TITLE 34. PUBLIC FINANCE

PART 1. COMPTROLLER OF PUBLIC ACCOUNTS

CHAPTER 3. TAX ADMINISTRATION

SUBCHAPTER JJ. CIGARETTE, E-CIGARETTE, AND TOBACCO PRODUCTS REGULATION

34 TAC §3.1205

The Comptroller of Public Accounts proposes amendments to §3.1205, concerning delivery sales of cigarettes (Health and Safety Code, Chapter 161, Subchapter R). This section is amended to implement Senate Bill 97, 84th Legislative Session, 2015 and related statutory provisions. The section is located in Title 34, Chapter 3, Subchapter JJ.

Throughout the section, titles are added to statutory citations as appropriate. In addition, the section is revised to use the term United States Postal Service for consistency throughout the section and to follow the terminology used in the Health and Safety Code.

Subsection (a)(1) is amended to add a definition of the term "cigarette" as described in Tax Code, §154.001. Subsequent paragraphs are re-numbered accordingly. Subsection (a)(6), defining the term "seller," is amended to follow the statutory language more closely. The definition is derived from the following sections of Health and Safety Code, §161.452(b) (Requirements for Delivery Sales), which sets out the compliance responsibilities of a "person taking a delivery sale order;" §161.453(a) (Age Verification Requirements), describing a person who both accepts a delivery sale order and mails or ships cigarettes in connection with a delivery sale order; §161.455(a) (Shipping Requirements), which applies to a person who mails or ships cigarettes in connection with a delivery sale order; and §161.455(b), which applies to a person taking delivery sale orders.

Subsection (b) is amended to address only tax permits and registration. The term "requirements" is deleted. Subsection (b)(1) is amended to delete the term "registration" and to describe the types of tax permits a seller making delivery sales must obtain. To make the amended paragraph easier to read, it is reorganized into subparagraphs. Subparagraph (A) addresses out-of-state sellers. Subparagraph (B) addresses Texas sellers. New paragraph (2) is added to implement the existing statutory requirement in Health and Safety Code, §161.456 (Registration and Reporting Requirements) that sellers making delivery sales must first register with the comptroller. The paragraph identifies the specific information that must be provided to the comptroller.

New subsection (c) is added to address seller's and purchaser's responsibilities. Subsequent paragraphs are re-lettered and re-numbered accordingly. For example, current subsection (b)(2) addressing collection and payment of taxes is amended to be subsection (c)(1).

Subsection (c)(3), currently subsection (b)(4), addressing determining a customer's age, is renamed as "Age verification" to follow the syntax of other paragraphs in the subsection. In addition, the paragraph is amended to add subparagraphs (A) and (B). Subparagraph (A) contains the information that currently appears in subsection (b)(6), and subparagraph (B) contains the information that currently appears in subsection (b)(7). Minor revisions are made to more closely follow the language of Health and Safety Code, §161.453 and to make the subparagraphs easier to read.

Subsection (c)(4), currently subsection (b)(5), is amended to identify a means by which notice may be provided to a prospective purchaser. In addition, minor revisions are made to the subsection to more closely follow the language of Health and Safety Code, §161.454 (Disclosure Requirements).

Subsection (b)(6) and (7) are deleted because the information provided in those paragraphs is now addressed in subsection (c)(3). Subsection (b)(8) is deleted because the information provided in that paragraph is now addressed in subsection (c)(4).

Current subsection (c), addressing purchaser requirements, is renumbered as subsection (b)(5). Corresponding changes are made to current paragraphs (1) - (3).

Subsection (d)(2) is amended to implement the existing statutory requirement that a seller who does not use a delivery service must still comply with the terms set out in the paragraph. See Health and Safety Code, §161.455(b). Paragraph (2)(A) is amended to remove language distinguishing between deliveries at residential and commercial locations and to more closely follow Health and Safety Code, §161.455(a). Subparagraph (A) is divided into subparagraphs (A) and (B). Current subparagraph (B) is deleted as it is unnecessary.

