BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
------------------------------------------------------------------
|Bill No: |AB 567 |Hearing |6/22/16 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Gipson |Tax Levy: |No |
|----------+---------------------------------+-----------+---------|
|Version: |6/15/16 Amended |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Bouaziz |
|: | |
-----------------------------------------------------------------
Medical cannabis: regulation and taxation amnesty
Requires the Board of Equalization, and the Employment
Development Department to develop and administer a tax penalty
amnesty for qualified taxpayers.
Background
Current law imposes a sales and use tax (SUT) on the gross
receipts from the sale of, tangible personal property based on
the sales price, unless specifically exempted by statute. The
current state SUT is 7.5%, but beginning January 1, 2017, the
state SUT rate on tangible personal property will be 7.25%.
Cities and Counties may increase the SUT rate up to 2% as a
transactions and use tax for either specific or general purposes
with a vote of the people.
Under state law, every person, retailer, and wholesaler engaged
in selling tangible personal property subject to sales tax must
apply to the Board of Equalization (BOE) for a seller's permit.
Failure to obtain a seller's permit is a misdemeanor crime.
Furthermore, persons who fail to pay their tax obligations are
liable for their past tax obligation including accrued interest
and penalties for up to eight previous calendar years. In
February 2007, BOE issued a Special Notice confirming its policy
of subjecting medical marijuana transactions to the Sales and
Use Tax, as well as its requirement that businesses engaging in
AB 567 (Gipson) 6/15/16 Page 2
of ?
such transactions hold a Seller's Permit. A permit does not
allow individuals to make unlawful sales, but instead merely
provides a way to remit any sales and use taxes due.
Under current law, any person who fails to pay tax to the state
by the due date of that tax shall be assessed interest at the
modified adjusted rate per month from the date the tax became
due and payable to the state until the date of payment. There
are also an array of penalties that are imposed under a variety
of provisions of the Sales and Use Tax Law. These penalties, as
applicable to dispensaries, are as follows:
For late payments generally, a penalty of 10% of the
amount of all unpaid taxes added to any tax not paid in
whole or in part within the time required by law.
Any person who fails to file a timely return is required
to pay a penalty of 10% of the amount of taxes, exclusive
of prepayments, with respect to the period for which the
return is required.
Any person remitting taxes by electronic funds transfer
is required to, on or before the due date of the
remittance, file a return for the preceding reporting
period in the form and manner prescribed by the Board. Any
person who fails to timely file the required return is
required to pay a penalty of 10% of the amount of taxes,
exclusive of prepayments, with respect to the period for
which the return is required.
A penalty of 10% of the amount of the tax specified in a
determination is added to deficiency determinations if any
part of the deficiency for which the determination is
imposed is due to negligence or intentional disregard of
the law.
A penalty of 25% of the amount of the tax specified in a
deficiency determination is added in the case of a
determination for failure to file a return, if that failure
is due to fraud or an intent to evade the law.
A penalty of 50% applies to the taxes imposed upon any
person who, for the purpose of evading the payment of
taxes, knowingly fails to obtain a valid permit prior to
AB 567 (Gipson) 6/15/16 Page 3
of ?
the date in which the first tax return is due. The 50%
penalty applies to the taxes determined to be due for the
period during which the person engaged in business in this
state as a seller without a valid permit and may be added
in addition to the 10% penalty for failure to file a
return. However, the 50% penalty does not apply if the
taxable sales or purchases over the period during which the
person was engaged in business without a valid permit
averaged $1,000 or less per month.
A penalty of 10% of the amount of the tax specified in
the determination shall be added to any determination not
paid within the time required by law.
A penalty of 10% applies to the taxes imposed upon any
person who knowingly issues a resale certificate for
personal gain or to evade the payment of taxes while not
actively engaged in business as a seller. The penalty is
10% of the amount of tax or $500, whichever is greater, if
the purchase is made for personal gain or to evade payment
of taxes.
For prepayments, taxpayers with taxable sales in excess
of $17,000 per month are required to make two prepayments
of the tax during each quarter) the following penalties
apply:
o Taxpayers who fail to make a prepayment before
the last day of the monthly period following the
quarterly period in which the prepayment became due
and who files a timely return and payment for that
quarterly period is required to pay a penalty of 6% of
the amount of prepayment, as specified, for each of
the periods during that quarterly period for which a
required prepayment was not made.
o Taxpayers who fail to make a timely
prepayment, but who makes the prepayment before the
last day of the monthly period following the quarterly
period in which the prepayment became due, is required
to pay a penalty of 6% of the amount of the
prepayment.
AB 567 (Gipson) 6/15/16 Page 4
of ?
o If any part of a deficiency in prepayment is
due to negligence or intentional disregard of the
Sales and Use Tax Law or authorized regulations, a
penalty of 10% of the deficiency is required to be
paid.
State law requires employers who pay employees
California-sourced income to withhold expected taxes.
