BILL ANALYSIS Ó
AB 2243
Page 1
Date of Hearing: April 4, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2243
(Wood) - As Introduced February 18, 2016
2/3 vote. Fiscal committee.
SUBJECT: Medical cannabis: taxation: cannabis production and
environment mitigation
SUMMARY: Enacts the Medical Cannabis Tax Law (MCTL).
Specifically, this bill:
1)Imposes, for the privilege of distributing "medical cannabis
flowers", "medical cannabis leaves", and "immature medical
cannabis plants", a tax upon all "licensed cultivators" at the
following rates:
a) $9.25 per ounce of "medical cannabis flowers";
b) $2.75 per ounce of "medical cannabis leaves"; and,
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c) $1.25 per "immature medical cannabis plant".
2)Specifies that the "licensed distributor" shall collect the
tax from the "licensed cultivator" and separately state the
amount of tax imposed on the purchase order, which shall be
given by the "licensed distributor" to the "licensed
cultivator" at the time of sale.
3)Exempts from the tax sales by a "licensed cultivator" that the
state is prohibited from taxing under the Constitution or laws
of the United States (U.S.) or the Constitution of this state.
Any claim for exemption from the tax shall be made to the
State Board of Equalization (BOE) in the manner prescribed by
the BOE.
4)Requires the Legislative Analyst's Office to review regularly
the tax levels established by this bill, at a minimum of every
other year, beginning in 2018, and to make recommendations to
the Legislature on appropriate adjustments that would further
the goals of addressing public safety and the environmental
impacts caused by the proliferation of cannabis cultivation.
5)Defines "medical cannabis flowers" as the flowers of a
cannabis plant, excluding the leaves and stems, that are
intended to be sold for use by medical cannabis patients in
California under the Compassionate Use Act of 1996
(Proposition 215), found in Health and Safety Code Section
11362.5.
6)Defines "medical cannabis leaves" as all parts of a cannabis
plant, other than cannabis flowers, that are intended to be
sold for use by medical cannabis patients in California under
Proposition 215.
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7)Defines an "immature medical cannabis plant" as a cannabis
plant with no observable flowers or buds, that is intended to
be sold for use by medical cannabis patients in California
under Proposition 215.
8)Defines a "licensed cultivator" as a person licensed as a
cultivator under the Medical Marijuana Regulation and Safety
Act (MMRSA), found in Business and Professions Code (B&PC)
Section 19300 et seq.
9)Defines a "licensed distributor" as a "distributor" under B&PC
Section 19300.5.
10)Charges the BOE with administering and collecting the new tax
under the Fee Collection Procedures Law, found in Revenue and
Taxation Code (R&TC) Section 55001 et seq.
11)Specifies that a licensed cultivator is liable for the tax
until it has been paid to the state, except that payment to
the licensed distributor relieves the licensed cultivator from
further liability for the tax.
12)Authorizes the BOE to prescribe, adopt, and enforce
regulations relating to the implementation, administration,
and enforcement of the MCTL, including applicant requirements,
collections, reporting, refunds, and appeals.
13)Authorizes the BOE to prescribe, adopt, and enforce any
emergency regulations as necessary to implement the MCTL.
14)Provides that the tax is due and payable to the BOE quarterly
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on or before the last day of the month following each calendar
quarter.
15)Requires a return for the preceding calendar quarter to be
filed with the BOE on or before the last day of the month
following each calendar quarter. Returns shall be
authenticated in a form or pursuant to methods as the BOE
prescribes.
16)Establishes the Cannabis Production and Environment
Mitigation Fund (Fund) in the State Treasury. All taxes,
interest, penalties, and other amounts collected and paid to
the BOE, less payments of refunds and costs of administration,
shall be deposited in the Fund.