Subsection (e) is amended to delete the word "seller" and to add a statement that the reporting requirements apply to all sellers and persons shipping cigarettes into Texas in connection with a delivery sale. This amendment is intended to more closely follow the language of Health and Safety Code, §161.456(b). New paragraphs (1), (2), and (3) outline the filing requirements, and the exemption from the filing requirements, for sellers making delivery sales. This implements Senate Bill 97, 84th Legislature, 2015. New paragraph (1) describes the information persons engaged in delivery sales are required to file. New subparagraph (A) provides the information that must be submitted. New subparagraph (B) explains that a Texas Cigarette/E-Cigarette Delivery Sales Report will satisfy this filing requirement. New subparagraph (C) identifies due dates.

Information in current subsection (e) concerning the "Jenkins Act" is renumbered as paragraph (2), without change.

New paragraph (3) is added to implement the exemption from the delivery sale filing requirement and includes the comptroller's interpretation of Health and Safety Code, §161.456(d) to mean that sellers who commit certain violations, or are reported as having committed certain violations, lose the exemption and are required to submit delivery sale filings for two years following the violation. New subparagraph (A) provides information on the delivery sale filing requirements for a seller who commits a violation but does not have two years of prior delivery sales history. New subparagraph (B) explains the delivery sale filing requirement for a person who commits a violation.

Subsection (f), addressing violations and penalties, is amended to follow the statutory language more closely.

Tom Currah, Chief Revenue Estimator, has determined that for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government.

Mr. Currah also has determined that for each year of the first five years the rule is in effect, the public benefit anticipated as a result of enforcing the rule will be by conforming the rule to current statutes and clarifying agency policy. This rule is proposed under Tax Code, Title 2, and does not require a statement of fiscal implications for small businesses. There is no significant anticipated economic cost to individuals who are required to comply with the proposed rule.

Comments on the proposal may be submitted to Teresa G. Bostick, Director, Tax Policy Division, P.O. Box 13528, Austin, Texas 78711-3528. Comments must be received no later than 30 days from the date of publication of the proposal in the Texas Register.

The amendments are proposed under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture) and §111.0022 (Application to Other Laws Administered by Comptroller), which provide the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of the Tax Code, Title 2, and taxes, fees, or other charges that the comptroller administers under other law.

The amendments implement legislative changes to Health and Safety Code, Chapter 161, Subchapter R (Delivery Sales of Cigarettes and E-Cigarettes).

§3.1205.Delivery Sales of Cigarettes (Health and Safety Code, Chapter 161, Subchapter R).

(a) Definitions. The following words and terms, when used in this section shall have the following meanings, unless the context clearly indicates otherwise.

(1) Cigarette--A roll for smoking:

(A) that is made of tobacco or tobacco mixed with another ingredient and wrapped or covered with a material other than tobacco; and

(B) that is not a cigar.

(2) [(1)] Delivery sale--A sale of cigarettes to a consumer in Texas in which:

(A) the purchaser submits the order for the sale:

(i) by telephone or any other method of voice transmission;

(ii) by mail or any other delivery service; or

(iii) through the Internet or another on-line service; or

(B) the cigarettes are delivered by mail or another delivery service.

(C) A sale of cigarettes not for personal consumption to a person who is a wholesale dealer or a retail dealer is not a delivery sale.

(D) A sale of cigarettes is a delivery sale regardless of whether the seller is located outside or within Texas.

(3) [(2)] Delivery service--A person, including the United States Postal Service [(U.S. Post Office)], who is engaged in the commercial delivery of letters, packages, or other containers.

(4) [(3)] Shipping container--A container in which cigarettes are shipped in connection with a delivery sale.

(5) [(4)] Shipping document--A bill of lading, airbill, United States Postal Service [Post Office] form, or any other document used to document a delivery.

(6) [(5)] Seller--A person, located outside or within Texas, who takes or accepts delivery sale orders from [offers cigarettes for sale to] the public by telephone [order], mail [order], or on the Internet, or who mails or ships cigarettes in connection with a delivery sale.

(b) Seller permits and registration. [requirements. A person who makes a delivery sale of cigarettes in Texas, must comply with the following requirements.]

