BILL ANALYSIS Ó
AB 567
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
567 (Gipson)
As Amended August 19, 2016
Majority vote
--------------------------------------------------------------------
|ASSEMBLY: | | (May 28, |SENATE: |32-7 |(August 23. |
| | |2015) | | |2016) |
| | | | | | |
| | | | | | |
--------------------------------------------------------------------
(vote not relevant)
----------------------------------------------------------------------
| | | | | |
| | | | | |
|COMMITTEE VOTE: |5-2 |(August 29, |RECOMMENDATION: |concur |
| | |2016) | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
----------------------------------------------------------------------
(Rev. & Tax.)
Original Committee Reference: REV. & TAX.
SUMMARY: Requires the State Board of Equalization (BOE) to
administer a six-month tax penalty amnesty program for medical
AB 567
Page 2
cannabis-related businesses.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Find and declare that enacting the Medical Cannabis Tax
Amnesty Act would further the public purpose of preventing
undue hardship on medical cannabis-related businesses, and
relief of penalties would provide a strong incentive for those
businesses to come forward and pay the taxes and interest that
they owe, but did not pay, in fear that compliance with state
tax laws would lead to federal prosecution.
2)Define "qualified taxpayer" to mean a seller that is a medical
cannabis-related business.
3)Define "medical cannabis-related business" to mean a person
that engages in the sale of cannabis for medical purposes to
qualified patients or the primary caregivers of qualified
patients, as specified.
4)Define "amnesty period" to mean the period during which the
tax penalty amnesty program is conducted, as specified.
5)Require the BOE to develop and administer a tax penalty
amnesty program for qualified taxpayers, to be conducted for a
six-month period beginning July 1, 2017, through December 31,
2017, inclusive, and applicable to tax liabilities due and
payable for tax reporting periods beginning before January 1,
2015.
6)Require the BOE to waive all penalties imposed under the Sales
and Use Tax (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.
AB 567
Page 3
7)Prohibit criminal action from being brought against the
qualified taxpayer, for the tax reporting periods for which
tax penalty amnesty is requested, based on the non-reporting
or underreporting of tax liabilities.
8)Specify that protection from penalties and criminal action do
not apply if one of the following has occurred:
a) A notice of determination has previously been issued for
the nonpayment of taxes;
b) The qualified taxpayer is on notice of a criminal
investigation, as specified; or,
c) A court proceeding has already been initiated against
the qualified taxpayer.
9)Provide that no refund or credit will be granted for any
penalty paid prior to the qualified taxpayer's request for tax
penalty amnesty.
10)Specify that the qualified taxpayer must file an application,
in the form and manner specified by the BOE, for tax penalty
amnesty during the amnesty period to benefit from the program,
and do all of the following within 60 days after the
conclusion of the amnesty period:
a) File completed tax returns reporting the non-reported or
underreported tax liabilities for all tax reporting periods
for which amnesty is being applied; and,
b) Pay in full the taxes and interest due for each period
AB 567
Page 4
for which amnesty is requested, or apply for an installment
payment agreement.
11)Authorize the BOE to enter into an installment payment
agreement, which includes interest on the outstanding amount
due at the rate prescribed by law, with the qualified
taxpayer.
12)Provide that failure by the qualified taxpayer to fully
comply with the terms of the installment payment agreement
renders any waiver of penalties null and void, making the
total amount of tax, interest, and all penalties immediately
due and payable, unless the BOE determines that the failure
was due to reasonable causes.
13)Allow the BOE to impose penalties at double the rate of
penalties described in law and for criminal action to be
brought against a qualified taxpayer, if, subsequent to the
amnesty period, the BOE issues a notice of determination upon
the following:
a) A return filed pursuant to the tax penalty amnesty
program; or,
b) Any other non-reporting or underreporting of tax
liability by any person who could have otherwise been
eligible for amnesty.
However, double penalties or criminal action may be brought
only with respect to the difference between the amount shown
on the tax return and the correct amount of tax due, and do
not invalidate any tax penalty waivers previously granted.
