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 |
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|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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