BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 987 |Hearing |4/6/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |McGuire |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |3/15/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Bouaziz | |: | | ----------------------------------------------------------------- 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 SB 987 (McGuire) 3/15/16 Page 2 of ? 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. SB 987 (McGuire) 3/15/16 Page 3 of ? 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 SB 987 (McGuire) 3/15/16 Page 4 of ? 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. SB 987 (McGuire) 3/15/16 Page 5 of ? 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 SB 987 (McGuire) 3/15/16 Page 6 of ? 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 SB 987 (McGuire) 3/15/16 Page 7 of ? 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 SB 987 (McGuire) 3/15/16 Page 8 of ? 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 SB 987 (McGuire) 3/15/16 Page 9 of ? 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 SB 987 (McGuire) 3/15/16 Page 10 of ? 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. SB 987 (McGuire) 3/15/16 Page 11 of ? -- END --