California Proposition 99: Tobacco Tax, Licensing, and Penalties

California’s Proposition 99 is the 1988 ballot measure, formally titled the Tobacco Tax and Health Protection Act, that added a 25-cent excise tax to every pack of cigarettes sold in the state and placed an equivalent tax on other tobacco products. The revenue flows into a dedicated fund, walled off from the general budget, that pays for health education, hospital and physician care for low-income Californians, tobacco-related disease research, and natural resource programs. The tax took effect on January 1, 1989, and still operates today as one layer in California’s broader tobacco taxation.¹

What Prop 99 Taxes and Who Pays It

The 25 cents applies to each pack of 20 cigarettes, which works out to $0.0125 per cigarette. It is collected at the wholesale level. The distributor who first brings cigarettes into California for sale is legally responsible for paying the tax, and consumers never file anything, though the cost is built into the shelf price.²

Cigars, pipe tobacco, chewing tobacco, and similar products are also covered. Because they vary so much in size and price, the tax on them is set as a percentage of the distributor’s wholesale cost rather than a flat per-unit figure. The California Department of Tax and Fee Administration (CDTFA) recalculates that percentage each year to keep the burden roughly equivalent to the combined cigarette excise taxes. From July 1, 2025, through June 30, 2026, the rate is 54.27 percent of wholesale cost.³

Electronic cigarettes sit on a slightly different track. California applies a separate 12.5 percent retail tax on e-cigarettes under the California Electronic Cigarette Excise Tax, which was created outside the Prop 99 framework, though vaping products may also fall under the other-tobacco-products rate depending on how they are classified.⁴

Where the Money Goes

All Prop 99 revenue is deposited into the Cigarette and Tobacco Products Surtax Fund, kept entirely separate from California’s general budget.⁵ That separation was intentional. By keeping the money out of the general fund, the measure’s authors prevented legislators from quietly redirecting it to unrelated purposes.

Revenue and Taxation Code Section 30124 locks in a fixed split among six accounts. After the CDTFA’s administrative costs and any tax refunds are deducted, the remaining revenue is allocated this way:⁶

Hospital Services Account, 35 percent, for payments to hospitals treating patients who cannot afford care and are not covered by private insurance or a fully federal program.
Unallocated Account, 25 percent, usable for any of the purposes the other five accounts cover, giving the legislature flexibility.
Health Education Account, 20 percent, for school and community programs that prevent and reduce tobacco use, with a focus on children.
Physician Services Account, 10 percent, for payments to doctors treating the same low-income, uninsured patients.
Research Account, 5 percent, reserved exclusively for tobacco-related disease research.
Public Resources Account, 5 percent, split equally between fish and wildlife habitat programs and state and local park and recreation resources.

These percentages are written into the statute rather than being set by annual budget negotiations. Any appropriation that isn’t spent within the prescribed period reverts to the same account it came from.⁶ Health Education Account and Research Account funds also cannot be used to match federal grants, which keeps California’s tobacco work independent of federal funding conditions.⁵

One point worth noting on the hospital and physician shares: the care those accounts pay for is not limited to tobacco-related illness. Any qualifying uninsured patient treated at an eligible facility can be covered.

How Prop 99 Fits Into California’s Total Tobacco Tax

The 25 cents from Prop 99 is only part of what California now charges per pack. Two later measures stack on top of it:

Proposition 10 (1998) added 50 cents per pack, effective January 1, 1999, with revenue going to the California Children and Families Trust Fund for early childhood development.⁷
Proposition 56 (2016) added $2.00 per pack, effective April 1, 2017, with most of the revenue funding Medi-Cal services and smaller shares going to tobacco prevention, disease research, physician training, and dental care.

Add in the original 10-cent base cigarette tax and a 2-cent Breast Cancer Fund surcharge, and California’s total state excise tax on a 20-pack reaches $2.87.¹ Only the original 25 cents flows into the Prop 99 fund and its six accounts. Each measure’s revenue stays inside its own fund.

Licensing Requirements for Sellers

Anyone distributing, wholesaling, or retailing cigarettes and tobacco products in California must hold the appropriate license under the Cigarette and Tobacco Products Licensing Act of 2003. A separate license is required for each physical location, and these licenses are in addition to the standard seller’s permit used for sales tax.⁸

What you need depends on your role. A manufacturer or importer selling to wholesalers and retailers needs a seller’s permit, a manufacturer/importer’s license, and a distributor’s license. A distributor selling directly to consumers needs a seller’s permit, a distributor’s license, and a retailer’s license. The distributor is responsible for reporting and paying the excise tax to the CDTFA on all tobacco products brought into the state for sale.⁸

Penalties for Evading the Tax

California prosecutes tobacco tax evasion as a felony once the unpaid liability crosses a set threshold. Anyone who intentionally evades or defeats the tax and accumulates $25,000 or more in unpaid liability within any 12 consecutive months faces felony charges. Each conviction carries a fine of $5,000 to $20,000, a prison term of 16 months, two years, or three years, or both.⁹ The CDTFA’s executive director or a designee must sign off on the liability determination before felony prosecution can proceed. Below the $25,000 threshold, civil penalties and interest still apply.

1
California Department of Tax and Fee Administration. Tax Guide for Cigarettes and Tobacco Products
2
Tobacco-Related Disease Research Program. About Us
3
California Department of Tax and Fee Administration. New Tobacco Products Tax Rate
4
Legislative Analyst’s Office. The 2026-27 Budget – CDTFAs Cannabis and Tobacco Programs
5
California Legislative Information. California Revenue and Taxation Code 30121-30123 – Cigarette and Tobacco Products Surtax
6
California Legislative Information. California Revenue and Taxation Code 30124
7
Legislative Analyst’s Office. Proposition 10, 1998 – State and County Early Childhood Development Programs
8
California Department of Tax and Fee Administration. Tax Guide for Cigarettes and Tobacco Products – Getting Started
9
California Department of Tax and Fee Administration. Cigarette and Tobacco Products Tax Law – Section 30480