Amended in Senate June 15, 2016

Amended in Senate May 24, 2016

Amended in Senate September 4, 2015

California Legislature—2015–16 Regular Session

Assembly Bill No. 567

Introduced by Assembly Member Gipson

February 24, 2015

An act to amend Section 19323 of the Business and Professions Code, to amend and renumber Sections 7076, 7076.1, 7076.2, 7076.3, 7076.4, 7077, and 7078 of, and to add Article 2.1 (commencing with Section 7077) to Chapter 8 of Part 1 of Division 2 of, the Revenue and Taxation Code, and to add Division 11 (commencing with Section 18740) to the Unemployment Insurance Code, relating to medical cannabis.

LEGISLATIVE COUNSEL’S DIGEST

AB 567, as amended, Gipson. Medical cannabis: regulation and taxation amnesty.

(1) Existing law, the Compassionate Use Act of 1996, an initiative measure enacted by the approval of Proposition 215 at the November 5, 1996, statewide general election, authorizes the use of marijuana for medical purposes. Existing law, the Medical Marijuana Program, requires the State Department of Public Health to establish a voluntary program for the issuance of identification cards to qualified patients and primary caregivers under the Compassionate Use Act, and grants immunity from arrest for violation of specified provisions relating to the cultivation, possession, transportation, and sale of marijuana, if conditions of the act are met.

Existing law imposes sales and use taxes collected and administered by the State Board of Equalization and employment taxes, as defined, collected and administered by the Employment Development Department. Existing law sets forth various penalties, including penalties for the nonpayment or late payment of those taxes, and the failure to file or intentional filing of incorrect returns. Existing law established a tax amnesty program, conducted in 2005, with respect to sales and use tax penalties.

This bill would require the State Board of Equalization and the Employment Development Department to administer tax penalty amnesty programs during the period beginning on July 1, 2017, through September 30, 2017, inclusive, for medical cannabis-related businesses, as provided. The bill would define a medical cannabis-related business for these purposes as a person that engages in the sale of cannabis for medical purposes to qualified patients or the primary caregivers of qualified patients pursuant to the Compassionate Use Act or the Medical Marijuana Program. The bill would require the Department of Consumer Affairs to revoke or refuse to issue a state license to a medical cannabis-related business that is eligible to, but does not participate in, those programs and meets other specified conditions.

(2) This bill would make related findings and declarations. The bill would also make technical and conforming changes.

(3) Existing state constitutional law prohibits the Legislature from making any gift, or authorizing the making of any gift, of any public money or thing of value to any individual, municipal, or other corporation.

This bill would make certain legislative findings and declarations that amnesty programs to incentivize a specific type of business to become current with their tax obligations serve a general public purpose, and therefore are not gifts of public funds.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

The Legislature finds and declares all of the
following:

(a) The voters of the State of California enacted the
Compassionate Use Act of 1996, which became effective on
November 6, 1996, as Section 11362.5 of the Health and Safety
Code. The act exempts patients and their designated primary
caregivers who possess and cultivate cannabis for personal medical
use upon recommendation or approval of a physician from
specified criminal laws.

(b) In 2004, the Legislature and Governor refined the
Compassionate Use Act through SB 420, which added Sections
11362.7 to 11362.83, inclusive, to the Health and Safety Code,
allows the formation of medical cultivation collectives or
cooperatives, and provides for a voluntary state identification card
system for medical cannabis patients. SB 420 also limits the
amount of medical cannabis patients are allowed to possess and
cultivate.

(c) However, the sale of any cannabis still remains illegal under
federal law. At the federal level, marijuana remains classified as
a Schedule I substance under the Controlled Substances Act.
Schedule I substances are defined as drugs with no currently
accepted medical use and a high potential for abuse.

(d) In August 2013, the United States Department of Justice
issued the “Cole Memo” to federal prosecutors, which established
priorities for federal prosecution of cannabis-related activities
under the Controlled Substances Act. The memo indicated that
states with a strong regulatory framework for legalized recreational
or medical cannabis that supports those priorities would make
federal involvement in local jurisdictions less likely.

