BILL ANALYSIS                                                                                                                                                                                                    

                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

          |Bill No:  |AB 2243                          |Hearing    |6/22/16  |
          |          |                                 |Date:      |         |
          |Author:   |Wood                             |Tax Levy:  |No       |
          |Version:  |6/15/16                          |Fiscal:    |Yes      |
          |Consultant|Bouaziz                                               |
          |:         |                                                      |

                 Medical cannabis:  taxation:  cannabis production and  
                               environment mitigation

          Enacts the Medical Cannabis Tax Law, and imposes, for the  
          privilege of distributing medical cannabis, an excise tax upon  
          all licensed distributors.


           Prior to 1996, both federal and state law prohibited the  
          possession, possession with intent to sell, cultivation, sale,  
          transportation, importation, or furnishing of marijuana.   
          However, in 1996, California voters approved Proposition 215,  
          known as the Compassionate use Act of 1996 (CUA).  Under CUA,  
          qualified patients with specified illnesses, and their primary  
          caregivers, cannot be prosecuted for possessing or cultivating  
          medical marijuana upon the written or oral recommendation or  
          approval of an attending physician.  Thus, CUA allowed qualified  
          patients and primary caregivers to obtain and use medical  

          The Legislature clarified CUA in 2003 by enacting SB 420  
          (Vasconcellos, 2003).  SB 420 exempted qualified patients and  
          caregivers from prosecution for using or from collectively or  
          cooperatively cultivating medical marijuana, and established a  
          medical marijuana card program for patients to use on a  
          voluntary basis.  SB 420 provides a safe harbor for qualified  


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          patients as to the amount of marijuana they may possess and the  
          number of plants they may maintain.  It also protects patients  
          with valid identification cards from both arrest and criminal  
          liability for possession, transportation, delivery, or  
          cultivation of marijuana.  Thus, California's estimated one  
          billion dollar medical marijuana industry exists amid a conflict  
          between federal and state law, and within state law itself.  The  
          industry remained largely unregulated at the same level until  

          Medical Marijuana Regulation and Safety Act.  In 2015, the  
          Legislature enacted the Medical Marijuana Regulation and Safety  
          Act (MMRSA), a package of legislation that comprehensively  
          regulates many aspects of medical marijuana including  
          cultivation, manufacturing, transportation, distribution, sale,  
          and product safety.  The MMRSA comprises three bills-SB 643  
          (McGuire, 2015), AB 243 (Wood, 2015), and AB 266 (Bonta, 2015).   
          Among other provisions, MMRSA: 

                 Creates the Bureau of Medical Marijuana Regulation (the  
               Bureau) within the Department of Consumer Affairs to  
               oversee and enforce the state's medical marijuana  
               regulations, in collaboration with the Board of  
               Equalization (BOE), the California Department of Public  
               Health, and the California Department of Food and  
               Agriculture (CDFA);

                 Establishes categories of licenses for various medical  
               marijuana activities, such as cultivation, manufacturing,  
               distribution, transportation, and sale, and provides  
               certain state agencies with the authority to issue those  
               licenses and enforce their terms.

                 Requires BOE and CDFA to implement a program that allows  
               regulators to uniquely identify each legally cultivated  
               medical marijuana plant and trace that plant throughout the  
               distribution chain.

                 Prohibits licensees from commencing activity under the  
               authority of a state license until the applicant has  
               obtained a license or permit pursuant to the applicable  
               local ordinance.

                 Protects the ability of local governments to pass and  


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               enforce laws, licensing requirements, and zoning  

                 Authorizes local governments to establish a licensing  
               system for the cultivation of medical marijuana through  
               their current or future land use authority, and prohibits  
               the cultivation of medical marijuana without obtaining both  
               a state license-issued by CDFA-and a local license.  

                 Requires the Medical Board of California to consult with  
               the California Marijuana Research Program on developing and  
               adopting medical guidelines for the appropriate  
               administration and use of medical cannabis.

                 Prohibits the recommendation of medical cannabis to a  
               patient unless the physician is the patient's attending  

                 Declares that recommending medical cannabis to a patient  
               for a medical purpose without an appropriate prior  
               examination and a medical indication constitutes  
               unprofessional conduct.

                 Declares that it is unprofessional conduct for an  
               attending physician recommending medical cannabis to be  
               employed by, or enter into any other agreement with, any  
               person or entity dispensing medical cannabis.

                 Requires any distribution of any form of advertising for  
               physician recommendation for medical cannabis in California  
               to include a consumer notice.

