BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 987| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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. SB 987 Page 2 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 SB 987 Page 3 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. SB 987 Page 4 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. SB 987 Page 5 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. SB 987 Page 6 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 SB 987 Page 7 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 **** END ****