(e) In February 2014, the United States Department of the
Treasury’s Financial Crimes Enforcement Network (FinCEN)
issued guidance to financial institutions setting forth FinCEN’s
Bank Secrecy Act expectations for financial institutions choosing
to work with cannabis-related businesses.

(f) A federal spending bill passed in late 2014 prohibits the use
of United States Department of Justice funds to prevent states,
including California, that authorize the use, distribution, possession,
or cultivation of cannabis for medical use from implementing laws
related to these activities. At a minimum, this prohibition will
remain in effect for the rest of the federal fiscal year that ends
September 30, 2015. Various other federal legislative proposals
to loosen federal restrictions on the cultivation, possession, and
sale of cannabis in states where it is legal are also pending.

(g) Despite this identified federal guidance, the uncertainty
created by state and federal differences has left medical
cannabis-related businesses with the fear that compliance with
state tax laws could lead to federal prosecution. Thus, many of
these businesses have been noncompliant since their inception,
and would owe massive penalties and interest if they were to come
into compliance.

(h) It is the intent of the Legislature to further the public
purposes of preventing undue hardship on medical cannabis-related
businesses and providing a strong incentive, the relief of penalties,
for those businesses to come forward and pay the taxes and interest
that they owe. In furtherance of this intent, the Legislature hereby
enacts the Medical Cannabis Tax Amnesty Act as set forth below.

SEC. 2.  

Section 19323 of the Business and Professions Code
is amended to read:

19323.  

(a) The licensing authority shall deny an application
if either the applicant or the premises for which a state license is
applied do not qualify for licensure under this chapter.

(b) The licensing authority may deny the application for
licensure or renewal of a state license if any of the following
conditions apply:

(1) Failure to comply with the provisions of this chapter or any
rule or regulation adopted pursuant to this chapter, including but
not limited to, any requirement imposed to protect natural
resources, instream flow, and water quality pursuant to subdivision
(a) of Section 19332.

(2) Conduct that constitutes grounds for denial of licensure
pursuant to Chapter 2 (commencing with Section 480) of Division
1.5.

(3) A local agency has notified the licensing authority that a
licensee or applicant within its jurisdiction is in violation of state
rules and regulation relating to commercial cannabis activities,
and the licensing authority, through an investigation, has
determined that the violation is grounds for termination or
revocation of the license. The licensing authority shall have the
authority to collect reasonable costs, as determined by the licensing
authority, for investigation from the licensee or applicant.

(4) The applicant has failed to provide information required by
the licensing authority.

(5) The applicant or licensee has been convicted of an offense
that is substantially related to the qualifications, functions, or duties
of the business or profession for which the application is made,
except that if the licensing authority determines that the applicant
or licensee is otherwise suitable to be issued a license and granting
the license would not compromise public safety, the licensing
authority shall conduct a thorough review of the nature of the
crime, conviction, circumstances, and evidence of rehabilitation
of the applicant, and shall evaluate the suitability of the applicant
or licensee to be issued a license based on the evidence found
through the review. In determining which offenses are substantially
related to the qualifications, functions, or duties of the business or
profession for which the application is made, the licensing authority
shall include, but not be limited to, the following:

(A) A felony conviction for the illegal possession for sale, sale,
manufacture, transportation, or cultivation of a controlled
substance.

(B) A violent felony conviction, as specified in subdivision (c)
of Section 667.5 of the Penal Code.

(C) A serious felony conviction, as specified in subdivision (c)
of Section 1192.7 of the Penal Code.

(D) A felony conviction involving fraud, deceit, or
embezzlement.

(6) The applicant, or any of its officers, directors, or owners, is
a licensed physician making patient recommendations for medical
cannabis pursuant to Section 11362.7 of the Health and Safety
Code.

(7) The applicant or any of its officers, directors, or owners has
been subject to fines or penalties for cultivation or production of
a controlled substance on public or private lands pursuant to
Section 12025 or 12025.1 of the Fish and Game Code.

(8) The applicant, or any of its officers, directors, or owners,
has been sanctioned by a licensing authority or a city, county, or
city and county for unlicensed commercial medical cannabis
activities or has had a license revoked under this chapter in the
three years immediately preceding the date the application is filed
with the licensing authority.