                 Requires advertising for attending physician  
               recommendations for medical cannabis to meet all the  
               requirements of existing law related to medical  
               advertising, and states that price advertising shall not be  
               fraudulent, deceitful, or misleading, including statements  
               or advertisements of bait, discounts, premiums, gifts, or  
               statements of a similar nature.

            State law imposes a sales and use tax on retailers for the  
          privilege of selling tangible personal property, absent a  
          specific exemption.  The tax is based upon the retailer's gross  


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          receipts from sales in this state.  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  

          Thus, the sale of medical marijuana is subject to both the state  
          and local sales and use tax.


          Proposed Law

           Assembly Bill 2243 enacts the Medical Cannabis Tax Law (Law),  
          and imposes, for the privilege of distributing medical cannabis,  
          an excise tax upon all licensed distributors.  Specifically, AB  

                 Imposes a tax of an unspecified amount on medical  
               cannabis flowers cultivated by a small specialty  

                 Imposes a tax of $9.25 per ounce of medical cannabis  
               flowers cultivated by a small cultivator.

                 Imposes a tax of an unspecified amount on medical  


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               cannabis flowers cultivated by a medium cultivator.

                 Imposes a tax of $1.25 per immature medical cannabis  

                 Requires BOE to administer and collect the tax from  
               medical marijuana distributers.  The bill also requires BOE  
               to issue permits to every retailer.  The permits are not  
               assignable and are valid only for the person whose name it  
               is issued and the place of business listed.

                 Allows BOE to revoke or suspend a permit after the  
               retailer is given 10 days' notice in writing detailing the  
               reason for suspension or revocation.  The notice shall also  
               specify a time and place for a hearing so the retailer may  
               have an opportunity to show why the permit should not be  
               revoked or suspended.

                 Allows BOE to refuse to issue a permit if the retailer  
               has an outstanding final liability due for any amount under  
               the bill, unless the retailer has entered into an  
               installment agreement with BOE.

                 Requires BOE to collect the tax quarterly, on or before  
               the last day of the month succeeding each quarterly period.

                 Authorizes BOE to prescribe, adopt, and enforce  
               regulations relating to administration and enforcement.  In  
               addition, the Law authorizes BOE to prescribe, adopt, and  
               enforce any emergency regulations as necessary for  
               implementation, including utilizing tax stamps or  
               state-issued product bags.

                 Establishes the Marijuana Value Tax Fund in the State  
               Treasury.  The bill requires that all revenues, less  
               refunds, collected from the Marijuana Value Tax must be  
               deposited into the Marijuana Value Tax Fund, as follows:

                  o         30% to the Board of State and Community  
                    Corrections for disbursement for local law  
                    enforcement-related activities pertaining to illegal  
                    cannabis cultivation.  Funds must be allocated on a  
                    competitive grant process. Applicants may include  


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                    local entities that support enforcement activities  
                    related to unpermitted activity. 

                  o         2% to the Department of Justice to fund and  
                    create Regional Marijuana Enforcement Officers who  
                    shall coordinate enforcement efforts, related to  
                    illegal cannabis cultivation, between the Department  
                    of Fish and Wildlife's Marijuana Enforcement Team, the  
                    Department of Justice's Bureau of Narcotic  
                    Enforcement, the United States Drug Enforcement  
                    Administration, and local law enforcement. 

                  o         30% to the Natural Resources Agency for  
                    environmental cleanup restoration and protection of  
                    public and private lands that have been damaged by  
                    illegal cannabis cultivation.

                  o         8% to the Open Space Subvention Payment  
                    Account of the California Land Conservation Act of  

                  o         30% to the Department of Fish and Wildlife and  
                    the 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.

          AB 2243 defines terms for purposes of the Medical Cannabis Tax  
          Law, and only becomes operative if Secretary of State Initiative  
          Number 1762 is not approved by the voters on November 8, 2016.  
          AB 2243 takes immediate effect as an urgency measure and sunsets  
          on January 1, 2025.  


          State Revenue Impact




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           1.   Purpose of the bill.   According to the author, "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 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.   The Colorado and Washington Experience.   In November 2012,  
          voters in Colorado and Washington approved legal recreational  
          retail sales of marijuana, with Colorado sales starting January  
          1, 2014 and Washington sales on June 1, 2014.

