BILL ANALYSIS Ó SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Jerry Hill, Chair 2015 - 2016 Regular Bill No: AB 567 Hearing Date: June 13, 2016 ----------------------------------------------------------------- |Author: |Gipson | |----------+------------------------------------------------------| |Version: |May 24, 2016 | ----------------------------------------------------------------- ---------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ---------------------------------------------------------------- ----------------------------------------------------------------- |Consultant|Sarah Huchel | |: | | ----------------------------------------------------------------- Subject: Medical cannabis: regulation and taxation amnesty SUMMARY: Requires the Board of Equalization (BOE) and Employment Development Department (EDD) to establish a tax amnesty program (Program) for medical cannabis-related businesses and requires state licensing authorities to revoke or refuse to issue, reinstate, or renew a state license under the Medical Marijuana Regulation and Safety Act (MMRSA) if a qualified taxpayer that is eligible to participate in the Program does not come forward and pay owed taxes and interest. Existing law: 1)Establishes the Bureau of Medical Marijuana Regulation within the Department of Consumer Affairs (DCA) to administer and enforce the MMRSA. (Business and Professions Code (BPC) 19302) 2)Defines "licensing authority" as the state agency responsible for the issuance, renewal, or reinstatement of the license, or the state agency authorized to take disciplinary action against the licensee. (BPC §19300.5 (w)) 3)Establishes the BOE to: (Government Code § 15606) a) Prescribe rules and regulations to govern local boards of equalization when equalizing, and assessors when AB 567 (Gipson) Page 2 of ? assessing, including uniform procedures for the consideration and adoption of written findings of fact by local boards of equalization, as specified. b) Prescribe and enforce the use of all forms for the assessment of property for taxation, including forms to be used for the application for reduction in assessment. c) Prepare and issue instructions to assessors designed to promote uniformity throughout the state and its local taxing jurisdictions in the assessment of property for the purposes of taxation. It may adapt the instructions to varying local circumstances and to differences in the character and conditions of property subject to taxation as in its judgment is necessary to attain this uniformity. d) Prescribe rules and regulations to govern local boards of equalization when equalizing, and assessors when assessing, with respect to the assessment and equalization of possessory interests. e) Bring an action in a court of competent jurisdiction to compel an assessor or any city or county tax official to comply with any provision of law, or any rule or regulation of the BOE, as specified, governing the assessment or taxation of property. The Attorney General shall represent the BOE in the action. 4)Establishes the EDD in the Labor and Workforce Development Agency responsible, for the following functions: (Unemployment Insurance Code § 301) a) Job creation activities. b) Making manual computations and making or denying recomputations of the amount and duration of benefits. c) Determination of contribution rates and the administration and collection of contributions, penalties and interest, including but not limited to filing and releasing liens. d) Establishment, administration, and transfer of reserve accounts. AB 567 (Gipson) Page 3 of ? e) Making assessments and the administration of credits and refunds. f) Approving elections for coverage or for financing unemployment and disability insurance coverage. This bill: 1)Makes Legislative findings that, although California enacted and expanded the Compassionate Use Act of 1996, the sale of any cannabis still remains illegal under federal law. As a result of uncertainty created by state and federal differences, many medical cannabis-related businesses have been noncompliant with tax laws since their inception, and would owe massive penalties and interest if they were to come into compliance. 2)Makes Legislative findings that the portions of this bill establishing medical cannabis-related business tax penalty programs 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. 3)Declares Legislative intent to further the public purposes of preventing undue hardship on medical cannabis-related businesses and providing a strong incentive for those businesses to come forward and pay owed taxes and interest by enacting the Medical Cannabis Tax Amnesty Act (Act). 4)Requires the BOE and EDD to develop and administer a tax penalty amnesty program (Program) for qualified taxpayers. 5)Defines the following terms: a) "Amnesty period" is the period July 1, 2017, through September 31, 2017, during which the tax penalty amnesty program is conducted. b) "Medical cannabis-related business" is a person that engages in the sale of cannabis for medical purposes to qualified patients or the primary caregivers of qualified AB 567 (Gipson) Page 4 of ? patients pursuant to the Compassionate Use Act of 1996 or the Medical Marijuana Program. c) "Qualified taxpayer" is a seller that is a medical cannabis-related business. d) "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, as specified. e) "State license" includes a license issued for any activity of a medical cannabis-related business. f) "Employment taxes" or "taxes" is the unemployment insurance tax and employment training tax, as specified; state disability insurance tax, as specified; and personal income tax witholding, as specified. g) "Qualified employer" is an employer or employing unit that is a medical cannabis-related business, as specified. 6)Requires a licensing authority to revoke or refuse to issue, reinstate, or renew a state license under the MMRSA if a qualified taxpayer that is eligible to participate in the Program does not participate, as specified. 7)Requires the Program to be conducted for a three-month period beginning July 1, 2017, through September 30, 2017, and apply to tax liabilities due and payable for tax reporting periods beginning before January 1, 2015. 