17)Provides that, notwithstanding Government Code Section 13340,
all moneys deposited in the Fund are to be continuously
appropriated, without regard to fiscal year, in the following
manner:
a) 30% to an unspecified entity for disbursement for local
law enforcement-related activities pertaining to illegal
cannabis cultivation. Such funds shall be allocated on a
competitive grant application process administered by the
unspecified entity;
b) 30% to the Natural Resources Agency to fund a
competitive grant program for environmental cleanup
restoration and protection of public and private lands that
have been damaged by illegal cannabis cultivation, as
specified. Such funds shall be prioritized to restoration
and cleanup projects, on public or private lands, based on
the level of damages that have occurred. At least 35% of
the funds shall be used for these purposes related to
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public lands, including parks managed by the California
Department of Parks and Recreation, and at least 20% of the
funds shall be used for these purposes related to private
lands;
c) 30% to the multiagency task force, the Department of
Fish and Wildlife and State Water Resources Control Board,
to address the environmental impacts of cannabis
cultivation on public and private lands in California and
fund other state enforcement-related activities pertaining
to illegal cannabis cultivation; and,
d) 10% to the Bureau of Medical Marijuana Regulations, and
other state agencies or departments that the bureau
determines are appropriate, to conduct ongoing studies of
areas that may create challenges to compliance of the
MMRSA, including financial transactions, allowable tax
deductions, and the public safety implications of a cash
industry. The bureau or other state agencies or
departments shall prepare reports on the results of those
studies and submit those reports to the Legislature on or
before January 1, 2020, and on or before January 1, every
two years thereafter.
18)Requires the BOE to submit a report to the Legislature on the
total amount of revenue that was collected for the two-year
period beginning on this tax's operative date. The report
shall be due on or before the last day of the month commencing
180 days after the two-year period.
19)Provides that this act shall become operative on or after
[sic] the first day of the first calendar quarter commencing
more than 270 days after adequate funding has been received by
the BOE to implement and administer this bill. The BOE shall
post a notice on its Internet Web site when this condition has
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been satisfied.
20)Specifies that funds for the establishment and support of the
activities required under this bill shall be advanced as a
General Fund or special fund loan, and shall be repaid by the
BOE from the initial proceeds from taxes collected, no later
than six months after the bill's operative date.
EXISTING FEDERAL LAW prohibits the manufacture, possession,
sale, or distribution of marijuana. [21 United States Code
Section 841 et seq.]
EXISTING STATE 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.
2)Imposes a complimentary use tax on the storage, use, or other
consumption of TPP purchased out-of-state and brought into
California. The use tax is imposed on the purchaser, and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. The use tax is set at
the same rate as the state's sales tax and must generally be
remitted to the BOE.
3)Applies the sales and use tax (SUT) to retail sales of
marijuana, including medical marijuana, to the same extent as
any other retail sale of TPP.
4)Provides a SUT exemption for medicines, when the medicines
are:
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a) Prescribed by an authorized person and dispensed on a
prescription filled by a pharmacist;
b) Furnished by a licensed physician to his or her own
patient; or,
c) Furnished by a health facility for treatment pursuant to
a licensed physician's order, or sold to a licensed
physician. [R&TC Section 6369]
5)Defines "cannabis" as all parts of the plant Cannabis sativa
Linnaeus, Cannabis indica, or Cannabis ruderalis, whether
growing or not; the seeds thereof; the resin, whether crude
or purified, extracted from any part of the plant; and every
compound, manufacture, salt, derivative, mixture, or
preparation of the plant, its seeds, or resin. [B&PC Section
19300.5]
6)Defines "distribution" as the procurement, sale, and transport
of medical cannabis and medical cannabis products between
licensed entities. [B&PC Section 19300.5]
FISCAL EFFECT: The BOE estimates that this bill's new tax would
generate roughly $77 million in revenues annually.
Additionally, BOE staff estimates that this bill would generate
roughly $6.3 million in state and local SUT revenues annually.
