gov) and comply with all applicable federal laws (e.g., proper packaging, flavor prohibitions, warning labels, ingredient list, etc…) and State laws.  Please see DOR’s LTN12-01 (available on www.AZDOR.gov/business/LuxuryTax.aspx), setting forth the applicable State laws that must be complied with, such as the Directory Statute and the State Fire Marshal’s Fire Standards (A.R.S. §§ 41-2170 – 41-2170.08).  Until all of these existing laws are complied with as is required of other cigarette manufacturers, the RYO machine cannot be operated, nor can any rolled cigarettes be possessed for sale or sold at the distributor or retail level.  Violators of this law will be subject to criminal and civil penalties, including a fine up to $50,000 and seizure and subsequent forfeiture of the RYO machine and related materials.  See A.R.S. § 13-3711.

Senate Bill 1312 Changes Regarding the Escrow Statute (A.R.S. § 44-7101):
The most notable change to the Escrow Statute is the change to the “units sold” definition.  The new definition, has the effect of classifying as “units sold” most cigarettes (the definition of cigarettes includes RYO) distributed in Arizona, including those on which the state excise tax is fully offset by a tribal tax.  Pursuant to SB1312, the definition of “units sold” may be found at subsection (2)(k) of the Escrow Statute, and is redefined as follows: 

Units sold means the number of individual cigarettes sold in the state by the applicable tobacco product manufacturer (whether directly or through a distributor, retailer or similar intermediary or intermediaries) during the year in question, as measured by State tobacco excise taxes collected or precollected by the State and Tribal luxury taxes collected or precollected by an Indian Tribe.  The department of revenue shall promulgate such regulations as are necessary to ascertain the amount of any such tax collected or precollected on the cigarettes of such tobacco product manufacturer for each year.  The term units sold does not include cigarettes described in section 42-3304, subsection A, paragraphs 2 and 3.  

A.R.S. § 42-3304(A)(2) & (3) states: “The tax levied by this article does not apply to cigarettes, cigars, smoking tobacco, plug tobacco, snuff and other forms of tobacco: . . .  2. That are sold by an Indian tribe, or by a federally licensed Indian trader, on an Indian reservation to Indians who are enrolled members of the Indian tribe for whose benefit the Indian reservation was established. 3 That are exempt from tax under 26 United States Code section 5701 and that are distributed according to federal regulations.” Further, “Tribal luxury taxes” is defined as “those taxes referenced in section 42-3302, subsection C.”  A.R.S. § 44-7101(2)(j).

The exceptions outlined in A.R.S. § 42-3304(A)(2) & (3) represent very few cigarettes distributed in Arizona; therefore, the practical effect of this change to Arizona law is that most cigarettes and RYO distributed into Arizona are now units sold. For example, all cigarettes affixed with a red stamp (and the RYO equivalent) are now units sold. Please remember that Escrow Statute compliance is required on all units sold. AGO closely monitors distributors and NPMs to ensure compliance with the Escrow Statute.

The second major change to the Escrow Statute is chaptered at A.R.S. § 44-7101(3)(c). This section allows NPMs to assign their rights to escrowed funds to the State via AGO. The Escrow Statute did not previously include an assignment provision. The new law allows the State to take possession of the escrowed funds in the event the NPM no longer wishes to maintain the account. However, until such time as AGO formally agrees to an assignment, the account must remain properly funded and maintained.  

Senate Bill 1312 Changes Regarding the Directory Statute (A.R.S. § 44-7111):
The Directory Statute changes are chaptered at A.R.S. § 44-7111(3)(d) through (j).  Compliance with these new provisions is required in order for a NPM to remain in or be included on the Arizona Cigarette Directory.  

First, in certain situations outlined in the new law, the State requires NPMs to post a bond of at least $50,000 against which outstanding escrow may be collected in the future.  See A.R.S. § 44-7111(3)(d) – (g).

Second, a NPM located outside the United States is now required to provide AGO with a declaration from each of its importers that the importer accepts joint and several liability with the NPM for making the required escrow deposits under the Escrow Statute. See A.R.S. § 44-7111(3)(h).