(1) Cigarette tax permits and sales and use tax permits. [Registration.]

(A) Out-of-state sellers who intend [Sellers located outside of Texas, who wish] to make delivery sales to Texas customers must apply for and obtain a cigarette retailer's permit and a cigarette distributor's [distributor] permit from the comptroller's office as described in §3.102 of this title (relating to Applications, Definitions, Permits, and Reports) [before making a delivery sale in Texas or before shipping cigarettes into Texas in connection with a delivery sale].

(B) Sellers located in Texas who intend to make delivery sales to Texas customers must apply for and obtain a cigarette retailer's permit from the comptroller's office, as described in §3.102 of this title, and must obtain a Texas sales and use tax permit, as described in §3.286 of this title (relating to Seller's and Purchaser's Responsibilities, including Nexus, Permits, Returns and Reporting Periods, and Collection and Exemption Rules). [Sellers located in Texas, who wish to make delivery sales to Texas customers must obtain a cigarette retailer permit and a state sales tax permit from the comptroller's office before making a delivery sale in Texas.]

(2) Delivery sale registration. Before making a delivery sale in Texas, all sellers must register with the comptroller by filing a statement that includes:

(A) the seller's name and trade name;

(B) the address of the seller's principal place of business and any other place of business;

(C) the seller's telephone number; and

(D) the person's e-mail address.

(c) Seller and purchaser responsibilities.

(1) [(2)] Collection and payment of taxes. The comptroller's office collects cigarette excise tax through the sale of cigarette tax stamps to permitted distributors. A seller located outside of Texas who has obtained a distributor permit is required to purchase and pay for tax stamps before the comptroller's office will ship the stamps to the seller. In addition, as provided in Tax Code, Chapter 151(Limited Sales, Excise, and Use Tax), a seller engaged in business in Texas is required to collect and remit to the comptroller's office sales tax on all cigarette sales made in Texas.

(2) [(3)] Stamping requirements. A seller located outside of Texas must affix a Texas tax stamp to each package of cigarettes that is to be shipped or delivered to a purchaser in Texas before shipment. A Texas seller can purchase only stamped packages of cigarettes from distributors and wholesalers.

(3) [(4)] Age verification. A [Determine customer's age. Using the methods established in paragraphs (6) and (7) of this subsection, a] seller must confirm the age of the prospective purchaser placing an order for cigarettes to be delivered by the United States Postal Service [U. S. Post Office] or by a delivery service before the cigarettes can be mailed or delivered to a purchaser in Texas.

(A) Written verification. A seller is required to obtain from the prospective purchaser a written certification that includes a reliable confirmation that the prospective purchaser is at least 18 years of age and a statement signed by the prospective purchaser under penalty of law:

(i) certifying the prospective purchaser's address and date of birth;

(ii) confirming that the prospective purchaser understands that signing another person's name to the certification is illegal, that sales of cigarettes to, and the purchase of cigarettes by, an individual younger than 18 years of age are illegal under state law; and

(iii) confirming that the prospective purchaser wants to receive mailings from a tobacco company.

(B) Age verification. A seller must make a good faith effort to verify the information contained in the certification required under subparagraph (A) of this paragraph. A seller may compare the information against a commercially available database or obtain a photocopy or other image of a government-issued identification bearing a photograph and date of birth of the prospective purchaser.

(4) [(5)] Disclosure requirements. A seller must send a prospective purchaser, by e-mail or other means, a notice that includes a prominent and clearly legible statement that:

(A) [state law prohibits] cigarette sales to individuals younger than 18 years of age are illegal under state law;

(B) sales of cigarettes are restricted to those individuals who [can] provide verifiable proof of age in accordance with paragraph (3) of this subsection;

(C) sales of cigarettes are taxable under Texas Tax Code, Chapter 154 (Cigarette Tax);

(D) the excise tax due on the cigarettes has been paid by the purchase of a tax stamp for each cigarette package; and

(E) that a tax stamp has been affixed to each cigarette package sold.

