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 ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: March 15, 2016 |Policy Vote: GOV. & F. 5 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: April 18, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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). SB 987 (McGuire) Page 1 of ? 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 SB 987 (McGuire) Page 2 of ? (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. SB 987 (McGuire) Page 3 of ? 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 SB 987 (McGuire) Page 4 of ? 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 SB 987 (McGuire) Page 5 of ? 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 SB 987 (McGuire) Page 6 of ? 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) SB 987 (McGuire) Page 7 of ? 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. -- END --