14)Require the Department of Consumer Affairs (DCA) to suspend
or refuse to issue, reinstate, or renew a state license of a
AB 567
Page 5
qualified taxpayer that is eligible to, but does not
participate in, the tax penalty amnesty program, provided the
qualified taxpayer does any of the following:
a) Fails to register with the BOE;
b) Has a seller's permit revoked by the BOE, as specified;
or,
c) Does both of the following:
i) Reports a gross understatement of tax; and,
ii) Fails to pay in full the taxes and interest due for
each period for which amnesty is requested, or fails to
fully comply with the terms of an installment payment
agreement entered into with the BOE.
15)Require DCA to suspend or refuse to issue, reinstate, or
renew a state license of a qualified taxpayer if the BOE
issues a deficiency determination upon a return filed pursuant
to the tax penalty amnesty program, provided the qualified
taxpayer does both of the following:
a) Reports a gross understatement of tax; and,
b) Fails to pay in full the taxes and interest due for each
period for which amnesty is requested, or fails to fully
comply with the terms of an installment payment agreement
entered into with the BOE.
16)Provide that suspension of or refusal to issue, reinstate, or
renew a state license is not effective unless DCA mails a
AB 567
Page 6
notice to the qualified taxpayer indicating that his or her
license will be suspended or refused, at least 60 days prior
to the action's effective date.
17)Define "gross understatement of tax" to mean a deficiency
that is in excess of 25% of the amount of tax reported on a
qualified taxpayer's return filed pursuant to the Revenue and
Taxation Code (R&TC), Chapter 5, Article 1.
18)Define "state license" to include a license issued for any
activity of a medical cannabis-related business.
19)Authorize the BOE to refuse to issue a seller's permit,
pursuant to R&TC Section 6070.5, or revoke a seller's permit
issued for any person that is both of the following:
a) Eligible to, but does not participate in, the tax
penalty amnesty program; and,
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.
20)Require the BOE to issue forms and instructions and take
other actions needed to implement the tax penalty amnesty
program, and adequately publicize the program to maximize
awareness and participation.
21)Find and declare that medical cannabis tax penalty amnesty
program serves a general public purpose by incentivizing a
specific type of business to become current with its tax
obligations and therefore does not constitute a gift of public
funds.
AB 567
Page 7
22)Make technical and conforming changes.
23)Add chaptering out language with AB 26 (Jones-Sawyer) of the
current legislative session.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in this state. There is a complimentary use tax,
imposed on the purchaser, on the storage, use, or other
consumption of TPP purchased out-of-state and brought into
California.
2)Requires every person engaged in the business of selling TPP
subject to sales tax to apply to the BOE for a seller's
permit.
3)Provides that a person engaged in business as a seller without
a seller's permit is guilty of a misdemeanor.
4)Sets forth interest and penalties for the nonpayment or late
payment of tax, and the failure to file or intentional filing
of incorrect returns. For example:
a) Interest is assessed at the modified adjusted rate per
month from the date the tax became due and payable to the
state until the date of payment.
b) For late payments generally, a penalty of 10% of the
amount of all unpaid taxes is added to any tax not paid in
whole or in part within the time required by law.
c) Any person who fails to file a timely return is required
to pay a penalty of 10% of the amount of taxes, exclusive
AB 567
Page 8
of prepayments, with respect to the period for which the
return is required.
d) A penalty of 10% of the amount of tax specified in a
determination is added to deficiency determinations if any
part of the deficiency is due to negligence or intentional
disregard of the law.
e) A penalty of 25% of the amount of tax specified in a
determination is added in the case of a determination for
failure to file a return, if that failure is due to fraud
or intent to evade the law.
f) A penalty of 50% of the amount of tax determined to be
due for the period during which the person engaged in
business in this state as a seller without a valid permit,
if the person knowingly fails to obtain a valid permit for
the purpose of evading payment of taxes.
5)Provides different statutes of limitations controlling when
deficiency determinations can be issued, as follows:
a) In general, three years from the date the return is due
or filed, whichever is later;
b) In the event no return has been filed, eight years from
the date the return was due; or,
c) In the event of fraud or intent to evade payment,
indefinite statute of limitations.