(9) Failure to obtain and maintain a valid seller’s permit required
pursuant to Part 1 (commencing with Section 6001) of Division 2
of the Revenue and Taxation Code.

(c) The licensing authority shall revoke or refuse to issue,
reinstate, or renew a state license pursuant to Section 7077.4 of
the Revenue and Taxation Code and Section 18744 of the
Unemployment Insurance Code.

SEC. 3.  

Section 7076 of the Revenue and Taxation Code, as
added by Section 1 of Chapter 87 of the Statutes of 2003, is
amended and renumbered to read:

7079.  

(a) The State Board of Equalization shall determine
which taxpayer’s accounts are eligible for the managed audit
program in a manner that is consistent with the efficient use of its
auditing resources and the maximum effectiveness of the program.

(b) A taxpayer is not required to participate in the managed
audit program.

SEC. 4.  

Section 7076.1 of the Revenue and Taxation Code is
amended and renumbered to read:

7079.1.  

A taxpayer’s account is eligible for the managed audit
program only if the taxpayer meets all of the following criteria:

(a) The taxpayer’s business involves few or no statutory
exemptions.

(b) The taxpayer’s business involves a single or small number
of clearly defined taxability issues.

(c) The taxpayer is taxed pursuant to this part and agrees to
participate in the managed audit program.

(d) The taxpayer has the resources to comply with the managed
audit instructions provided by the board.

SEC. 5.  

Section 7076.2 of the Revenue and Taxation Code is
amended and renumbered to read:

7079.2.  

(a) If the board selects a taxpayer’s account for a
managed audit, all of the following apply:

(1) The board shall identify all of the following:

(A) The audit period covered by the managed audit.

(B) The types of transactions covered by the managed audit.

(C) The specific procedures that the taxpayer is to follow in
determining any liability.

(D) The records to be reviewed by the taxpayer.

(E) The manner in which the types of transactions are to be
scheduled for review.

(F) The time period for completion of the managed audit.

(G) The time period for the payment of the liability and interest.

(H) Any other criteria that the board may require for completion
of the managed audit.

(2) The taxpayer shall:

(A) Examine its books, records, and equipment to determine if
it has any unreported tax liability for the audit period.

(B) Make available to the board for verification all computations,
books, records, and equipment examined pursuant to subparagraph
(A).

(b) The information provided by the taxpayer pursuant to
paragraph (2) of subdivision (a) is the same information that is
required for the completion of any other audit that the board may
conduct.

SEC. 6.  

Section 7076.3 of the Revenue and Taxation Code is
amended and renumbered to read:

7079.3.  

Nothing in this article limits the board’s authority to
examine the books, papers, records, and equipment of a taxpayer
under Section 7054.

SEC. 7.  

Section 7076.4 of the Revenue and Taxation Code is
amended and renumbered to read:

7079.4.  

Upon completion of the managed audit and verification
by the board, interest on any unpaid liability shall be computed at
one-half the rate that would otherwise be imposed for liabilities
covered by the audit period. Payment of the liabilities and interest
shall be made within the time period specified by the board. If the
requirements for the managed audit are not satisfied, the board
may proceed to examine the records of the taxpayer in a manner
to be determined by the board under law.

SEC. 8.  

Section 7077 of the Revenue and Taxation Code is
amended and renumbered to read:

7076.3.  

The board shall adequately publicize the tax penalty
amnesty program so as to maximize public awareness of the
participation in the program. The board shall coordinate to the
highest degree possible its publicity efforts and other actions taken
in implementing this article with similar programs administered
by the Franchise Tax Board.

SEC. 9.  

Section 7078 of the Revenue and Taxation Code is
amended and renumbered to read:

7076.5.  

Subdivision (b) of Section 19736, to the extent feasible
and practical, shall also apply to the board.

SEC. 10.  

Article 2.1 (commencing with Section 7077) is added
to Chapter 8 of Part 1 of Division 2 of the Revenue and Taxation
Code, to read:

 

Article 2.1.  Medical Cannabis Tax Amnesty

 

7077.  

