BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 2243 (Wood) - Medical cannabis:  taxation:  cannabis  
          production and environment mitigation
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          |Version: August 1, 2016         |Policy Vote: GOV. & F. 5 - 1    |
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          |Urgency: Yes                    |Mandate: Yes                    |
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          |Hearing Date: August 8, 2016    |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.


          Summary: AB 2243 would require every distributor to pay tax upon  
          the distribution of medical cannabis flowers, immature medical  
          cannabis plants, and medical cannabis products.

                 The Board of Equalization (BOE) would incur annual costs  
               of $25,000 in 2016-17, $747.000 in 2017-18, $1.3 million  
               for FY 2018-19, and $1.6 million in the out-years to  
               implement the provisions of the bill (special fund).  
               Administrative costs would include taxpayer identification,  
               notification, and registration; regulation development;  
               manual and publication revisions; tax return design;  
               computer programming; return, payment, and refund claim  
               processing; audit and collection tasks; staff training; and  


          AB 2243 (Wood)                                         Page 1 of  
               public inquiry responses.

                 BOE estimates that the bill would result in annual  
               revenue increases ranging from $71 million to $286 million  
               (special fund). The range is provided because the nature of  
               this market makes the assumptions used to develop the  
               estimates subject to considerable uncertainty.

                 The Department of Justice (DOJ) would incur annual costs  
               in excess of $10 million by 2018-19 to fund six marijuana  
               investigative teams (special fund). Additionally, DOJ would  
               incur unknown, reimbursable expenses to conduct research  
               and advise client agencies regarding the bill's  
               interactions with requirements under the California  
               Environmental Quality Act. 

          Background: Prior to 1996, federal and state law both prohibited the  
          possession, cultivation, sale, transportation, importation, or  
          furnishing of marijuana.  However, in 1996, California voters  
          approved Proposition 215, 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 specified  
          approval of an attending physician. Consequently, CUA allowed  
          qualified patients and primary caregivers to obtain and use  
          medical marijuana.  
          The Legislature clarified CUA in 2003 with the enactment of SB  
          420 (Vasconcellos, 2003).  This bill (1) exempted qualified  
          patients and caregivers from prosecution for using/ cultivating  
          medical marijuana, and (2) established a medical marijuana card  
          program for patients to use on a voluntary basis. The bill  
          provides a safe harbor for qualified patients regarding both 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. Consequently, California's medical marijuana industry  
          operates amid a conflict between federal and state law, and  
          within state law itself. 

          The industry remained largely unregulated until 2015. That year,  


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          the Legislature enacted a package of legislation that  
          comprehensively regulates many aspects of medical marijuana  
          including cultivation, manufacturing, transportation,  
          distribution, sale, and product safety. Three bills comprise the  
          package-SB 643 (McGuire, 2015), AB 243 (Wood, 2015), and AB 266  
          (Bonta, 2015), which are collectively known as the Medical  
          Marijuana Regulation and Safety Act (MMRSA). Among other things,  
          MMRSA does the following: 

                 Creates the Bureau of Medical Marijuana Regulation  
               (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  
               enforce laws, licensing requirements, and zoning  

                 Authorizes local governments to establish a licensing  


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               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.


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          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  
          receipts from sales in California. Generally, medicine is exempt  
          from the sales and use tax, but medical marijuana does not  
          qualify for the exemption. To be exempt, medication must be (1)  
          prescribed by an authorized person and dispensed on a  
          prescription filled by a pharmacist, (2) furnished by a licensed  
          physician to his or her own patient, or (3) furnished by a  
          health facility for treatment pursuant to a licensed physician's  
          order, or sold to a licensed physician. Consequently, the sale  
          of medical marijuana is subject to both the state and local  
          sales and use tax.

