BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 567 (Gipson) - Medical cannabis: regulation and taxation amnesty ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: August 2, 2016 |Policy Vote: GOV. & F. 4 - 3, | | | B., P. & E.D. 8 - 1, | | | GOV. & F. 5 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 8, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 AB 567 (Gipson) Page 1 of ? 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. AB 567 (Gipson) Page 2 of ? 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. AB 567 (Gipson) Page 3 of ? 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. AB 567 (Gipson) Page 4 of ? 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 AB 567 (Gipson) Page 5 of ? 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. AB 567 (Gipson) Page 6 of ? 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. -- END --