The board shall develop and administer a tax penalty
amnesty program for qualified taxpayers.

7077.05.  

For the purposes of this article, the following terms
have the following meanings:

(a) “Amnesty period” means the period during which the tax
penalty amnesty program is conducted, as described in Section
7077.1.

(b) “Medical cannabis-related business” means a person that
engages in the sale of cannabis for medical purposes to qualified
patients or the primary caregivers of qualified patients pursuant
to the Compassionate Use Act of 1996 (Section 11362.5 of the
Health and Safety Code) or Article 2.5 (commencing with Section
11362.7) of Chapter 6 of Division 10 of the Health and Safety
Code, commonly referred to as the Medical Marijuana Program.

(c) “Qualified taxpayer” means a seller that is a medical
cannabis-related business.

7077.1.  

The tax penalty amnesty program shall be conducted
for a begin delete six-month end delete begin insert three-month end insert period beginning July 1, 2017, through
September begin delete 31, end delete begin insert 30, end insert 2017, inclusive. The program shall apply to tax
liabilities due and payable for tax reporting periods beginning
before January 1, 2015.

7077.2.  

(a) For any qualified taxpayer that meets the
requirements of Section 7077.3, all of the following shall apply:

(1) The board shall waive all penalties imposed by this part, for
the tax reporting periods for which tax penalty amnesty is
requested, that are owed as a result of the nonreporting or
underreporting of tax liabilities.

(2) No criminal action shall be brought against the qualified
taxpayer, for the tax reporting periods for which tax penalty
amnesty is requested, based on the nonreporting or underreporting
of tax liabilities.

(3) Paragraphs (1) and (2) do not apply to the nonpayment of
any taxes for which a notice of determination has previously been
issued.

(b) This section does not apply to violations of this part for
which, as of the first day of the amnesty period, either of the
following applies:

(1) The qualified taxpayer is on notice of a criminal investigation
by a complaint having been filed against the qualified taxpayer or
by written notice having been mailed to the qualified taxpayer that
the qualified taxpayer is under criminal investigation.

(2) A court proceeding has already been initiated.

(c) No refund or credit shall be granted of any penalty paid prior
to the time the qualified taxpayer makes a request for tax penalty
amnesty pursuant to Section 7077.3.

7077.3.  

(a) This article applies to any qualified taxpayer that
during the amnesty period files an application for tax penalty
amnesty and, within 60 days after the conclusion of the amnesty
period, does all of the following:

(1) Files completed tax returns reporting the nonreported or
underreported tax liabilities for all tax reporting periods for which
amnesty is being applied.

(2) Pays in full the taxes and interest due for each period for
which amnesty is requested, or applies for an installment agreement
under subdivision (b).

(b) The board may enter into an installment payment agreement
pursuant to paragraph (2) of subdivision (a), which shall include
interest on the outstanding amount due at the rate prescribed by
law. Failure by the qualified taxpayer to fully comply with the
terms of the agreement renders the waiver of penalties null and
void, unless the board determines that the failure was due to
reasonable causes, and the total amount of tax, interest, and all
penalties shall be immediately due and payable.

(c) If, subsequent to the amnesty period, the board issues a notice
of determination upon a return filed pursuant to subdivision (a),
the board may impose penalties, and criminal action may be
brought under this part only with respect to the difference between
the amount shown on that return and the correct amount of tax.
This action shall not invalidate any waivers granted under Section
7077.2.

(d) The application required under subdivision (a) shall be in
the form and manner specified by the board, but in no case shall
a mere payment of any taxes and interest due, in whole or in part,
for any period otherwise eligible for amnesty under this part, be
deemed to constitute an acceptable amnesty application under this
part. For purposes of the preceding sentence, the application of a
refund from one period to offset a tax liability for another period
otherwise eligible for amnesty shall not be allowed without the
filing of an amnesty application under this part.

7077.4.  

(a) (1) Notwithstanding any other law, the Department
of Consumer Affairs shall revoke or refuse to issue, reinstate, or
renew a state license of a qualified taxpayer that is eligible to
participate in the tax penalty amnesty program under this article
but does not participate in the amnesty program, and that does any
of the following:

(A) Fails to register with the board.

