BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 567 (Gipson) - Medical cannabis:  regulation and taxation  
          amnesty
          
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          |Version: August 2, 2016         |Policy Vote: GOV. & F. 4 - 3,   |
          |                                |          B., P. & E.D. 8 - 1,  |
          |                                |          GOV. & F. 5 - 1       |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 8, 2016    |Consultant: Robert Ingenito     |
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          This meets the criteria for referral to the Suspense File.


          


          Bill  
          Summary: AB 567 would require the Board of Equalization (BOE)  
          develop and administer a tax penalty amnesty for qualified  
          taxpayers.


          Fiscal  
          Impact:
                 BOE would incur administrative costs in the low millions  
               of dollars annually, resulting from taxpayer notification,  
               amnesty application processing, return processing, computer  
               programming, and public inquiry responses.

                 BOE estimates that the bill would lead to increased  
               one-time state and local revenue in the range of $53  







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               million to $106 million, depending on the participation  
               rate of cannabis-related businesses. 

                 The Department of Consumer Affairs (DCA) would incur  
               first-year costs of $102,000 and $94,000 thereafter  
               (special funds) to process applications and verify with BOE  
               that distributors are in compliance with the bill's  
               requirements. 



          Background: Current law imposes a sales and use tax (SUT) on the gross  
          receipts from the sale of, tangible personal property (TPP)  
          based on the sales price, unless specifically exempted by  
          statute.  The state portion of the SUT will be 7.25 percent  
          effective January 1, 2017. Cities and Counties may increase  
          their SUT rate up to two percentage points as a transactions and  
          use tax for either specific or general purposes, if voter  
          approved. 
          Under current state law, every person, retailer, and wholesaler  
          engaged in selling TPP subject to sales tax must apply to BOE  
          for a seller's permit; failure to do so is a misdemeanor.  
          Additionally, 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 SUT, as well  
          as its requirement that businesses engaging in 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 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  
          a myriad of penalties that are imposed. These penalties, as  
          applicable to medical marijuana dispensaries, are as follows:


                 For late payments generally, a penalty of 10 percent of  
               the amount of all unpaid taxes added to any tax not paid in  
               whole or in part within the time required by law.








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                 Any person who fails to file a timely return is required  
               to pay a penalty of 10 percent 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 BOE. Any person  
               who fails to timely file the required return is required to  
               pay a penalty of 10 percent of the amount of taxes,  
               exclusive of prepayments, with respect to the period for  
               which the return is required.


                 A penalty of 10 percent 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 percent 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 percent 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  
               the date in which the first tax return is due.  The 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 percent penalty for failure to file a  
               return.  However, the 50 percent 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.









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                 A penalty of 10 percent 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 percent 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  
                    percent 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 percent of the amount of the  
                    prepayment.


                  o         If any part of a deficiency in prepayment is  
                    due to negligence or intentional disregard of the SUT  
                    Law or authorized regulations, a penalty of 10 percent  
                    of the deficiency is required to be paid.









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          Proposed Law:  
          This bill would require BOE to administer a tax penalty amnesty  
          program for medical cannabis-related businesses for a six-month  
          period beginning July 1, 2017 through December 31, 2017.  
          Specifically, the bill would do all of the following:
                 Apply to tax liabilities due and payable for tax  
               reporting periods beginning before January 1, 2015.


                  o         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 both of the following: (1)  
                    files completed tax returns reporting the non-reported  
                    or underreported tax liabilities for all tax reporting  
                    periods for which amnesty is being applied, and (2)  
                    pays in full the taxes and interest due for each  
                    period for which amnesty is requested, or applies for  
                    an installment agreement.


                 Allow 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.


                 Require BOE to waive all penalties imposed under SUT  
               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. 


                 Prohibit any criminal action brought against the  








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               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 SUT 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.


                 Provide 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.


                 Require 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.


                  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.


                 Require the DCA 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: (1) fails  
               to register with BOE, (2) has a seller's permit revoked, or  
               (3) reports a gross understatement of tax. 










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          Staff  
          Comments: This measure would provide medical cannabis-related  
          businesses an incentive to obtain a seller's permit by waiving  
          all penalties imposed under SUT Law and prohibiting any criminal  
          action against the qualified taxpayer provided tax amnesty  
          provisions are followed.
          In developing its revenue estimate, BOE staff identified 1,623  
          dispensaries selling medical marijuana in the State. Staff  
          assumes annual sales of $613,000 per dispensary. As noted  
          previously, BOE estimates that the bill would lead to increased  
          one-time state and local revenue in the range of $53 million to  
          $106 million, depending on the participation rate of  
          cannabis-related businesses. Nearly half of the amount would be  
          General Fund revenues.


          DCA has yet to finalize its estimate of the bill's fiscal  
          impact, but indicates that it would incur unknown expenses to  
          interface with BOE to suspense, refuse to issue, reinstate or  
          renew licenses, as specified. 




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