          Proposed Law:  
          This bill would do, among other things, the following:
                 Impose upon every distributor a tax on all distributions  
               of medical cannabis flowers, medical cannabis products, and  
               immature medical cannabis plants to a dispensary at the  
               following rates:  

                  o         For medical cannabis flowers, (1) four dollars  
                    and seventy-five cents ($4.75) per ounce of medical  
                    cannabis flowers cultivated by a licensee with, or  
                    subject to, a Type 1, Type 1A, or Type 1B  
                    classification, (2) nine dollars and twenty-five cents  
                    ($9.25) per ounce of medical cannabis flowers  
                    cultivated by a licensee with, or subject to, a Type  
                    2, Type 2A, or Type 2B classification, and (3)  
                    thirteen dollars and twenty-five cents ($13.25) amount  
                    per ounce of medical cannabis flowers cultivated by a  
                    licensee with, or subject to, a Type 3, Type 3A, or  
                    Type 3B classification.

                  o         For immature medical cannabis plants, one  
                    dollar and twenty five cents ($1.25) per immature  
                    medical cannabis plant.


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                  o         For medical cannabis products, the rate  
                    equivalent to the combined rate of taxes on the  
                    privilege of selling tangible personal property at  
                    retail in this state that are imposed by the Sales and  
                    Use Tax Law and the California Constitution, upon the  
                    wholesale cost of any medical cannabis product  
                    manufactured by a licensee with a Type 6 or Type 7  
                    classification. The current rate would be 6.25  

                 Require distributor to maintain record-keeping  
               requirements, as specified for the medical cannabis product  
               tax to document "wholesale cost."

                 Specify that the tax rates imposed apply proportionately  
               to quantities of less than one ounce.

                 Require 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.

                 Allow 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.

                 Allow 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.

                 Require BOE to collect the tax quarterly, on or before  


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               the last day of the month succeeding each quarterly period.

                 Authorize 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.

                 Establish the Marijuana Value Tax Fund in the State  
               Treasury. The bill would require that all revenues, less  
               refunds, collected from the Marijuana Value Tax must be  
               deposited into the Marijuana Value Tax Fund, for continuous  
               appropriations, as follows:

                  o         30 percent 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  
                    local entities that support enforcement activities  
                    related to unpermitted activity. 

                  o         2 percent 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 percent 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 percent to the Open Space Subvention Payment  


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                    Account of the California Land Conservation Act of  

                  o         30 percent 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.

          The bill would only become operative if Proposition 64 is not  
          approved by the voters on November 8, 2016. It would take  
          immediate effect as an urgency measure, and would sunset on  
          January 1, 2025.  

          Legislation: SB 987 (McGuire) would impose a 10 percent fee on  
          medical marijuana purchased from a retailer of medical  
          marijuana, beginning January 1, 2018. The bill failed passage in  
          the Assembly Revenue and Taxation Committee.

          Comments: BOE research staff employed the following assumptions  
          in developing its revenue estimate: (1) 3.2 million ounces are  
          produced and regulated by Type 1 licensees, (2) 6.4 million  
          ounces are produced and regulated by Type 2 licensees, and (3)  
          6.4 million ounces are produced and regulated by Type 3  
          licensees. Assuming full compliance, BOE estimates that  
          resulting revenues under the bill would total $159 million per  
          year. In addition, BOE cites an industry estimate of 2016  
          California medical marijuana sales to be about $2.7 billion. BOE  
          obtained dispensary recent dispensary prices and "street prices"  
          for 34 selected cities across the State. BOE assumes that the  
          average street price percentage of the dispensary prices for  
          these cities is a reasonable estimate of the wholesale  


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          percentage of retail sales. This average is about 75 percent. At  
          a tax rate of 6.25 percent, revenues would be $126 million with  
          one hundred percent compliance. Thus, total revenues from the  
          measure (assuming full compliance) would be about $286 million.  
          However, full compliance is unlikely, especially in the  
          near-term.  Accordingly, BOE notes that revenues would fall as  
          compliance drops, and would be $71 million annually with 25  
          percent compliance.
          Any local government costs resulting from the mandate in this  
          measure are not state-reimbursable because the mandate only  
          involves the definition of a crime or the penalty for conviction  
          of a crime.

          Amendments: Staff recommends deleting the bill's continuous  
          appropriation authority, as continuous appropriations limit  
          legislative oversight.

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