8)Requires the following to apply to any qualified taxpayer who files an application for tax penalty amnesty and pays the taxes and interest, as specified in Item # 11): a) The BOE and EDD shall waive all penalties, as specified, 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 or the nonpayment or underpayment of employment tax liabilities. b) Prohibits a criminal action from being brought against the qualified taxpayer for the tax reporting periods for which tax penalty amnesty is requested based on the AB 567 (Gipson) Page 5 of ? nonreporting or underreporting of tax liabilities. c) States that (a) and (b) do not apply to the nonpayment of any taxes, excluding employment taxes, for which a notice of determination has previously been issued. 9)Prohibits the waiving of penalties and the prohibition against the bringing of a criminal action for violations if the either of the following applies as of the first day of the amnesty period: a) The qualified taxpayer is on notice of a criminal investigation. b) A court proceeding has already been initiated. 10)Prohibits a refund or credit from being granted of any penalty paid prior to the time the qualified taxpayer makes a request for tax penalty amnesty, as specified. 11) States that the Program shall apply to any qualified taxpayer who, 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: a) Files completed tax returns reporting the nonreported or underreported tax liabilities for all tax reporting periods for which amnesty is being applied; and, b) Pays in full the taxes and interest due for each period for which amnesty is requested, or applies for an installment agreement, as specified. 12)Authorizes the BOE to enter into an installment payment agreement that 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. 13)Authorizes the BOE to impose penalties and bring criminal actions with respect to the difference between the amount AB 567 (Gipson) Page 6 of ? shown on the return and the correct amount of tax if the BOE issues a notice of determination after the amnesty period upon a return filed, as specified. States that this will not invalidate any waivers, as specified. 14)Requires the application for the Program to be in the form and manner specified by the BOE, 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. 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 a Program application. 15)Requires the DCA to revoke or refuse to issue, reinstate, or renew a state license of a qualified taxpayer that is eligible to participate in the Program but does not participate in the Program, and that does any of the following: a) Fails to register with the BOE. b) Has a seller's permit revoked, as specified. c) Reports a gross understatement of tax. 16)States that the Director's revocation or refusal to issue, reinstate, or renew a state license shall not be effective unless the DCA, 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. 17)Requires the BOE to refuse to issue a permit to any person or shall revoke a seller's permit issued for any person that is both of the following: a) Eligible to participate in the Program but does not participate; and, b) Engaged in retail sales of medical cannabis in this state that would have been eligible to participate in the Program as a medical cannabis-related business. AB 567 (Gipson) Page 7 of ? 18)Requires the BOE and EDD to issue forms and instructions and take other actions needed to implement this bill. 19)Requires the BOE to adequately publicize the Program for medical cannabis-related businesses so as to maximize public awareness of, and participation in, the Program. Requires the BOE to coordinate to the highest degree possible its publicity efforts and other actions taken in implementing this article with similar programs administered by the EDD. 20)States that the Program shall apply to any qualified employer that during the amnesty period files an application the Program and, within 60 days after the conclusion of the amnesty period, does all of the following: a) Files quarterly contribution returns and reports reporting the nonreported or underreported wages and taxes for the calendar quarter that ended December 31, 2013, and prior calendar quarters, for which amnesty is being applied. b) Pays in full all amounts due for all periods for which amnesty is requested, or applies for an installment agreement. 21)Authorizes the EDD to enter into an installment payment agreement 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 EDD 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. 22)States that if, subsequent to the amnesty period, the EDD issues a deficiency assessment upon a return filed, as specified, the EDD may impose penalties and criminal action may be brought 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 as specified. 23)States that if the EDD issues a deficiency assessment , the EDD may issue that deficiency assessment within 10 years from AB 567 (Gipson) Page 8 of ? the last day of the calendar month following the quarterly period for which the amount is proposed to be assessed. 24)Requires an application for the Program to be in the form and manner specified by the EDD, 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 be deemed to constitute an acceptable amnesty application. 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. 25)Requires the DCA to revoke or refuse to issue, reinstate, or renew a state license of a qualified taxpayer that is eligible to participate in the Program but does not participate in the Program, and that does any of the following: a) Fails to register with the EDD. b) Reports a gross understatement of tax. FISCAL EFFECT: This bill is keyed "fiscal" by the Legislative Counsel. The Assembly Appropriations Committee did not analyze this bill because it was not in this form. COMMENTS: 1. Purpose. This bill is Author sponsored. According to the Author's office, this bill is necessary because many cannabis businesses have failed to comply with California's business tax requirements due to misunderstanding or fear of becoming a target for investigation. 