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California State Auditor Report Number : 2015-119

State Board of Equalization
Its Tobacco Tax Enforcement Efforts Are Effective and Properly Funded, but Other Funding Options and Cost Savings Are Possible

Response to the Audit


February 12, 2016

Ms. Elaine Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Dear Ms. Howle:

The State Board of Equalization (BOE) would like to thank the California State Auditor’s Office (CSA) for its recommendations contained in the California State Board of Equalization, Cigarette and Tobacco Licensing Fee Program Audit 2015-119, draft report provided on February 8, 2016. The BOE concurs with the observations described in the State Auditor’s report. The following is the BOE’s response to CSA’s findings and recommendations.

Recommendations as stated in California State Auditor (CSA) Report:

1. Unless the Legislature directs the board to eliminate the compliance fund's excess fund balance within a time frame of more than a year, the board should eliminate the excess fund balance by June 30, 2017. Also, in the future, the board should limit the fund's balance to no more than two months' worth of licensing program expenditures.

BOE’s Reply:


The BOE agrees that the excess balance in the Cigarette and Tobacco Products Compliance Fund should be drawn down to the recommended level. As noted in the report, BOE’s appropriation is currently at a higher level than the average annual revenue. This would draw down the balance over time, albeit, at a relatively slow pace. A more aggressive approach, as recommended in the report, would be acceptable. The BOE will follow the direction of the Department of Finance and the Legislature as to the best approach to eliminating the excess fund balance. Any funding change, including making the program self-funded, should have a mechanism for adjusting the program’s budget due to increasing or decreasing program costs.

2. The special taxes division should amend its budget to reflect actual work that supervisors and support staff perform instead of adjusting staff members' predetermined allocations of time to ensure that the division does not exceed each program's budget.

BOE’s Reply:

In 2010, the Special Taxes and Fees Department underwent a large-scale reorganization. For many years prior to 2010, the department had been divided by like programs into three divisions: the Excise Taxes Division, the Environmental Fees Division, and the Fuels Division. Each of these divisions was responsible for approximately 7 - 9 tax programs, with Cigarette and Tobacco Taxes and Licensing falling under the Excise Taxes Division. At that time, it was quite workable for supervisors and support staff to report actual hours worked to the individual programs as there were far fewer programs and time codes to keep track of each day/month.

As of July, 2010, the Special Taxes and Fees Department was established; staff were aligned by work function and reassigned to one of five branch offices: Collection and Registration Branch, Return Processing Branch, Program Policy and Administration Branch, Audit Examination Branch and the Appeals and Data Analysis Branch. Each of these branches now handles specific functions and duties, providing their particular tasks and services for all of the 29 tax and fee programs administered. As a result, the scope of knowledge and number of programs expected to be handled by each employee greatly increased.

This reorganization was brought about for consistency, to streamline processes and to provide better customer service. For example, we consolidated our phone reception by utilizing one main phone number, centralized our mail processing areas, filing and scanning areas, combining the staff and functions into one administrative support area, instead of maintaining three separate smaller groups performing each function under three divisions.


The commingling of work functions does not readily lend itself to reporting each individual’s work product by individual tax program codes, making it especially difficult for the supervisory and support staff. The vast majority of our employees are reporting actual time worked to the actual tax and fee program worked. For the smaller population of supervisors and support staff, it would not be economically feasible for them to spend the time to track or separate their work for the purpose of time allocation. For example, a supervisor will review time sheets for all of their employees every month. Their employees may work on all 29 programs to varying degrees throughout the month. Another employee might spend 8 hours a day sorting and prepping material for digital scanning. In either situation there is no economically feasible way for these staff to record and report their actual time spent by individual program code and attempting to do so when the materials or subject matter is commingled increases the difficulty.

The following paragraph is the second statement included in our rebuttal point number three

The prorated time codes are based on the number of staff and work activities associated with the programs, which reasonably translates to an allocable amount of time needed to perform the supervisory and support functions without parsing the activities performed down to a minute level. We have developed a formula to allocate our supervisory and support time to the various tax and fee programs. The formula is based on the number of Personnel Years (PYs) in each branch allocated to each tax and fee program. The formula is reviewed and adjusted as needed throughout the fiscal year. We looked at several ways to allocate the time and have found that this approach is the most equitable to all our tax and fee programs.

The Centralized Revenue Opportunity System (CROS), a five-year Business/IT project to replace BOE’s aging legacy computer systems, will provide additional tools to track work activities and time. We will be examining this issue as part of the CROS post-implementation phase to determine how work activity can be tracked without reducing employee productivity.

3. The investigations division should ensure that investigators charge their time according to division policy and determine a method to more accurately allocate investigators' time instead of using a predetermined method established in 2005 and since discontinued.