[(6) Written certification. A seller is required to obtain from the prospective purchaser a written certification that includes:]

[(A) a reliable confirmation that the prospective purchaser is at least 18 years of age;]

[(B) a statement signed by the prospective purchaser certifying the prospective purchaser's address and date of birth;]

[(C) a confirmation that the prospective purchaser understands that signing another person's name to the certification is illegal, that state law prohibits the sale of cigarettes to, and the purchase of cigarettes by, an individual younger than 18 years of age; and]

[(D) a confirmation that the prospective purchaser wants to receive mailings from a tobacco company.]

[(7) Age verification. A seller must make a good faith effort to verify the information contained in the certification required under paragraph (6) of this subsection. A seller may compare the information against a commercially available database or obtain a photocopy or other image of a government-issued identification bearing a photograph and date of birth of the prospective purchaser.]

[(8) Disclosure notice. A seller must send to the prospective purchaser, by e-mail or other means, a notice that complies with the requirements in paragraph (5) of this subsection.]

(5) [(c)] Purchaser age certification [requirements]. A person placing an order for cigarettes to be mailed or delivered must first:

(A) [(1)] provide the seller with proof of age;

(B) [(2)] provide the seller with a signed written statement that confirms:

(i) [(A)] the purchaser's address and date of birth;

(ii) [(B)] the purchaser's permission for a tobacco company to send mailings to the purchaser;

(iii) [(C)] the purchaser's knowledge that signing another person's name to the written statement is illegal, and that state law prohibits the sales of cigarettes to, and the purchase of cigarettes by, an individual younger than 18 years of age; and

(C) [(3)] pay for the cigarettes ordered by mail or over the Internet by check or by a credit or debit card that has been issued in the purchaser's name.

(d) Seller shipping requirements. Anyone who mails, ships, or delivers cigarettes into Texas in connection with a delivery sale order must:

(1) include as part of the shipping documents a clear and conspicuous statement: "CIGARETTES: TEXAS LAW PROHIBITS SHIPPING TO INDIVIDUALS UNDER 18 YEARS OF AGE AND REQUIRES THE PAYMENT OF ALL APPLICABLE TAXES";

(2) require, or use a method of mailing or shipping that obligates the delivery service to require:

(A) [for residential deliveries,] the purchaser who placed the delivery sale order, or an adult who resides at the purchaser's address and who is at least 18 years of age, to sign to accept delivery of the shipping container; and

(B) [for] the person signing to accept delivery of the shipping container to provide proof, in the form of a government-issued identification bearing a photograph, that the person is:

(i) the purchaser, or an adult who is at least 18 years of age and resides at the purchaser's address; and

(ii) at least 18 years of age if the person appears to be younger than 27 years of age; and [accepting delivery to provide proof of identity and age by means of government-issued identification bearing a photograph;]

[(B) for non-residential deliveries, the purchaser who placed the delivery sale order, or a person who is at least 18 years of age, to sign to accept delivery of the shipping container and to provide proof of identity and age by means of a government-issued identification bearing a photograph;]

(3) if applicable, provide the delivery service with a written and signed statement that a Texas cigarette tax stamp has been affixed to each package of cigarettes included in the delivery sale. If the seller is located in Texas, the seller must also include a written and signed statement that the sales tax due on each package of cigarettes included in the delivery sale will be remitted to the comptroller's office.

(e) Reporting [Seller reporting] requirements. [On or before the 10th day of each month, each seller who has made a delivery sale in Texas or shipped or delivered cigarettes into Texas in connection with a delivery sale during the previous month must file a Texas Cigarette Delivery Sales Report with the comptroller's office. This report must be completed and filed online. The report is available on the comptroller's Window on State Government Web site at www.window.state.tx.us. The first report required under this subsection is due February 10, 2004, and will cover the period of September 1, 2003 through January 31, 2004.]

(1) Each seller who has made a delivery sale, and each person who has delivered cigarettes in connection with a delivery sale, is required to file a delivery sales report with the comptroller's office.