2. Background. California began regulating medical marijuana with the passage of the Compassionate Use Act in 1996, which exempted patients and their primary caregivers from criminal liability under state law for the possession and cultivation of marijuana. In 2003, the Legislature authorized the formation of medical marijuana cooperatives-nonprofit organizations that cultivate and distribute marijuana for AB 567 (Gipson) Page 9 of ? medical uses to their members through dispensaries. Most recently, the (MMRSA) passed in 2015, which consisted of three separate bills enacted together to license and regulate medical marijuana ( AB 243 (Wood, Chapter 688, Statues of 2015); AB 266 , (Bonta, Chapter 689, Statutes of 2015); and SB 643 (McGuire, Chapter 719, Statutes of 2015). These bills created a comprehensive state licensing system for the commercial cultivation, manufacture, retail sale, transport, distribution, delivery, and testing of medical cannabis. Medical marijuana cooperatives will be phased out under the MMRSA and replaced by state-licensed businesses. The MMRSA went into effect on January 1, 2016, and licensure requirements will follow when the regulatory entities responsible for implementation pass necessary regulations. The MMRSA distributes state responsibilities among six agencies: DCA (Bureau of Medical Marijuana Regulation): responsible for licensing and regulating dispensaries, transporters, and distributors. Department of Fish and Wildlife (DFW): monitor and reduce environmental impacts of marijuana cultivation. State Water Resources Control Board (SWRCB): regulate the environmental impacts of marijuana cultivation on water quality and instream flows. California Department of Food and Agriculture (CDFA): regulate medical marijuana cultivation and issue licenses to growers. Department of Public Health (DPH): develop and enforce regulations and standards for medical marijuana product manufacturers and testing laboratories. Department of Pesticide Regulation (DPR): develop pesticide use guidelines for the cultivation of medical marijuana. This bill will require these state licensing authorities to AB 567 (Gipson) Page 10 of ? revoke or refuse to issue, reinstate, or renew a state license under the MMRSA if a qualified taxpayer that is eligible to participate in the tax amnesty program established by the BOE and EDD does not participate in the program. This bill is also referred to the Senate Governance and Finance Committee, which will analyze the tax implications of this bill and other issues related to tax amnesty programs. 1. Related Legislation. AB 26 (Jones-Sawyer) of 2015 requires a licensee under the Act to institute and maintain a training program to educate, inform, and train the licensee's agents and employees regarding compliance with the Act, and requires the Bureau to approve and regulate the training programs. ( Status : This bill is pending in the Senate Committee on Business, Professions and Economic Development.) AB 2385 (Jones-Sawyer) of 2015 prohibits licensing authorities from requiring a local license, permit, or other authorization, and would require the issuance of state license if the authorities determine that the applicant meets all the requirements of the Act and specified criteria relating to Measure D, which was approved by the voters of the City of Los Angeles. ( Status : This bill is pending in the Senate Committee on Business, Professions and Economic Development.) 2. Previous Legislation. AB 266 (Bonta, Cooley, Jones-Sawyer, Lackey, and Wood, Chapter 689, Statutes of 2015) enacted the Act for the licensure and regulation of medical marijuana, established the Bureau within the DCA, required the CDFA to administer the provisions of the act related to cultivation, required the CDPH to administer the provisions of the Act related to manufacturing and testing of medical cannabis and required the Board of Equalization to adopt a system for reporting the movement of commercial cannabis and cannabis products. AB 243 (Wood, Chapter 688, Statutes of 2015) required the CDFA, the DPR, the CDPH, the DFW, and the SWRCB to promulgate regulations relating to medical marijuana and its cultivation, as specified, required various state agencies to take specified actions to mitigate the impact that marijuana AB 567 (Gipson) Page 11 of ? cultivation has on the environment, and established the Act Fund. SB 643 (McGuire, Chapter 719, Statutes of 2015) established standards for the prescription of medical cannabis, required the Medical Board of California to prioritize its investigative and prosecutorial resources to identify and discipline physicians and surgeons that have repeatedly recommended excessive cannabis to patients for medical purposes or repeatedly recommended cannabis to patients for medical purposes without a good faith examination, as specified; authorized counties to impose a tax upon specified cannabis-related activity; and set forth standards for the licensed cultivation of medical cannabis. 3. Arguments in Support. The BOE writes in support, "Many medical cannabis-related businesses want to be regulated, taxed, and treated like other businesses. However, these businesses have been operating in the shadows for years for fear of federal prosecution. Last year, the Legislature enacted the MMRSA, a package of legislation that establishes a comprehensive licensing and regulatory framework for medical marijuana including cultivation, manufacturing, transportation, distribution, and sale. The MMRSA comports with the enforcement priorities outlined in the U.S. Department of Justice guidance to federal prosecutors regarding cannabis enforcement under the Controlled Substances Act (referred to as the Cole Memo ) and likely will serve to shield the state's industry from federal action. As a result, medical cannabis-related businesses that previously operated underground may be more willing to come forward and comply with state tax and regulatory laws." 4. Recommended Technical Amendments. The following are technical amendments addressing drafting errors: Page 10, line 2, replace "six" with "three" On page 10, line 4, replace "31" with "30" Page 17, line 24, replace "six" with "three" On page 18, line 19, replace "2013" with "2014" AB 567 (Gipson) Page 12 of ? NOTE : Double-referral to Governance and Finance Committee SUPPORT AND OPPOSITION: Support: Board of Equalization Opposition: None on file as of June 7, 2016. -- END --