          Currently, Colorado collects tax revenue from recreational  
          marijuana sales through a 15% excise tax on the average  
          wholesale market rate, a 10% state tax on retail marijuana  
          sales, a state sales tax of 2.9%, and varied local sales taxes,  
          such as the 3.5% marijuana tax in Denver.  A $30 sale of  
          recreational marijuana in Denver, CO results in $8.59 in taxes,  
          or about a 29% overall tax rate.  Beginning on July, 1 2017, the  
          10% state tax rate will be reduced to 8%.  The rate change was  
          to prevent over-taxation, although even with these layers of  
          taxation, Colorado has not seen additional black market activity  
          that can be attributed to higher costs due to taxation.  Medical  
          marijuana is only subject to the 2.9% state sales tax and any  


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          local sales taxes.  In the first year of taxation, Colorado's  
          revenue from marijuana taxes and fees was about $76 million,  
          which includes fees on the industry, plus the pre-existing sales  
          taxes on medical marijuana products. 

          Initially, Washington collected tax revenue from recreational  
          marijuana sales through a 25% tax on producer sales to  
          processors; a 25% tax on processor sales to retailers; a 25% tax  
          on retailer sales to customers; a state sales tax of 6.5%; and  
          varied local sales taxes.  The total effective tax rate is about  
          44%.  However, due to complaints from marijuana farmers,  
          processors, and retailers, that heavy state and federal tax  
          burdens and competition from an unregulated medical marijuana  
          market have made it difficult for them to do business, the tax  
          rate and administration was revised.  A single tax rate of 37%  
          on retail customers took effect on July 1, 2015.  The excise tax  
          applies only to recreational marijuana sales, but medical  
          marijuana is subject to the state sales tax.  However, beginning  
          on July of 2016, medical marijuana will be subject to the 37%  
          excise tax, but patients listed in a registry would be exempt  
          from sales tax on medical marijuana purchases. In the initial  
          year of taxation, Washington's revenue from marijuana excise  
          taxes was $62 million. The state's original forecast was $36  
          million.  Additionally, when the state and local sales tax is  
          included, the total revenue from marijuana taxes was over $70  

          3.   Medical versus recreational.   Although informative, the  
          Colorado and Washington experiences are distinguishable from AB  
          2243 in one crucial way: California has not legalized the use of  
          recreational marijuana.  AB 2243 imposes an excise tax on  
          medical marijuana, while Colorado and Washington currently  
          exempt medical marijuana from almost all taxes imposed on  
          recreational marijuana.  However, in July of this year,  
          Washington plans to exempt medical marijuana from that state  
          sales tax but impose the recreational 37% excise tax.  While  
          this bill will not go into effect if marijuana is legalized this  
          November, if legalization does not occur, how will having a high  
          tax rate impact patients, especially those who are low-income?   
          If legalization occurs in the future, should taxation apply to  
          recreational use only?  What incentive exists for marijuana  
          users to purchase recreational marijuana if medical marijuana is  
          vastly cheaper? 


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          4.   How high is too high?   Both Washington and Colorado have  
          reduced their marijuana tax rates, which can serve as a lesson  
          to California when attempting to determine the right tax rate.   
          Taxes increase product prices, and higher prices can exacerbate  
          tax evasion and foster illegal marijuana sales.  Tax evasion  
          will also reduce state revenues that marijuana products taxes  
          generate.  Alternatively, setting the rate too low may be a  
          missed opportunity to generate new state and local revenue.   
          Under Article XIII A Section 3 of the California Constitution, a  
          2/3 vote is required to enact a new tax or to raise an existing  
          tax.  Thus, if AB 2243 sets the excise tax too high, the  
          Legislature can reduce the rate with a majority vote, but, if  
          the rate is too low, a 2/3 vote is required to raise the rate.   
          Additionally, setting a tax rate that is too high can diminish  
          revenues for local entities if they are unable to tax the same  
          base as a result.  On the other hand, local entities and the  
          state already tax the same base in many instances. 

          5.   Point of Taxation.   It is important to consider the point of  
          taxation in the distribution chain. Generally, the higher the  
          tax is imposed in the distribution chain, the fewer the  
          taxpayers.  This is advantageous because the fewer the taxpayers  
          collection is less burdensome, and tax evasion is reduced.  But  
          in a new previously unregulated, quasi-legal market such as  
          marijuana cultivation, determining the new taxpayers, and  
          establishing a relationship between the taxpayer and BOE can be  
          difficult.  Also, when a tax is imposed on a distributer, the  
          tax can be passed on in the purchase price to the retailer.  The  
          consumer pays a sales tax with the distributer tax included in  
          the sale price, leading to a tax on a tax. Imposing the tax at  
          the retail level can be advantageous for the consumer by  
          eliminating the hidden tax.  Also, BOE currently collects sales  
          tax from dispensaries, so BOE already has a relationship with  
          the intended taxpayers.  However, currently dispensaries are not  
          isolating medical marijuana sales versus other sales subject to  
          sales tax, thus a point of sale excise tax would require  
          separating the amount of medical marijuana sales versus other  

          6.   November ballot.   AB 2243 only becomes operative if  
          Secretary of State Initiative Number 1762, also known as the  
          Control, Regulate and Tax Adult Use of Marijuana Act is not  
          approved the voters on November 8, 2016. 