(B) Has a seller’s permit revoked pursuant to Section 7077.6.

(C) Reports a gross understatement of tax.

(2) Revocation or refusal to issue, reinstate, or renew a state
license pursuant to paragraph (1) shall not be effective unless the
Department of Consumer Affairs, at least 60 days before the date
of revocation or refusal, mails a notice to the qualified taxpayer
that indicates that the license will be refused or revoked by that
date.

(b) For purposes of this section, the following terms have the
following meanings:

(1) “Gross understatement of tax” is a deficiency that is in excess
of 25 percent of the amount of tax reported on a qualified
taxpayer’s return filed pursuant to Article 1 (commencing with
Section 6451) of Chapter 5.

(2) “State license” includes a license issued for any activity of
a medical cannabis-related business.

7077.6.  

The board shall refuse to issue a permit to any person
or shall revoke a seller’s permit issued under this part for any
person that is both of the following:

(a) Eligible to participate in the tax penalty amnesty program
under this article but does not participate in the amnesty program.

(b) Engaged in retail sales of medical cannabis in this state that
would have been eligible to participate in the tax penalty amnesty
program as a medical cannabis-related business.

7077.7.  

The board shall issue forms and instructions and take
other actions needed to implement this article.

7077.8.  

The board shall adequately publicize the tax penalty
amnesty program for medical cannabis-related businesses so as to
maximize public awareness of, and participation in, the program.
The board shall coordinate to the highest degree possible its
publicity efforts and other actions taken in implementing this article
with similar programs administered by the Employment
Development Department.

SEC. 11.  

Division 11 (commencing with Section 18740) is
added to the Unemployment Insurance Code, to read:

 

Division 11.  Medical Cannabis Tax Amnesty

 

18740.  

The department shall develop and administer a tax
penalty amnesty program for qualified employers.

18740.5.  

For purposes of this division, the following terms
have the following meanings:

(a) “Amnesty period” means the period during which the tax
penalty amnesty program is conducted, as described in Section
18741.

(b) “Department” means the Employment Development
Department.

(c) “Employment taxes” or “taxes” means the unemployment
insurance tax and employment training tax imposed under Part 1
(commencing with Section 100) of Division 1, state disability
insurance tax imposed under Part 2 (commencing with Section
2601) of Division 1, and personal income tax withholding imposed
under Division 6 (commencing with Section 13000).

(d) “Medical cannabis-related business” means a person that
engages in the sale of cannabis for medical purposes to qualified
patients or the primary caregivers of qualified patients pursuant
to the Compassionate Use Act of 1996 (Section 11362.5 of the
Health and Safety Code) or Article 2.5 (commencing with Section
11362.7) of Chapter 6 of Division 10 of the Health and Safety
Code, commonly referred to as the Medical Marijuana Program.

(e) “Person” has the meaning set forth in Section 6005 of the
Revenue and Taxation Code.

(f) “Qualified employer” means an employer or employing unit
that is a medical cannabis-related business subject to Part 1
(commencing with Section 100) of Division 1, Part 2 (commencing
with Section 2601) of Division 1, or Division 6 (commencing with
Section 13000).

18741.  

The tax penalty amnesty program shall be conducted
for a begin delete six-month end delete begin insert three-month end insert period beginning July 1, 2017, through
September 30, 2017, inclusive. The program shall apply only to
amounts unpaid for the periods beginning before January 1, 2015.

18742.  

(a) For any qualified employer that meets the
requirements of Section 18743, both of the following shall apply:

(1) The department shall waive all penalties imposed by this
code, for the tax reporting periods for which tax penalty amnesty
is requested, which are owed as a result of the nonpayment or
underpayment of employment tax liabilities or failure to file
reports.

(2) No criminal action shall be brought against the qualified
employer, for the tax reporting periods for which tax penalty
amnesty is requested, for the nonreporting or underreporting of
tax liabilities.

(b) This section does not apply to violations of this code for
which, as of the first day of the amnesty period, either of the
following applies:

(1) The qualified employer is on notice of a criminal
investigation by a complaint having been filed against the qualified
employer or by written notice having been mailed to the qualified
employer that the qualified employer is under criminal
investigation.