(A) For each delivery sale, a person must file a memorandum or a copy of an invoice that provides:

(i) the name, address, telephone number, and e-mail address of the individual to whom the delivery sale was made;

(ii) the brand or brands of the cigarettes that were sold; and

(iii) the quantity of cigarettes that were sold.

(B) A person may comply with the reporting requirement described in this paragraph by filing a Texas Cigarette/E-Cigarette Delivery Sales Report. The report is available on the comptroller's website.

(C) This filing is due on or before the 10th day of each month based on delivery sales made in the previous month.

(2) A seller who submits a monthly "Jenkins Act" report required by 15 U.S.C. Section 376, as amended, to the comptroller's office has complied with the monthly delivery sales reporting requirement and no further report is required.

(3) A person is exempt from the filing requirement in this subsection, if in the preceding two years from the date the report is due, the person is not in violation of the requirements under Health and Safety Code, Chapter 161, Subchapter R (Delivery Sales of Cigarettes and E-Cigarettes) and has not been reported under Health & Safety Code, §161.090 (Reports of Violations) to the comptroller as having violated Subchapter H (Distribution of Cigarettes, E-Cigarettes, or Tobacco Products).

(A) A person is exempt from the filing requirement in this subsection even if the person does not have a two-year report filing history, provided that the person has not committed a violation during the time the person has been making delivery sales.

(B) If a person violates the requirements of Health and Safety Code, Chapter 161, Subchapter R, or is reported to the comptroller under §161.090 for violating Health and Safety Code, Chapter 161, Subchapter H, the person must comply with the monthly filing requirements described in this subsection.

(i) A person who commits a violation, and who does not have two years of prior delivery sales, must file the required information from its first day of business.

(ii) A seller who commits a violation is liable for reporting all delivery sales for all business locations of the seller.

(f) Violations and Penalties.

(1) A person [seller] commits an offense if the person [seller] violates a provision of [the] Health and Safety Code, Chapter 161, Subchapter R for which a criminal penalty is not otherwise provided, or Tax Code, Chapter 154. For example, a seller who makes

[(1)] [Age violation. Making] a delivery sale of cigarettes to a person younger than 18 years of age commits an offense. The person's first offense is a Class C misdemeanor. If it is shown on the trial of a person that the person has previously been convicted of an offense under Health and Safety Code, Chapter 161, Subchapter R, the [for the first offense. A second and any subsequent] offense is a Class B misdemeanor.

(2) Knowing [Intentional] violations. A person [seller] who knowingly violates a provision of [the] Health and Safety Code, Chapter 161, Subchapter R, or knowingly submits a certification described in subsection (c)(3)(A) of this section, in another person's name commits a [third degree] felony of the third degree.

(3) Non-payment of tax. A person [seller] who fails to pay the cigarette tax or remit the sales and use tax due in connection with a delivery sale [tax] must pay to the state a civil penalty in an amount equal to five times the amount of tax due. This penalty is in addition to penalties imposed under Tax Code, Chapter 154.

(4) Forfeiture of cigarettes and property. Cigarettes sold, or cigarettes that a person [Packages of cigarettes that a seller sold or] attempted to sell in a delivery sale that does [do] not comply with [the] Health and Safety Code, Chapter 161, Subchapter R, are [may be] forfeited to the state and will [may] be destroyed. A fixture, [Any] equipment, or other material[,] or [other ] personal property on the premises of a person [seller] who, with the intent to defraud the state, fails to comply with the provisions of [the] Health and Safety Code, Chapter 161, Subchapter R, is also [may also be] forfeited to the state.

(5) Tax code violations. If the comptroller finds that a person [seller] violates Tax Code, Chapter 154, or a rule made pursuant to Chapter 154, the comptroller may impose a penalty of not more than $2,000 for each violation per day and [and/or] suspend or revoke the person's [a] permit pursuant to [Texas] Tax Code, §154.1141(Summary Suspension of a Permit).

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on January 5, 2017.

TRD-201700059

Lita Gonzalez

General Counsel

Comptroller of Public Accounts

Earliest possible date of adoption: February 19, 2017

For further information, please call: (512) 475-0387