6)Authorizes the BOE to administer a voluntary disclosure
program for in-state purchasers who fail to report use tax on
purchases of TPP from a retailer outside of this state, and
for out-of-state businesses that fail to report use tax on
sales to consumers in this state. If the taxpayer files all
returns and pays all of the tax and interest due, the BOE
limits the time it can assess use tax to the prior three years
AB 567
Page 9
and waives penalties otherwise owed.
AS PASSED BY THE ASSEMBLY, this bill allowed the BOE, as well as
county assessors, 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 that statement.
FISCAL EFFECT:
1)According to the Senate Appropriations Committee:
a) The 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.
b) DCA would incur first-year costs of $102,000 and $94,000
thereafter (special funds) to process applications and
verify with the BOE that businesses are in compliance with
this bill's requirements.
2)The BOE estimates that this bill would lead to increased
one-time state and local revenue in the range of $27.4 million
(50% take-up rate) to $54.7 million (100% take-up rate),
depending on the participation rate of cannabis-related
businesses.
COMMENTS:
1)Overview of Federal Law: Federal law prohibits the
manufacture, possession, sale, or distribution of marijuana.
AB 567
Page 10
Congress enacted the Controlled Substances Act (CSA) as part
of the Comprehensive Drug Abuse Prevention and Control Act of
1970. The CSA sets forth five "schedules" of specified drugs
and other substances designated "controlled substances." For
a drug or other substance to be designated as a "Schedule I"
controlled substance, it must be found that the substance "has
a high potential for abuse", and has "no currently accepted
medical use in treatment in the United States". Federal law
lists marijuana as a Schedule I controlled substance, deemed
to have no accepted medical use.
a) The Cole Memo: On August 29, 2013, the United States
(U.S.) Department of Justice issued guidance to federal
prosecutors regarding cannabis enforcement under the CSA
(referred to as the "Cole Memo"). The Cole Memo reiterated
the Department's commitment to enforcing the CSA consistent
with Congress' determination that cannabis is a dangerous
drug that provides a significant source of revenue to
large-scale criminal enterprises, gangs, and cartels. In
furtherance of these objectives, the Cole Memo instructed
Department attorneys and law enforcement officials to focus
on enforcement priorities that protect minors, public
safety, public health, and the environment from the impact
of marijuana. While the Cole Memo's guidance was issued in
response to recent marijuana legalization initiatives in
other states, it applies to all Departmental marijuana
enforcement nationwide.
b) Public Law 113-235: Operative December 16, 2014, Public
Law 113-235 prohibits the U.S. Department of Justice (DOJ)
from using funds to prevent specified states, including
California, from implementing laws that authorize the use,
distribution, possession, or cultivation of medical
marijuana. This prohibition was extended into the next
federal fiscal year by subsequent legislation, but is again
set to expire on September 30, 2016 at the end of the
current fiscal year.
On August 16, 2016, the 9th U.S. Circuit Court of Appeals
AB 567
Page 11
ruled that the law prohibiting the DOJ from using funds to
prevent states from implementing their medical marijuana
laws also prohibits the DOJ from prosecuting individuals
who violate federal marijuana laws, so long as they are in
full compliance with state laws. The Court specified that
defendants are entitled to evidentiary hearings to
determine whether their conduct was completely authorized
by state law if the DOJ wished to continue prosecutions.
As such, the federal government's long-term enforcement
landscape remains uncertain and medical marijuana
businesses may still be subject to federal prosecution.
2)Overview of State Law: The California Uniform Controlled
Substances Act prohibits, except as authorized, the
possession, cultivation, transportation, and sale of marijuana
and marijuana derivatives. Under Proposition 215, however,
existing law does authorize a patient (or the patient's
primary caregiver) to cultivate or possess marijuana for the
patient's medical use when recommended by a physician, as
specified.
a) SB 420: SB 420 (Vasconcellos), Chapter 875, Statutes of
2003, established statewide guidelines for Proposition 215
enforcement. Specifically, SB 420 called for the
establishment of a voluntary program for the issuance of
identification cards to qualified patients. SB 420 further
specified that no patient or primary caregiver in
possession of a valid identification card shall be subject
to arrest for possession, transportation, delivery, or
cultivation of medical marijuana, as specified.
b) BOE Special Notice: In 2007, the BOE mailed a special
notice to California sellers of medical marijuana to
clarify the application of tax to medical marijuana sales
and the requirement that they must hold a seller's permit.