Committee staff notes, however, that these estimates assume a
100% compliance rate.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
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We are seeing unpermitted land grading and road
construction, illegal stream diversions, discharge of
sediments, and pollutants into waterways, as well as
contamination of water and soil by pesticides,
rodenticides, fertilizers and fuels. Mammals, birds and
fish are dying horrible deaths from poisons used to protect
crops and left behind long after the growers leave an area.
These toxins seep into our water supply.
Water is being held from traditional agriculture to ensure
there is water in the streams for endangered fish, but
instead it is being pumped onto illegal marijuana farms and
poisoned by chemicals. Last year, Sproul Creek, in
Humboldt County, ran dry for the first time and officials
believe it was due in large part to illegal diversions of
water for marijuana.
The Medical Marijuana Regulation Safety Act, specifically
AB 243, created an environmental regulatory structure to
address many of these environmental damages, such as the
establishment of a permanent and statewide Watershed
Enforcement Team (WET), but the funding component was
removed in AB 243 before the bill reached the Governor's
desk.
AB 2243 reestablishes an excise tax for medical marijuana
that is charged to a licensed medical cannabis cultivator
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and collected by a licensed medical marijuana distributor.
The funds collected will pay for environmental remediation,
local law enforcement, and the WET program to address
illegal marijuana related activities.
2)This bill is supported by the California Association of
Professional Scientists, which notes the following:
The Legislature recently passed, and the Governor signed,
the Medical Marijuana Regulation and Safety Act (the Act),
which created a state regulatory licensing structure for
medical marijuana. The Act brings sensible regulation,
oversight and environmental protections to California's
medical marijuana industry. Irresponsible marijuana
cultivation is threatening California's environment; it is
threatening the state's water supply, the state's water
quality and the lives and habitat of endangered and other
sensitive species. In an effort to protect the
environment, the State Water Resources Control Board and
the California Department of Fish and Wildlife requested
funding from the Governor to create a taskforce to address
the damages to natural resources from marijuana
cultivation. [. . .]
The Act will help ensure that watersheds and wildlife
habitat throughout the state will be protected and, while
proposed funding is helpful, there are still gaps that need
to be addressed to fully protect the environment.
The Act did not include environmental remediation funding
to combat illegal marijuana activities and there is a dire
need for another funding mechanism focused on illegal
marijuana activities. AB 2243 will address that oversight
and provide that funding.
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3)This bill is opposed by California NORML, which notes the
following:
We urge the committee to reject AB 2243 (Wood), which would
impose a new $9.75/ounce tax on the cultivation of
medical-only marijuana. At current wholesale prices of 4
$1,500 / lb, this is tantamount to a 10% tax on the value
of marijuana. This would be in addition to the current
7.5+% sales tax plus various local business taxes imposed
by some localities.
The proposed tax is unreasonably high and burdensome to
low-income patients who need marijuana for medicine. No
other state has a comparably high tax on medical (only)
marijuana.
The proposed tax will also likely be counterproductive
insofar as it will encourage the diversion of marijuana to
the untaxed, unregulated adult-use market.
[. . .]
At this time when providers already face burdensome new
costs and regulations under MMRSA, it is unwise and unfair
to impose further costs on those trying to comply with the
law. It is unfair to tax the minority of law-abiding,
medical-only suppliers for all of the costs due to illicit,
black-market recreational use traffickers. And it is
unfair to the many low-income patients who have legitimate
medical need for marijuana to impose such a tax on their
medicine.
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4)The BOE notes the following in its staff analysis of this
bill:
a) Proposed tax is complicated : "This bill proposes a
complicated tax scheme that departs from other
distributor-level tax structures administered by the BOE.
[. . .] The MCTL requires a licensed distributor to issue
a purchase order to document the tax imposed. However, a
purchase order is simply a merchandise order and not
documentation of a sale or distribution. This method could
be problematic when the distributor does not purchase the
quantity specified on the purchase order. Further, it is
unclear how a distributor, who makes the payment rather
than receives a payment, can collect the tax. Does the
distributor "short" his or her payment to the cultivator by
the tax amount?