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          The initiative imposes a marijuana excise tax upon purchasers of  
          marijuana or marijuana products sold in this state at the rate  
          of fifteen percent (15%) of the gross receipts of any retail  
          sale by a dispensary.  The sales and use tax would not apply to  
          the sale of medical marijuana. Additionally, the initiative  
          would establish a cultivation tax at the following rates:

                 The tax for marijuana flowers shall be $9.25 per  
               dry-weight ounce.

                 The tax for marijuana leaves shall be $2.75 per  
               dry-weight ounce.

                 BOE may adjust the tax rate for marijuana leaves  
               annually to reflect fluctuations in the relative price of  
               marijuana flowers to marijuana leaves.

          The cultivation tax would not apply to marijuana cultivated for  
          personal use or cultivated by a qualified patient or primary  
          caregiver in accordance with the Compassionate Use Act.

          7.   Related Legislation.   SB 987 (McGuire) establishes the  
          Marijuana User Fee Act, which imposes a 10% excise tax on  
          medical marijuana.  SB 987 (McGuire) is currently pending in the  
          Assembly Committee on Revenue and Taxation.

          8   Missing something?   AB 2243 does not specify all of the tax  
          rates for medical cannabis flowers.  The author's intent is to  
          create a tiered tax system for small versus medium cultivators.  
          The author intends to continue working with stakeholders to  
          determine the appropriate tax rate amounts.  

          9.   Let's get clear.   Several terms in the bill may need to be  
          clarified.  For example, "distribution" is defined as both of  
          the following in AB 2243: 

                 The sale of untaxed medical cannabis flowers, medical  
               cannabis leaves, and immature medical cannabis plants, and  
               medical cannabis product in this state 

                 The use or consumption of untaxed medical cannabis  
               flowers, medical cannabis leaves, and immature medical  
               cannabis plants, and medical cannabis product in this  


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          However, under MMRSA "distribution" is defined as the  
          procurement, sale, and transport of medical cannabis and medical  
          cannabis products between licensed entities.  The Committee may  
          wish to consider amending the bill to reduce potential  
          disagreements between taxpayers and BOE.

          10.   Technical amendments.  

                 Replace "medical cannabis flowers" with "medical  
               cannabis flower" throughout the bill.

                 Replace "immature medical cannabis plants" with  
               "immature medical cannabis plant" throughout the bill.
                 On page 9, line 37, strike out "the multiagency task  
                 On page 9, line 38, strike out "Wildlife," and replace  
               with "Wildlife's"
                 On page 9, line 38, strike out "Board," and replace with  
                 On page 9, line 38, add "multiagency task force, the  
               Watershed Enforcement Team," after "Board."

           Assembly Actions

           Assembly Revenue and Taxation                8-0

          Assembly Appropriations                      13-1
          Assembly Floor                               60-12

           Support and  
          Opposition   (6/16/16)

           Support  :  Andrew Mills, Eureka Police Chief; Bill Dobberstein,  
          Fortuna Police Chief; Butte County Sheriff's Office; California  
          Association of Professional Scientists; California Cattleman's  
          Association; California Growers Association; California League  
          of Conservation Voters; California Trout; Center for Biological  
          Diversity; Central Coast Forest Association; Environmental  
          Protection Information Center; George Runner, Board of  
          Equalization Member; Gerardo Gonzalez, Willits Police Chief;  


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          Humboldt County Sheriff's Office                  ; Lassen  
          County Sheriff's Office; Mendocino County Sheriff's Office;  
          Monterey County Sheriff's Office; Professional Engineers in  
          California Government; Rural County Representatives of  
          California; Sierra Club California                ; Sonoma  
          County Sheriff's Office; The Nature Conservancy; Trust for  
          Public Land.

           Opposition  :  Americans for Safe Access; California NORML; Legal  
          Services for Prisoners with Children; UCBA Trade Association.

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