BILL ANALYSIS                                                                                                                                                                                                    Ó





          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 987 (McGuire) - Taxation:  medical marijuana:  Marijuana  
          Value Tax Act
          
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          |Version: March 15, 2016         |Policy Vote: GOV. & F. 5 - 1    |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date: April 18, 2016    |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.




          Bill  
          Summary: SB 987 would impose a 15 percent excise tax on medical  
          marijuana.


          Fiscal  
          Impact: 
                 The Board of Equalization (BOE) estimates that the bill  
               would result in a revenue increase of $126 million in  
               2017-18, and $251 million annually thereafter. However,  
               because of the nature of this market, the assumptions used  
               to develop these estimates are subject to considerable  
               uncertainty (see Staff Comments). 








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                 BOE indicates that it would incur administrative costs  
               of $3.1 million in 2016-17, $5.4 million in 2017-18, $5.1  
               million for FY 2018-19, and $4.8 million in the out-years  
               to implement the provisions of the bill. 



          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,  
          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  







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               (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.


                 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.









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                 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 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  







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          of medical marijuana is subject to both the state and local  
          sales and use tax.




          Proposed Law:  
          This bill would establish the Marijuana Value Tax Act (Act), and  
          would require all revenues from the imposed tax to be deposited  
          in the Marijuana Value Tax Fund. Specifically, the bill would do  
          the following: 
                 Impose a 15 percent excise tax on medical marijuana on  
               consumers, purchased from a retailer on or after January 1,  
               2018.


                 Require BOE to administer and collect the tax from  
               medical marijuana retailers. The bill also would require  
               BOE to issue permits to every retailer, as specified. 


                 Allow BOE to revoke or suspend a permit after the  
               retailer is given 10 days' notice in writing detailing the  
               reason. 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  
               this Act, unless the retailer has entered into an  
               installment agreement with BOE.


                 Require BOE to collect the tax quarterly, as specified. 


                 Authorize BOE to prescribe, adopt, and enforce  
               regulations relating to administration and enforcement,  
               including any necessary emergency regulations. 


                 Establish 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  







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               deposited into the Marijuana Value Tax Fund, as follows:


                  o         30 percent to the General Fund.


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


                  o         20 percent 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 percent to counties for drug and alcohol  
                    treatment programs, distributed according to  
                    population. 


          


          Staff Comments: According to its annual report, BOE administers  
          30 tax and fee programs. When legislation is introduced to  
          modify these programs, BOE is often able to utilize information  
          from current taxpayers to develop a reliable revenue estimate.  
          For this bill, however, such information is not available.  
          Specifically, sales and use tax returns do not currently require  
          retailers of medical marijuana to be specifically identified.  
          Consequently, BOE research staff had to develop an alternative  
          methodology to determine the number of retailers reporting  
          medical marijuana sales. Using various internal and external  
          sources, BOE assumes that 1,623 taxpayer accounts likely  
          reported marijuana sales in 2014.


          In addition to the number of accounts, a revenue estimate for  
          this bill requires several critical assumptions, including (1)  
          the market price of medical marijuana, (2) the amount of current  







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          demand for the product, (3) the extent to which the proposed tax  
          rate lowers demand for the product relative to what would have  
          happened on the natural (also known as the "elasticity of  
          demand"), (4) future growth in demand for medical marijuana over  
          time, and (5) the rate of compliance. The specific medical  
          marijuana assumptions BOE incorporated into its revenue estimate  
          include the following:


                 A price of $220 per ounce.
                 National consumption in 2014 was 216 million ounces.  
               California accounted for about 14 percent of the national  
               total.
                 Total state sales in 2014 were $1.3 billion. 
                 Annual growth in the range of five to six percent  
               through 2019.
                 100 percent compliance.


          Using these assumptions, BOE staff estimated that dispensaries  
          would report sales of $1.7 billion of medical cannabis in  
          2017-18. At a tax rate of 15 percent, the full-year revenue  
          increase would be $251 million. However, the bill's operative  
          date of January 1, 2018 reduces 2017-18 revenue by half, to $126  
          million. 

          Staff notes that the assumption of immediate, full compliance is  
          not likely to be attained (as BOE itself acknowledges).  
          Consequently, BOE's full annual revenue estimate of $251 million  
          is not likely to be quickly achieved. Additionally,  
          microeconomic theory predicts that because the 15 percent tax  
          would raise the price of medicinal marijuana, demand for the  
          product would decline. To the extent that the 15 percent tax  
          rate lowers demand more than is assumed by BOE, actual revenues  
          could be lower than its estimate. Finally, it is impossible for  
          anyone to know what the future market price of medicinal  
          marijuana will be, as it will reflect future unknown supply and  
          demand factors. All told, however, BOE's revenue estimate is  
          likely overstated in 2017-18 (due to the assumption of full  
          compliance), and understated in the out-years (as the statewide  
          median population continues to increase, growth in demand for  
          the product could exceed the assumed six percent).  

          BOE's administrative duties to implement the bill include (1)  
          taxpayer identification, notification, and registration, (2)  







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          regulation development, (3) manual and publication revisions,  
          (4) tax return design, (5) computer programming, (6) return,  
          payment, and refund claim processing, (7) audit and collection  
          workload, (8) staff training, and (9) public inquiry responses.  
          BOE estimates overall costs to administer the new tax at $3.1  
          million in 2016-17, $5.4 million in 2017-18, $5.1 million for FY  
          2018-19, and $4.8 million in the out-years.

          As noted above, the tax would be imposed on and after January 1,  
          2018. BOE generally requires at least eight months lead time to  
          implement a new tax or fee program. Consequently, BOE must begin  
          to implement this bill in 2016-17, one fiscal year prior to when  
          the revenue flow would begin. Currently, BOE's 2016-17 budget  
          does not include funding to implement this bill. 

          The bill would only become operative if Secretary of State  
          Initiative Number 1762 is not approved by the voters on November  
          8, 2016.


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