BOE staff suggests imposing the tax on the "first sale" or
"distribution" of flowers, leaves, and immature plants in
this state. The taxpayer in this case would be defined as
the person who makes the first sale or distribution of
cannabis flowers, leaves, and immature plants in this
state. A sale from a cultivator to a distributor would be
excluded from the definition of sale or distribution thus
imposing the tax on the distributor's sale or distribution.
This mechanism closely follows the imposition of the
cigarette and tobacco products tax. In addition to the
suggested revisions to the proposed tax, BOE staff also
suggests revising the MCTL's definitions to conform to the
imposition and collection change."
b) Lack of license should not exclude tax liability : "This
bill imposes the medical cannabis tax upon a cultivator.
The bill defines licensed cultivator to mean: a person that
is licensed as a cultivator under the MMRSA. The bill
requires tax collection by a licensed distributor. Does a
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cultivator or distributor escape the tax if they do not
comply with the MMRSA's licensing requirements? (Emphasis
in original)"
c) Do cultivators always sell to distributors ? "Under the
MMRSA, [B&PC] Section 19326 specifies certain restrictions
on medical cannabis. For example, the statute requires a
licensed cultivator or licensed manufacturer "to send" all
medical cannabis to a distributor for quality assurance,
inspection, and batch testing prior to distribution to a
dispensary. Accordingly, the MMRSA allows a cultivator to
sell medical cannabis directly to a manufacturer. That
manufacturer must send the finished product to a
distributor prior to distribution to a dispensary. Since
the MMRSA does not require a cultivator to sell to a
distributor, how would the tax be imposed and collected if
a cultivator sells directly to a manufacturer or if the
cultivator "sends" (does not sell) the medical cannabis to
the distributor for testing?"
d) Proposed tax is subject to sales tax : "The total retail
sales price of [TPP] is subject to the sales or use tax,
unless specifically exempted or excluded by law.
To be reimbursed for the proposed new tax, a distributor
would likely incorporate the additional tax into the sales
price of the medical cannabis. The sales tax applies to the
entire sales price of medical cannabis, including any
increase in the retail sales price to the consumer due to
the prior imposition of the medical cannabis tax."
e) Future track and trace tax program : "The bill requires
a licensed distributor to collect and remit the tax and a
return to the BOE quarterly. The bill does not
specifically allow tax payment through the use of stamps,
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other markings capable of encrypting certain tax
information, or track and trace technology.
BOE staff suggests amending the bill to provide the BOE
authority to prescribe by regulation a method and manner
for the medical cannabis tax payment. This suggestion
builds upon existing requirements for the BOE to adopt a
track and trace system ([R&TC] Section 31020) and for the
CDFA to establish a unique identifier program ([B&PC]
Section 19335)."
f) Suggested technical amendments : "The BOE staff
recommends the following amendments:
i) The bill specifies two distinct points of tax
imposition: sale and distribution. The bill should
specify only one point of taxation to eliminate
confusion.
ii) The bill should require licensed distributors to
file electronic returns, consistent with other
BOE-administered tax programs.
iii) The bill should allow licensed distributors to remit
the medical cannabis tax by means other than an
electronic funds transfer (EFT) when they are unable to
obtain a bank account. Under the law [citation omitted],
certain reporting requirements are imposed on tax and
feepayers that have substantial tax or fee liabilities.
Specifically, tax and feepayers with monthly tax
liabilities that average $20,000 or more must remit their
tax and fee payments via an EFT under BOE-prescribed
procedures."