BOE’s Reply:

The Investigation Division (ID) will discontinue the use of the timesheet template from 2005. The 2010 timesheet template will be re-distributed with instructions for supervisors to discuss in their next staff meeting as well as confirming the appropriate template is being used when the supervisors approve the monthly and weekly timesheets for their criminal investigators. An analysis of criminal investigator functions will be completed to determine if a time study will be helpful in addressing the allocation of time between the three integrated cigarette and tobacco codes for the criminal cigarette and tobacco investigations.

In addition, the ID will be working with the BOE Budget Unit to ensure that the allocation of time to the three integrated cigarette and tobacco codes are better defined.

4. To reduce enforcement cost without compromising the level of increased compliance with the cigarette and tobacco tax law that the inspection program has produced, the board should reduce the number of annual inspections and inspections of retailers, distributors, and wholesalers that it conducts each year to reflect changes in the number of licensed retailers, distributors, and wholesalers that sell cigarettes and tobacco products in California. This adjustment should align with the same frequency of inspections that the board followed when it implemented the inspection program, which is 26 percent of these licenses' locations each year, or approximately one inspection every four years for each licensed location.

BOE’s Reply:

To implement the reduction in enforcement resources and, subsequently, the number of inspections, for the cigarette and tobacco licensing program, the necessary steps will require time, resources and board approval. Additional hours will be allocated to the cigarette and tobacco program to develop and execute an implementation plan for the CSA recommendations, track ID actions, and complete any required follow-up reports to the CSA.

Upon receiving Board approval, the current ten AB 71 inspection teams could be reduced to nine teams to satisfy the described reduction of enforcement activity. With a reduction of one inspection team, the assigned geographical area and associated distributor, wholesaler and retailer permits will require a re-allocation from the current designated zones to a reduced number of zones. Zones determine the permits and geographical territory assigned to each AB 71 inspection team. The impact of this re-zoning will generate a need to update all pertinent databases, zone maps and reports. A primary goal to rezoning will be to ensure adequate team staffing to meet operational needs and ensure staff safety.

With changes to the zones and increased geographical areas for each of the remaining inspection teams, travel expenses and inspection time may increase, resulting in fewer inspections than the envisioned 27% to ensure inspections, re-inspections and suspended account inspections are completed uniformly throughout the state. The logistics may impact the division’s efficiencies relating to expanded travel times.

BOE’s Human Resources Division, the Board, and SEIU will need to be notified of the intended reduction in staff. It will be assumed that a meet and confer with SEIU will be needed to explain the details of the recommendation and the impact to staff from this program. With a reduction of an inspection team, specialized facility space may become vacant. This may result in ongoing cost until the conclusion of the current lease terms. With the administrative costs associated with the reduction of a team, the full stated savings in the report may not be realized for at least two fiscal years.

The BOE is committed to exploring alternative cost savings and other funding options in order to improve overall effectiveness and efficiency of tobacco enforcement. We appreciate the State Auditor's review and analysis of the tobacco programs and look forward to the State Auditor’s feedback on the above corrective actions.

If you have any questions concerning the enclosed BOE response please contact me at (916) 327-4975 or David J. Gau, Chief Deputy Director, at (916) 323-9070.


Original signed by Cynthia Bridges

Cynthia Bridges
Executive Director


California State Auditor’s Comments on the Response From the State Board of Equalization

To provide clarity and perspective, we are commenting on the response to our audit by the State Board of Equalization (board). The numbers below correspond to the numbers we have placed in the margin of board’s response.


To clarify, absent any direction from the Legislature or the California Department of Finance, the intent of our second recommendation is for the board is to eliminate the excess Cigarette and Tobacco Products Compliance Fund (compliance fund) balance by June 30, 2017 by using it to offset the licensing program’s annual funding shortfall. Also, in the future, the board should limit the compliance fund’s balance to no more than two months’ worth of licensing program expenditures.


What the board refers to as a smaller population of supervisors and support staff in the Special Taxes and Fees Division (special taxes division) amounts to 80 staff as indicated, which we believe is a significant number of employees.


We stand by our recommendation for the board to implement a process in which the special taxes division’s time charges reflect, as close as possible, the actual amount of time its supervisors and support staff work on each program. This process would provide the most realistic costs for each program irrespective of what was budgeted for each program. However, as we indicate, the board increases or decreases the time charges of the special taxes division’s supervisors and support staff to ensure each program does not exceed its budget. Without implementing our recommendation the tax and licensing programs’ actual costs are irrelevant and merely reflect whatever the board budgets for supervisor and support staff rather than reflecting the actual work they perform. Moreover, although the board believes such a process is economically unfeasible, many state departments use this type of system to ensure that costs are properly allocated.

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