Third, the grounds upon which AGO can refuse inclusion or retention of a NPM on the Arizona Cigarette Directory have been expanded.  For example, NPMs who refuse to certify that they are subject to A.R.S. § 44-7101 or A.R.S. § 36-798.06, including on the basis of sovereign immunity, may be refused inclusion or retention on the Arizona Cigarette Directory.  Additionally, NPMs may be refused inclusion or retention on the Arizona Cigarette Directory who: (1) provide incorrect, false or misleading statements on any Certification to the State pursuant to the Escrow Statute or Section 3 of the Directory Statute, or (2) were not or are not in compliance with any State  or Federal laws. See A.R.S. § 44-7111(3)(i) - (j).

Delivery Sales of Tobacco Products Are Prohibited (Except Pipe Tobacco and Cigars):

Pursuant to A.R.S 36-798.06 ("Delivery Sales Statute") it is unlawful for any person, other than a person licensed under A.R.S. § 42-3201, or a retailer ordering from a person so licensed, to order or purchase, or cause to be ordered or purchased, a tobacco product via mail, phone, the Internet, or any electronic means (except for pipe tobacco and cigars). Simply put, under this law, Arizona consumers must buy tobacco products in a face-to-face transaction at a retail establishment (except for pipe tobacco and cigars). Penalties for violating this law include, among others, a civil penalty not to exceed $5,000 per violation, and each order or purchase of tobacco products constitutes a separate violation. Further, a violation of this law constitutes a felony. A.R.S. § 36-798.06(H). 

Moreover, a Common Carrier shall not knowingly transport a tobacco product for a person who is in violation of the Delivery Sales Statute. A.R.S. § 36-798.06(B). This means Common Carriers will no longer be permitted to deliver tobacco products directly to consumers (except for pipe tobacco and cigars). Penalties for violating this law include, among others, a civil penalty not to exceed $5,000 per violation, and each order or purchase of tobacco products constitutes a separate violation. Further, a violation of this law constitutes a felony. A.R.S. § 36-798.06(H). Please contact the Arizona Department of Revenue (www.azdor.gov) with questions regarding proper submission of taxes on purchases of pipe tobacco and cigars made online. 

For more information, please see the AGO press release here.

Quarterly Escrow Deposits Required by Non-Participating Manufacturers

Pursuant to A.R.S. § 44-7111(5)(g) “A tobacco product manufacturer that is subject to the requirements of section 3(a)(2) [of the Directory Statute] shall make the required escrow deposits in quarterly installments during the year in which the sales covered by the deposits are made.” Thus, NPMs are required to make four quarterly escrow deposits, and those deposits are to be based on the units sold from the corresponding quarter. The below chart provides a breakdown of the year by quarter along with the date by which the deposit and certification are due.

Quarter and Corresponding Months

Quarterly Deposit Due Date

First Quarter (Jan. - March)

On or before May 31

Second Quarter (April - June)

On or before August 31

Third Quarter (July – Sept.)

On or before November 30

Fourth Quarter (Oct. – Dec.)

On or before February 28 (of the following year)

Please be aware that the annual Escrow Statute compliance certification requirement remains in effect as well as all other requirements of the Escrow Statute (A.R.S. § 44-7101) and Directory Statute.


The fact that a Tobacco Product Manufacturer and its Brand Families are listed in the Directory does not mean that they are compliant with other State or federal laws applicable to the sale and/or distribution of Cigarettes.  Here are some examples (not an exhaustive list):