The notice informed sellers that "[i]f you do not obtain a
seller's permit or fail to report and pay the taxes due,
you will be subject to interest and penalty charges." The
notice also provided the following information for sellers
AB 567
Page 12
wishing to maintain anonymity:
The application for a seller's permit asks for information
regarding the products you sell, the name and addresses of
your suppliers, and the products you purchase. If you
decline to provide this information for any reason
including concerns about confidentiality and
self-incrimination, a permit will still be issued to allow
you to report and pay the taxes due on your sales.
c) Medical Marijuana Regulation and Safety Act (MMRSA): In
2015, the Legislature enacted the MMRSA through a package
of bills establishing a comprehensive licensing and
regulatory framework for medical marijuana. Specifically,
the MMRSA consists of three bills: i) SB 643 (McGuire),
Chapter 719, Statutes of 2015; ii) AB 243 (Wood), Chapter
688, Statutes of 2015; and, iii) AB 266 (Bonta), Chapter
689, Statutes of 2015.
Among its provisions, the MMRSA established the Bureau of
Medical Marijuana Regulation within DCA to oversee and
enforce the state's medical marijuana regulations, in
collaboration with the California Department of Public
Health and the California Department of Food and
Agriculture (CDFA). Additionally, the law established
categories of licenses for various medical marijuana
activities, such as cultivation, manufacturing,
distribution, transportation, and sale. AB 266 also added
R&TC Section 31020 to require the BOE, in consultation with
the CDFA, to adopt a system to report commercial cannabis
and cannabis product movement throughout the distribution
chain (i.e., "track and trace"). The adopted system must
employ secure packaging and provide information to the BOE.
Section 31020 also requires the system to capture, at a
minimum, all of the following:
i) The amount of tax due by the designated entity;
AB 567
Page 13
ii) The name, address, and license number of the
designated entity that remitted the tax;
iii) The name, address, and license number of the
succeeding entity receiving the product;
iv) The transaction date; and,
v) Any other information the BOE deems necessary for
the taxation and regulation of marijuana and marijuana
products.
1)Purpose of this Bill: The BOE estimates that there are about
1,623 dispensaries selling medical marijuana in California,
but that 66% of dispensaries are noncompliant with sales tax
law. According to the author, many medical marijuana
businesses have failed to comply with state tax laws because
of misunderstanding or fear of becoming a target for federal
investigation. This bill provides an incentive, in the form
of a penalty waiver and shield from state criminal action, for
those dispensaries that have failed to remit sales tax in the
past to step out of the shadows and pay any outstanding tax
and interest.
2)Out of the Shadows: The MMRSA provides a comprehensive
licensing and regulatory framework for medical marijuana in
California. With regard to the SUT, the MMRSA provides that
failure to obtain and maintain a valid seller's permit is a
condition for which DCA may deny a medical marijuana
business's application for licensure, and also establishes a
"track and trace" system to help the BOE collect tax. As a
result, activity by medical cannabis-related businesses that
operated without obtaining a seller's permit or remitting
sales tax may be highlighted for BOE enforcement as new MMRSA
rules are implemented. This bill would grant non-compliant
businesses at risk of being discovered an opportunity to come
AB 567
Page 14
forward and pay any outstanding sales tax liability without
penalty.
Despite the recent evolution of state policy, federal law
still prohibits the sale of marijuana for any purpose, and
recent measures that soften federal enforcement against
medical marijuana businesses are still temporary in nature and
do not provide full immunity from prosecution. Although the
BOE does not generally require medical marijuana sellers to
identify their business type when registering for a seller's
permit, businesses that participate in the tax penalty amnesty
program will not be able to remain anonymous. According to
the BOE staff analysis of this bill, sellers that participate
in the amnesty program will be separately identified in the
BOE's records as medical cannabis-related program
participants. A separate identification would allow the BOE,
if requested, to readily share non-confidential information
about each dispensary with local law enforcement or the U. S.
