BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 2243 |Hearing |6/22/16 |
| | |Date: | |
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|Author: |Wood |Tax Levy: |No |
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|Version: |6/15/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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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.
Background
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
marijuana.
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
AB 2243 (Wood) 6/15/16 Page 2
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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
2015.
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
AB 2243 (Wood) 6/15/16 Page 3
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enforce laws, licensing requirements, and zoning
ordinances.
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
physician.
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
AB 2243 (Wood) 6/15/16 Page 4
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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
physician.
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
2243:
Imposes a tax of an unspecified amount on medical
cannabis flowers cultivated by a small specialty
cultivator.
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
AB 2243 (Wood) 6/15/16 Page 5
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cannabis flowers cultivated by a medium cultivator.
Imposes a tax of $1.25 per immature medical cannabis
plant.
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
AB 2243 (Wood) 6/15/16 Page 6
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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
1965.
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
Unknown.
Comments
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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
million.
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
sales.
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
state.
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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
force,"
On page 9, line 38, strike out "Wildlife," and replace
with "Wildlife's"
On page 9, line 38, strike out "Board," and replace with
"Board's"
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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