  • A.R.S. § 36-798.04 states “[a] package or other container of cigarettes that contains fewer than twenty cigarettes . . . may be distributed or sold within this state only at a facility that is licensed pursuant to § 4-209, subsection B, paragraph 6, and that admits only people who are at least twenty-one years of age.”  A.R.S. § 36-798.04(A)(1) & (C).  A violation of A.R.S. § 36-798.04 is a criminal offense.  See A.R.S. § 36-798.04(D).
  • A.R.S. § 42-3210 (Arizona’s “Gray Market Statute”) prohibits the affixing of an Arizona tax stamp to any cigarette package in violation of that statute.  This law imposes significant requirements upon cigarette distributors.  For example, Subsection (A)(5) of the Gray Market Statute prohibits the affixing of an Arizona tax stamp to any cigarette package violating specific federal laws, including: (i) 15 USC § 1335(a) of the Federal Cigarette Labeling and Advertising Act; and (ii) 19 USC §§ 1681-1681(b).  In many instances, violations of these statutes will render an entire brand, and not just an individual package, ineligible for stamping.  These laws impose significant requirements upon importers and manufacturers of cigarettes and should be reviewed in their entirety. The Department of Revenue may, among other things: (i) revoke any license issued to a Distributor who sells or offers for sale cigarette packages . . . stamped in violation of the Gray Market Statute; and (ii) seize and destroy packages of cigarettes that are stamped in violation of the Gray Market Statute.  A.R.S. § 42-3210(B)(1) & (2).  Violations of the Gray Market Statute also constitute violations of the Consumer Fraud Act, which allows the Attorney General to, among other things: (i) “impound . . . merchandise material”; (ii) seek injunctive relief, enjoin the stamping for sale of non-compliant cigarettes; and (iii) prohibit a Distributor from engaging in a specified trade or occupation.  A.R.S. §§ 44-1524(A)(3) & (4) & 44-1528(A).  Finally, selling or offering for sale cigarettes that are in violation of the Gray Market Statute constitutes a class 2 misdemeanor.
  • Under the Arizona Reduced Cigarette Ignition Propensity Act, all cigarettes sold in the State of Arizona must comply with the State Fire Marshal’s Fire Standards pursuant to A.R.S. §§ 41-2170 through 41-2170.08. Any manufacturer who intends for its cigarettes to be sold must have its cigarettes listed as compliant in the Arizona State Fire Marshal Directory of Fire Standards Compliant Cigarettes.  A manufacturer, wholesaler, agent or other person or entity that knowingly sells or offers to sell cigarettes, other than through retail sale, in violation of § 41-2170.01 is subject to a civil penalty of not to exceed one hundred dollars for each pack of cigarettes sold or offered for sale. This penalty shall not exceed twenty-five thousand dollars during any thirty-day period.  A retailer who knowingly sells or offers to sell cigarettes in violation of § 41-2170.01 is subject to a civil penalty of not to exceed one hundred dollars for each pack of cigarettes sold or offered for sale. This penalty shall not exceed one thousand dollars during any thirty-day period. A.R.S. § 41-2170.04.

For information on Fire Standards Compliant Cigarettes click here

Other federal requirements include (but are not limited to):

  • The Prevent All Cigarette Trafficking ("PACT") Act, 15 U.S.C. §§ 375 et seq. imposes additional requirements on any person who sells, ships, or transfers or offers to sell, ship, or transfer tobacco products in interstate commerce.  For more information, click here.
  • The Federal Cigarette Labeling and Advertising Act (FCLAA), 15 U.S.C. §1335a(a), in part requires that each person who manufactures, packages, or imports cigarettes annually submit to the Department of Health and Human Services (HHS) a list of ingredients added to tobacco in the manufacture of cigarettes (Ingredient Report). The Centers for Disease Control and Prevention (CDC), Office on Smoking and Health (OSH), has been delegated the responsibility of implementing these provisions.  Cigarettes in violation of this federal law are also in violation of Arizona’s aforementioned Gray Market Statute (see the above information to learn how this affects you).
  • The Federal Food, Drug, and Cosmetic Act (“FDCA”) (21 U.S.C. 301 et seq.), as amended by the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) (Public Law 111-31), established a tobacco standard special rule for cigarettes that became effective on September 22, 2009.  All products that meet the description in § 907(a)(1)(A) of the FSPTCA are banned.  Section 907(a)(1)(A) states:  “a cigarette or any of its component parts (including the tobacco, filter, or paper) shall not contain, as a constituent (including a smoke constituent) or additive, an artificial or natural flavor (other than tobacco or menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, pineapple, vanilla, coconut, licorice, cocoa, chocolate, cherry, or coffee, that is a characterizing flavor of the tobacco product or tobacco smoke.” Note that § 900(3) of the FSPTCA defines “cigarette” as including “tobacco, in any form, that . . . is likely to be offered to, or purchased by, consumers as a cigarette or as roll-your-own tobacco.”  Loose tobacco intended to be used in cigarettes or as roll-your-own tobacco fits this definition of “cigarette” and therefore may not be flavored with a characterizing flavor.  To find more information regarding the FSPTCA, see the FDA website located at: http://www.fda.gov/
  • In addition to the requirements detailed here, manufacturers, importers, and distributors of tobacco products may have other legal obligations to consider. Although not an exhaustive list, other federal agencies that may have applicable laws include the Alcohol and Tobacco Tax and Trade Bureau, U.S. Customs, and the Federal Trade Commission.

Youth access statutes include (but are not limited to):