Attorney. Regardless of the tax incentive provided by this
bill, dispensaries that did not register for a seller's permit
fearing detection by the federal government may be even less
inclined to come forward in light of the amnesty program.
3)Scope of this Bill: As noted by the BOE staff analysis of
this bill, dispensaries may sell more than medical marijuana
products. For example, dispensaries may sell t-shirts,
stickers, pipes, and other TPP subject to the SUT. The
amnesty program provided by this bill applies to the seller,
not to the products sold. As a result, this bill would waive
a dispensary's penalties on taxable sales for TPP other than
medical marijuana products. A non-dispensary retailer with a
tax liability for sales of similar products would not benefit
from amnesty.
4)Is Tax Amnesty Fair? Tax amnesty programs allow taxpayers to
voluntarily remit unpaid or underpaid taxes without incurring
the full liability of penalties that they would otherwise have
to pay. Under ordinary collection processes, these taxpayers
not only owe the original tax, but also interest on the unpaid
AB 567
Page 15
amount and various penalties and fees, and may be subject to
criminal prosecution. As such, the goals of tax amnesty
programs must be balanced against principles of general
fairness towards law-abiding taxpayers. Businesses that pay
their taxes in a timely manner may operate at a competitive
disadvantage compared to businesses that do not pay their
taxes, as they have reduced cash flow to reinvest in business
operations - in a way, providing non-compliant businesses the
ability to become current on their tax liabilities without
penalty grants them a loan from the government at an interest
rate that may be lower than what is otherwise available to
law-abiding businesses in traditional credit markets. Tax
amnesty programs also often divert staff and resources from
existing departments that provide assistance to law-abiding
taxpayers.
According to ArcView Media Research, the medical marijuana
industry is rapidly growing, with sales in California totaling
$2.7 billion in 2015 and accounting for nearly half of all
legal marijuana sales in the country. Although medical
cannabis-related businesses have operated in a murkier legal
landscape than other types of businesses prior to passage of
Public Law 113-235 and the MMRSA, approximately 34% of
dispensaries are estimated to be compliant with the SUT
despite having faced the same risks. This bill would grant a
special benefit to the segment of medical cannabis-related
businesses that were not aware of or chose to not comply with
the SUT.
5)Amnesty Penalties: Research shows that pairing tax amnesty
programs with strengthened enforcement provisions may reduce
future noncompliance and sentiments of unfairness amongst
taxpayers who do not benefit from amnesty. Although this bill
contains some enhanced enforcement provisions, it is unclear
how they may be applied. This bill allows the BOE to impose
double the rate of penalties if a notice of determination is
issued to a taxpayer that was eligible for, but did not
participate in, amnesty. However, the BOE maintains
discretion to decide whether double penalties are justified
and imposed in specific cases.
AB 567
Page 16
Additionally, this bill requires DCA to suspend or refuse to
issue, reinstate, or renew a state dispensary license of a
qualified taxpayer that is eligible for, but does not
participate in, the amnesty program, and does any of the
following:
a) Fails to register with the BOE;
b) Has its seller's permit revoked; or,
c) Both reports a gross understatement of tax and fails to
pay in full the taxes and interest due for each requested
amnesty period.
However, a qualified taxpayer that does not participate in the
program would not have requested amnesty, leaving open the
possibility that a tax-delinquent dispensary would not have
its license suspended or refused by the DCA, so long as it
held a valid seller's permit. Although the BOE would likely
revoke a taxpayer's seller's permit in such an instance, the
BOE again maintains discretion to decide whether revocation is
justified in specific cases. Since the DCA is still in the
process of developing regulations regarding state licensure,
it is also unclear for how long of a period a qualified
taxpayer's state license may be suspended or refused.
6)Substantial amendments: This bill was substantially amended
in the Senate and the Assembly-approved provisions of this
bill were deleted. This bill, as amended in the Senate is
inconsistent with Assembly actions.
Analysis Prepared by:
Irene Ho / REV. & TAX. / (916) 319-2098 FN:
0004981
AB 567
Page 17