BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 987                           |Hearing    |4/6/16   |
          |          |                                 |Date:      |         |
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          |Author:   |McGuire                          |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |3/15/16                          |Fiscal:    |Yes      |
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          |Consultant|Bouaziz                                               |
          |:         |                                                      |
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                Taxation:  medical marijuana:  Marijuana Value Tax Act



          Establishes the Marijuana Value Tax Act, which imposes a 15%  
          excise tax on medical marijuana.


           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  
          patients as to the amount of marijuana they may possess and the  
          number of plants they may maintain.  It also protects patients  







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          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  
               enforce laws, licensing requirements, and zoning  
               ordinances.








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                 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  
          receipts from sales in this state.  Generally, medicine is  
          exempt from the sales and use tax, but medical marijuana does  








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          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

           Senate Bill 987 establishes the Marijuana Value Tax Act (Act),  
          and requires all revenues from the imposed tax to be deposited  
          in the Marijuana Value Tax Fund.  The bill specifies: 

                 Imposes a 15% excise tax on medical marijuana on  
               consumers, purchased from a retailer on or after January 1,  
               2018.   

                 Requires BOE to administer and collect the tax from  
               medical marijuana retailers. 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.









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                 Allows BOE to refuse to issue a permit if the retailer  
               has an outstanding final liability due for any amount under  
               this Act, 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 Act authorizes BOE to prescribe, adopt, and  
               enforce any emergency regulations as necessary for  
               implementation.

                 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 General Fund.

                  o         30% to the Bureau of Medical Marijuana  
                    Regulation for the administration of a grant program.  
                    The program will provide grants to local agencies to  
                    fund the regulation of cultivation, processing,  
                    manufacturing, distributing, and selling of medical  
                    marijuana.

                  o         20% to the Department of Parks and Recreation  
                    for the stewardship, operation, maintenance, and  
                    preservation of state parks, including state parks  
                    operated by local or regional agencies, or nonprofit  
                    agencies. 

                  o         20% to counties for drug and alcohol treatment  
                    programs, allocated based on population.

          SB 987 defines terms for purposes of the Marijuana Value Tax  
          Act, and only becomes operative if Secretary of State Initiative  
          Number 1762 is not approved by the voters on November 8, 2016.


           State Revenue Impact








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           According to the Board of Equalization, the excise tax would  
          generate $251 million in annual revenue.


           Comments

               1.   Purpose of the bill.   According to the author, "During  
               last year's deliberation over the historic medical  
               marijuana regulation bills, we always maintained that  
               regulation was just the first step for this multi-billion  
               dollar industry.  Once the necessary regulation was put in  
               place, it was always our intention was to follow it up with  
               a Marijuana Value tax and to use the proceeds to help our  
               great state. 

               And that is what this bill is about.  In simple terms, this  
               bill implements a 15 percent Point of Sale tax on all  
               medical marijuana products.  According to the Bureau of  
               Equalization, this 15% will raise between 150-250 million  
               dollars every year - depending on how long it takes  
               dispensaries to come into compliance.  

               Over 60% of all the marijuana in the western US is grown in  
               just four counties - all in my district, and that of my  
               colleague in the Assembly, Dr. Jim Wood.  We have seen both  
               the positive and negative effects of this industry first  
               hand - and our constituents have lived with this good and  
               bad for decades.  We have found strong support for this tax  
               and great need for the revenue it will generate.  And while  
               there is strong support for this tax, there are some that  
               believe 15% is too high - that the MVT, combined with sales  
               tax, local and other taxes may keep people in the black  
               market. 

               I believe I can tell you honestly that no one has more  
               incentive to get everyone out of the black market than we  
               do.  The reason we worked so hard last year on the  
               Regulation bill was make sure we did everything we can do  
               to bring light into this massive industry; to regulate it  
               for the first time in our state, and make sure it becomes  
               safe for patients, safe for members of the industry, and  
               safe for the public.  We believe we have been very careful  
               to keep the total accumulated tax under an amount that has  








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               kept people in the black market in other states.  

               The other major item of concern we've heard is that we  
               should "not be taxing medicine".  We agree. Unfortunately  
               the current system in place in our state makes it  
               impossible to legally separate those who purchase medical  
               marijuana for medicine, and those who wish to purchase it  
               for recreational use.  Voters may change this status at  
               some point in the future, but it is what we have to work  
               with today.  We believe that taxing this product is the  
               next natural step in the process of bringing marijuana into  
               the mainstream, and look forward to hearing from the  
               committee on this important legislation."

              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 the city of Denver  
               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 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  








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               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 SB 987 in one crucial way: California has not  
               legalized the use of recreational marijuana. SB 987 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? 


              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  








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               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 SB  
               987 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 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.  Nevertheless, currently dispensaries  
               are not isolating medical marijuana sales versus other  
               sales subject to sales tax and an excise tax would require  
               separating the amount of medical marijuana sales versus  
               other sales.  


              6.   November ballot.   SB 987 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. 

               The initiative imposes a marijuana excise tax upon  
               purchasers of marijuana or marijuana products sold in this  








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               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.

              1.   Related Legislation.   AB 2243 (Wood) imposes on all  
               licensed medical marijuana cultivators a tax at a rate of  
               $9.25 per ounce of medical cannabis flowers, $2.75 per  
               ounce of medical cannabis leaves, and $1.25 per immature  
               medical cannabis plant from the sale of all medical  
               cannabis flowers, medical cannabis leaves, and immature  
               medical cannabis plants distributed to a licensed  
               distributor in this state.  AB 2243 (Wood) is currently  
               pending in the Assembly Committee on Revenue and Taxation.



           Support and  
          Opposition   (3/30/2016)


           Support  :  Rural County Representatives of California.


           Opposition  :  Americans for Safe Access; California Cannabis  
          Industry Association; League of California Cities; Marijuana  
          Policy Project.








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