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
SB 987 (McGuire) Page 2 of
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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.
SB 987 (McGuire) Page 3 of
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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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