Businesses with one or more employees in the current or
preceding taxable year, and who pays wages in excess of $100 per
quarter must register with the Employment Development Department
(EDD). Employers deposit personal income tax withholding by
mail or electronically with EDD, along with amounts for
Unemployment Insurance (UI), Employment Training Taxes, and
State Disability Insurance (SDI). Federal schedules determine
when employers make Personal Income Tax and SDI payments, while
UI and ETT payments are made quarterly. Each quarter, the
taxpayer files a form to reconcile these deposits with actual
taxes due.
Proposed Law
Assembly Bill 567 requires the Board of Equalization and
Employment Development Department (EDD) to administer a tax
penalty amnesty program for medical cannabis-related businesses
for a three-month period beginning July 1, 2017 through
September 30, 2017. Specifically, the bill:
Applies to tax liabilities due and payable for tax
reporting periods beginning before January 1, 2015.
Applies 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:
o Files completed tax returns reporting the
non-reported or underreported tax liabilities for all
tax reporting periods for which amnesty is being
applied.
AB 567 (Gipson) 6/15/16 Page 5
of ?
o Pays in full the taxes and interest due for
each period for which amnesty is requested, or applies
for an installment agreement.
Allows qualified taxpayers to request to enter into an
installment payment agreement, which includes interest on
the outstanding amount due, in lieu of full payment.
Failure by the qualified taxpayer to fully comply with the
terms of the agreement renders the waiver of penalties null
and void, unless BOE determines that the failure was due to
reasonable cause, and the total amount of tax, interest,
and all penalties become due and payable immediately.
Requires BOE to waive all penalties imposed under the
Sales and Use Tax Law, for the tax reporting periods for
which tax penalty amnesty is requested, that are owed as a
result of the non-reporting or underreporting of tax
liabilities.
Prohibits any criminal action brought against the
qualified taxpayer based on the non-reporting or
underreporting of tax liabilities for the tax reporting for
which tax penalty amnesty is requested.
Does not apply to the nonpayment of any taxes for which
a notice of determination has previously been issued.
Does not apply to Sales and Use Tax Law violations, to
which, as of the first day of the amnesty period, the
qualified taxpayer is on notice of a criminal investigation
or a court proceeding has already been initiated.
Provides that 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.
Requires BOE to refuse to issue a permit to any person
or revoke a seller's permit issued for any person that is
both of the following:
o Eligible to participate in the tax penalty
amnesty program, but does not participate in the
amnesty program.
AB 567 (Gipson) 6/15/16 Page 6
of ?
o 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.
Requires the Department of Consumer Affairs to revoke or
refuse to issue, reinstate, or renew a qualified taxpayer's
state license who is eligible to participate in the tax
penalty amnesty program, but does not, and that does any of
the following:
o Fails to register with BOE.
o Has a seller's permit revoked.
o Reports a gross understatement of tax.
AB 567 applies almost all of the same provisions from the BOE
amnesty program to the EDD for employment taxes.
AB 567 becomes effective January 1, 2017.
State Revenue Impact
The Board of Equalization estimates a one-time General Fund
revenue increase of $52.8 million with 50% compliance, $79.2
million with 75% compliance, or $105.6 million with 100%
compliance.
Comments
1. Purpose of the bill. 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. Issue at hand. According to BOE, "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
AB 567 (Gipson) 6/15/16 Page 7
of ?
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."
3. Closing the gap. This bill aims to bring medical cannabis
dispensaries into compliance with sales tax laws. BOE estimates
a noncompliance rate of 66% of all dispensaries selling medical
marijuana. This bill provides an incentive for those
dispensaries who have failed to remit sales tax in the past to
do so prospectively. This bill could be effective in increasing
prospective sales tax compliance to the extent a tax incentive
induces medical marijuana dispensaries to comply with sales tax
law.
4. Employment taxes. Assembly Bill 567 enacts an amnesty
program for both sales and use tax as well as employment taxes.
Specifically, the bill requires the Employment Development
Department to administer a tax penalty amnesty program for
medical cannabis-related businesses for a three-month period
beginning July 1, 2017 through September 30, 2017. The amnesty
program would apply to the unemployment insurance tax and
employment training tax. Similar to the sales and use tax
amnesty program, the goal of waiving penalties owed by out of
compliance businesses is to incentivize employers to remit the
unemployment insurance tax and employment training tax.
5. Previous version. The February 24, 2015 version of this
bill allowed the Board of Equalization (BOE) or the assessor to
disclose that a person or legal entity has filed a legal entity
change in ownership statement with the BOE, or that the BOE has
issued a determination to the assessor relating to the statement
filed.
6. Incoming! The Senate Business, Professions and Economic
Development Committee approved AB 567 by a vote of 8-1 on June
13, 2016.
AB 567 (Gipson) 6/15/16 Page 8
of ?
Assembly Actions
Not relevant to this version of the bill.
Support and
Opposition (6/16/16)
Support : Board of Equalization; California Chamber of Commerce.
Opposition : Unknown.
-- END --