BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 821 |Hearing |5/11/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Gipson |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |1/13/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Bouaziz | |: | | ----------------------------------------------------------------- Sales and use taxes: administration: payments: dispensaries Allows a medical marijuana dispensary to remit tax liability due in a method other than an electronic funds transfer. Background State law imposes a sales and use tax (SUT) on the sale, storage, or use of tangible personal property unless exempted by state law. 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. Generally, medicine is exempt from the sales and use tax, but medical marijuana does not satisfy the following elements to qualify for the exemption. To be exempt, medication must be: Prescribed by an authorized person and dispensed on a prescription filled by a pharmacist; Furnished by a licensed physician to his or her own patient, or; Furnished by a health facility for treatment pursuant to a licensed physician's order, or sold to a licensed AB 821 (Gipson) 1/13/16 Page 2 of ? physician. Thus, the sale of medical marijuana is subject to both the state and local sales and use tax. State law provides that any person whose estimated tax liability due to the Board of Equalization (BOE) averages $10,000 or more per month shall remit the amounts due by an electronic funds transfer (EFT). If a person fails to remit taxes by EFT, a 10% penalty of the amount of taxes due is assessed, but BOE may relieve a person of the 10% penalty if that person's failure to utilize an EFT is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and in the absence of willful neglect. Proposed Law Senate Bill 821 allows medical marijuana dispensaries to remit tax liability due in a method other than an electronic funds transfer. SB 821 shall remain in effect until January 1, 2022. State Revenue Impact According to BOE, AB 821 would not significantly affect state revenues. Comments 1. Purpose of the bill. According to the author, "Currently, due to the fact that marijuana is still federally classified as a Schedule 1 substance, the medical marijuana industry has been rendered unbankable. This leads to companies having to hold large amounts of cash and requires that tax payments be made in cash as well. This bill seeks to support the state's collection of tax payments by removing the penalty associated with cash tax payments above $10,000 a month in cases where an industry has lack of access to banking services." 2. Nowhere to bank. Individuals who run a marijuana dispensary in compliance with California law are currently shut off from AB 821 (Gipson) 1/13/16 Page 3 of ? the banking system. Marijuana is classified as a Class I drug and the cultivation, sale, and possession can constitute a felony. Therefore, the majority of banks and credit unions have decided not to accept marijuana dispensaries as customers for fear of federal sanctions. As such, less than 1% of all banks and credit unions nationwide provide banking services to cannabis businesses. 3. Burden on dispensaries. Taxpayers must remit tax liability due by an EFT if the estimated tax liability averages $10,000 or more per month, otherwise a 10% penalty of the tax amount due is assessed on the taxpayer. Because many banks and credit unions refuse to accept medical dispensaries as customers for fear of federal sanctions, dispensaries that are remitting their tax liability in a form other than an EFT are assessed a 10% penalty. BOE may waive the 10% penalty for medical marijuana dispensaries if it can be shown that the failure to utilize an EFT is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and in the absence of willful neglect. However, taxpayers must request a waiver every time amounts due are remitted in a manner other than EFT, which creates an unfair administrative burden for cash-only industries. It appears, therefore, that the problem is not the imposition of a penalty but the burden of having to request the waiver. Assembly Actions Assembly Rules 11-0 Assembly Revenue and Taxation 5-3 Assembly Appropriations 12-5 Assembly Floor 58-17 Support and Opposition (5/4/16) Support : 3C Medical, LP; Americans for Safe Access; Board of Equalization Member, Fiona Ma; Board of Equalization Member, George Runner; Board of Equalization Member, Jerome Horton; California Growers Association; California Tax Reform Association; 4 individuals. AB 821 (Gipson) 1/13/16 Page 4 of ? Opposition : Unknown. -- END --