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5)Committee staff comments:
a) An overview of federal law : Federal law prohibits the
manufacture, possession, sale, or distribution of
marijuana. 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.
i) The Cole Memo : On August 29, 2013, the 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 the following eight enforcement
priorities:
(1) Preventing the distribution of marijuana to
minors;
(2) Preventing revenue from marijuana sales from
going to criminal enterprises, gangs, and cartels;
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(3) Preventing the diversion of marijuana from
states where it is legal under state law in some form
to other states;
(4) Preventing state-authorized marijuana activity
from being used as a cover or pretext for the
trafficking of other illegal drugs or other illegal
activity;
(5) Preventing violence and the use of firearms in
the cultivation and distribution of marijuana;
(6) Preventing drugged driving and the
exacerbation of other adverse public health
consequences associated with marijuana use;
(7) Preventing the growing of marijuana on public
lands and the attendant public safety and
environmental dangers posed by marijuana production on
public lands; and,
(8) Preventing marijuana possession or use on
federal property.
Under the Cole Memo, these priorities will guide the
Department's enforcement of the CSA against
marijuana-related conduct. 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.
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ii) Public Law 113-235 : Operative December 16, 2014,
Public Law 113-235 prohibits the U.S. Department of
Justice from using funds to prevent specified states,
including California, from implementing laws that
authorize the use, distribution, possession, or
cultivation of medical marijuana.
b) An 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.
i) 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.
ii) Medical Marijuana Regulation and Safety Act : 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: (1) SB
643 (McGuire), Chapter 719, Statutes of 2015; (2) AB 243
(Wood), Chapter 688, Statutes of 2015; and, (3) AB 266
(Bonta), Chapter 689, Statutes of 2015.
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Among its provisions, the MMRSA established the Bureau of
Medical Marijuana Regulation within the Department of
Consumer Affairs 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:
(1) The amount of tax due by the designated
entity;
(2) The name, address, and license number of the
designated entity that remitted the tax;
(3) The name, address, and license number of the
succeeding entity receiving the product;
(4) The transaction date; and,
(5) Any other information the BOE deems necessary
for the taxation and regulation of marijuana and
marijuana products.
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c) What would this bill do ? This bill would impose, for
the privilege of distributing medical cannabis flowers,
medical cannabis leaves, and immature medical cannabis
plants, a tax on all licensed cultivators of cannabis.
Specifically, this bill would require
licensed distributors to collect the tax from licensed
cultivators, and separately state the amount of tax imposed
on each purchase order. Funds generated from the new tax
would be used for, among other things, both
cannabis-related law enforcement activities and efforts to
address the environmental impacts of cannabis cultivation
on public and private lands in California.
d) How does this bill fit in with the changing legal
landscape ? There is at least one marijuana legalization
initiative currently being circulated for signatures.
Specifically, Proposed Initiative 1762 would legalize both
marijuana and hemp under state law. The initiative would
also impose a state excise tax on retail sales of marijuana
equal to 15% of the sales price, along with state
cultivation taxes on marijuana of $9.25 per ounce of
flowers and $2.75 per ounce of leaves. In addition, the
proposed initiative would exempt medical marijuana from
some taxation. As such, it is unclear to Committee staff
how the present bill's tax regime would be impacted by the
enactment of a subsequent initiative establishing a new tax
regime for cannabis in California.
e) Related legislation : SB 987 (McGuire), of the current
Legislative Session, would impose a 15% tax on medical
marijuana purchased from a retailer of medical marijuana,
beginning January 1, 2018. SB 987 would only become
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operative, however, if Proposed Initiative 1762 referenced
above is not approved by the voters at the November 8, 2016
statewide general election.
f) Suggested technical amendments : Committee staff
recommends the following technical amendments be adopted:
i) On page 7, in line 9, strike "is" and insert "are";
ii) On page 7, in line 10, strike "of" and insert
"with";
iii) On page 7, in line 16, strike "report" and insert
"reports"; and,
iv) On page 7, in line 34, strike "or" and insert "and".
REGISTERED SUPPORT / OPPOSITION:
Support
California Association of Professional Scientists
Opposition
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California NORML
UCBA Trade Association
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098