(2) A court proceeding has already been initiated.

(c) No refund or credit shall be granted of any penalty paid prior
to the time the qualified employer makes a request for tax penalty
amnesty pursuant to Section 18743.

18743.  

(a) This division applies to any qualified employer that
during the amnesty period files an application for tax penalty
amnesty and, within 60 days after the conclusion of the amnesty
period, does all of the following:

(1) Files quarterly contribution returns and reports reporting the
nonreported or underreported wages and taxes for the calendar
quarter that ended December 31, begin delete 2013, end delete begin insert 2014, end insert and prior calendar
quarters, for which amnesty is being applied.

(2) Pays in full all amounts due for all periods for which amnesty
is requested, or applies for an installment agreement under
subdivision (b).

(b) The department may enter into an installment payment
agreement pursuant to paragraph (2) of subdivision (a), which shall
include interest on the outstanding amount due at the rate
prescribed by law. Failure by the qualified employer to fully
comply with the terms of the agreement renders the waiver of
penalties null and void, unless the department determines that the
failure was due to reasonable causes, and the total amount of tax,
interest, and all penalties shall be immediately due and payable.

(c) If, subsequent to the amnesty period, the department issues
a deficiency assessment upon a return filed pursuant to subdivision
(a), the department may impose penalties and criminal action may
be brought under this division only with respect to the difference
between the amount shown on that return and the correct amount
of tax. This action shall not invalidate any waivers granted under
Section 18742.

(d) If the department issues a deficiency assessment under the
conditions described in subdivision (c), the department may issue
that deficiency assessment within 10 years from the last day of the
calendar month following the quarterly period for which the
amount is proposed to be assessed.

(e) The application required under subdivision (a) shall be in
the form and manner specified by the department, but in no case
shall a mere payment of any taxes and interest due, in whole or in
part, for any period otherwise eligible for amnesty under this
division, be deemed to constitute an acceptable amnesty application
under this division. For purposes of the preceding sentence, the
application of a refund from one period to offset a tax liability for
another period otherwise eligible for amnesty shall not be allowed
without the filing of an amnesty application under this division.

18744.  

(a) (1) Notwithstanding any other law, the Department
of Consumer Affairs shall revoke or refuse to issue, reinstate, or
renew a state license of a qualified employer that is eligible to
participate in the tax penalty amnesty program under this division
but does not participate in the amnesty program, and that does
either of the following:

(A) Fails to register with the department.

(B) Reports a gross understatement of tax.

(2) Revocation or refusal to issue, reinstate, or renew a state
license pursuant to paragraph (1) shall not be effective unless the
Department of Consumer Affairs, at least 60 days before the date
of revocation or refusal, mails a notice to the qualified employer
that indicates that the license will be refused or revoked by that
date.

(b) For purposes of this section, the following terms have the
following meanings:

(1) “Gross understatement of tax” is a deficiency that is in excess
of 25 percent of the amount of tax reported on a qualified
employer’s return filed pursuant to this code.

(2) “State license” includes a license issued for any activity of
a medical cannabis-related business.

18746.  

The department shall issue forms and instructions and
take other actions needed to implement this division.

18747.  

The department shall adequately publicize the tax
penalty amnesty program for medical cannabis-related businesses
so as to maximize public awareness of, and participation in, the
program. The department shall coordinate to the highest degree
possible its publicity efforts and other actions taken in
implementing this division with similar programs administered by
the State Board of Equalization.

SEC. 12.  

The Legislature finds and declares that Sections 10
and 11 of this act, establishing medical cannabis-related business
tax penalty programs by adding Article 2.1 (commencing with
Section 7077) to Chapter 8 of Part 1 of Division 2 of the Revenue
and Taxation Code and adding Division 11 (commencing with
Section 18740) to the Unemployment Insurance Code, serve a
general public purpose by incentivizing a specific type of business
to become current with its tax obligations and therefore do not
constitute gifts of public funds within the meaning of Section 6 of
Article XVI of the California Constitution.