BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                        SB 987|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
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                                   THIRD READING 


          Bill No:  SB 987
          Author:   McGuire (D) 
          Amended:  5/31/16  
          Vote:     27 

           SENATE GOVERNANCE & FIN. COMMITTEE:  5-1, 4/6/16
           AYES:  Hertzberg, Beall, Hernandez, Lara, Pavley
           NOES:  Nguyen
           NO VOTE RECORDED:  Moorlach

           SENATE APPROPRIATIONS COMMITTEE:  5-2, 5/27/16
           AYES:  Lara, Beall, Hill, McGuire, Mendoza
           NOES:  Bates, Nielsen

           SUBJECT:   Taxation:  medical marijuana:  Marijuana User Fee  
                     Act


          SOURCE:    Author


          DIGEST:  This bill establishes the Marijuana User Fee, which  
          imposes a 15% excise tax on medical marijuana.


          ANALYSIS:  


          Existing law:


          1)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. 








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          2)Exempts medication from the sales and use tax, that meets the  
            following criteria:


                 Is prescribed by an authorized person and dispensed on a  
               prescription filled by a pharmacist,


                 Is furnished by a licensed physician to his or her own  
               patient, or 


                 Is furnished by a health facility for treatment pursuant  
               to a licensed physician's order, or sold to a licensed  
               physician. 


          1)Subjects medical marijuana to both the state and local sales  
            and use tax.


          This bill establishes the Marijuana User Fee (Fee), and requires  
          all revenues from the imposed tax to be deposited in the  
          Marijuana User Fee Fund.  Specifically, this bill: 


          1)Imposes a 15% excise tax on medical marijuana on consumers,  
            purchased from a retailer on or after January 1, 2018.   


          2)Requires the Board of Equalization (BOE) to administer and  
            collect the tax from medical marijuana retailers. This 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.


          3)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  








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            time and place for a hearing so the retailer may have an  
            opportunity to show why the permit should not be revoked or  
            suspended.


          4)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.


          5)Requires BOE to collect the tax quarterly, on or before the  
            last day of the month succeeding each quarterly period.


          6)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.


          7)Establishes the Marijuana User Fee Fund in the State Treasury.  
             This bill requires that all revenues, less refunds, collected  
            from the Fee must be deposited into the Marijuana User Fee  
            Fund, as follows:


                 30% to the General Fund.


                 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.


                 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. 









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                 20% to counties for drug and alcohol treatment programs,  
               allocated based on population.


          1)Defines terms for purposes of the Fee, and only becomes  
            operative if Secretary of State Initiative Number 1762 is not  
            approved by the voters on November 8, 2016.


          2)Allows BOE to receive an initial operating loan from the  
            General Fund for the implementation and administration of the  
            Fee, not to exceed $5 million.




          Comments


          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. 








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          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 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.


          FISCAL EFFECT:   Appropriation:    Yes         Fiscal  
          Com.:YesLocal:   Yes


          According to the Senate Appropriations Committee, BOE estimates  
          that this bill will 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.  
           Additionally, 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 this bill.












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          SUPPORT:   (Verified5/31/16)


          Rural County Representatives of California
          Urban Counties of California


          OPPOSITION:   (Verified5/31/16)


          Americans for Safe Access
          California Cannabis Industry Association
          California Cannabis Operators League
          California NORML
          Consortium Management Group
          League of California Cities
          Marijuana Policy Project
          UFCW Western States Council


          ARGUMENTS IN SUPPORT:     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 User Fee  
          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 user fee 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.  I believe I can tell you honestly  








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          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."


          ARGUMENTS IN OPPOSITION:Opponents argue that proposing an excise  
          tax on the retail component of the industry is premature and  
          impractical before having the regulatory structure or licensing  
          components in place at both the state and local government.   
          Furthermore, the net economic burden of these taxes will be  
          unsustainable in a medical only market, particularly to  
          low-income patients, none of whom are insured for medical  
          marijuana.  Opponents believe the added cost will encourage the  
          diversion of the market from regulated medical suppliers to  
          untaxed, unregulated, non-medical providers.



          Prepared by:Myriam Bouaziz / GOV. & F. / (916) 651-4119
          5/31/16 22:13:07


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