BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 987


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          Date of Hearing:  June 20, 2016


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                           Sebastian Ridley-Thomas, Chair





          SB  
          987 (McGuire) - As Amended June 13, 2016


          2/3 vote.  Fiscal committee.  


          SENATE VOTE:  27-10


          SUBJECT:  Medical marijuana: Marijuana User Fee Act


          SUMMARY:  Enacts the Marijuana User Fee Act (Fee Act).   
          Specifically, this bill:  


          1)Imposes a fee, on and after January 1, 2018, on the  
            consumption or other use in this state of "medical marijuana"  
            purchased from any "retailer" for the consumption or other use  
            in this state at the rate of 10% of the sales price of the  
            "medical marijuana".  


          2)Provides that every "purchaser" consuming or otherwise using  
            in this state "medical marijuana" that the "purchaser"  
            purchased from a "retailer" for consumption or other use in  








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            this state is liable for the fee.  The "purchaser's" liability  
            is not extinguished until the fee has been paid to this state,  
            except that a receipt from a "retailer" engaged in business in  
            this state given to the "purchaser" is sufficient to relieve  
            the "purchaser" from further liability for the fee to which  
            the receipt refers.


          3)Provides that a "purchaser" is not liable for the tax [sic] if  
            the "purchaser" has an identification card issued under Health  
            and Safety Code Section 11362.7 et seq. indicating that the  
            "purchaser" has low income.      


          4)Requires every "retailer" engaged in business in this state  
            and making sales of "medical marijuana" to a "purchaser" to,  
            at the time of making such a sale, collect the fee as a charge  
            separate from, and not included in, any other fee, charge, or  
            other amount paid by the "purchaser".  


          5)Requires every "retailer" engaged in business in this state to  
            collect the fee from the "purchaser" and to give the  
            "purchaser" a receipt, as specified.


          6)Provides that a "retailer" engaged in business in this state  
            shall not collect the tax [sic] from a "purchaser" who, at the  
            time of the sale, presents the "retailer" with an  
            identification card issued under Health and Safety Code  
            Section 11362.7 et seq. indicating that the "purchaser" has  
            low income.    


          7)Defines "medical marijuana" to mean medical cannabis, as  
            defined in Business and Professions Code (B&PC) Section  
            19300.5.  










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          8)Defines a "retailer" to include every person that makes any  
            "retail sale" or sales of medical marijuana.  The term also  
            includes a person holding a dispensary license issued under  
            the Medical Marijuana Regulation and Safety Act (MMRSA).   
            Furthermore, every person making more than two "retail sales"  
            of medical marijuana during any 12-month period shall be  
            considered a retailer.   


          9)Defines a "purchaser" as a person that purchases medical  
            marijuana for consumption or other use in this state.  


          10)Defines a "retail sale" to mean a sale for any purpose other  
            than resale in the regular course of business in the form of  
            medical marijuana.  


          11)Excludes from the definition of sale or purchase the transfer  
            of title or possession, exchange, or barter of medical  
            marijuana for a consideration between a "qualified patient"  
            and his or her "primary caregiver". 


          12)Defines a "qualified patient" as a person who is entitled to  
            the protections of the Compassionate Use Act of 1996  
            (Proposition 215).  


          13)Defines a "primary caregiver" as a person who is exempt from  
            the licensure requirements of the MMRSA under B&PC Section  
            19319(b).  


          14)Requires the State Board of Equalization (BOE) to administer  
            and collect the fee pursuant to the Fee Collection Procedures  
            Law, as specified.  










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          15)Specifies that a retailer is relieved from liability to  
            collect the fee that became due and payable, insofar as the  
            measure of the fee is represented by accounts that have been  
            found to be worthless and charged off by the retailer in  
            accordance with generally accepted accounting principles.  


          16)Authorizes the BOE to prescribe, adopt, and enforce any  
            emergency regulations as necessary to implement this bill.  


          17)Provides that the fee shall be due and payable to the BOE  
            quarterly on or before the last day of the month next  
            succeeding each quarterly period.  


          18)Provides that, on or before the last day of the month  
            following each quarterly period, a return for the preceding  
            quarter shall be filed using electronic media with the BOE.  


          19)Provides that a retailer required to collect the fee must  
            register for a permit with the BOE.  The BOE, in turn, is  
            required to issue to each applicant a separate permit for each  
            place of business in California.  


          20)Authorizes the BOE, upon hearing and proper notice, to revoke  
            or suspend a permit whenever a retailer fails to comply with  
            this bill's provisions.  


          21)Establishes the Marijuana User Fee Fund (Fund) in the State  
            Treasury.  


          22)Provides that, except as otherwise specified, moneys in the  
            Fund shall be allocated by the Controller annually as follows:









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             a)   30% to the General Fund;


             b)   30% to the Bureau of Medical Marijuana Regulation for  
               the administration of a grant program to distribute grants  
               to local agencies that oversee or are affected by the  
               regulation of cultivating, processing, manufacturing,  
               distributing, and selling of medical marijuana, that  
               undertake enforcement activities pertaining to the  
               cultivation of marijuana in violation of state law or local  
               ordinance, or that are involved in a fire suppression,  
               emergency medical, or other "all-risk" response to a  
               marijuana cultivation, processing, manufacturing, or  
               distribution incident, upon appropriation by the  
               Legislature.  The grants shall be made available beginning  
               on or before July 1, 2018, and no more than 5% of any funds  
               allocated may be used for administrative costs of the grant  
               program by the bureau or for any administrative costs of  
               the local agency awarded the grant;


             c)   20% to the Department of Parks and Recreation for the  
               stewardship, operation, maintenance, and preservation of  
               state park units, including units operated on behalf of the  
               state by local or regional agencies or by nonprofit  
               organizations, upon appropriation by the Legislature; and, 


             d)   20% to "counties" for drug and alcohol treatment  
               programs, distributed based on the ratio of each county's  
               population to the total population of all counties, as  
               specified, upon appropriation by the Legislature.  Requires  
               any funds appropriated to be used for drug and alcohol  
               treatment and recovery and case management services.  For  
               purposes of this allocation, counties are defined as a  
               county mental health department, two or more county mental  
               health departments acting jointly, or a city-operated  
               program receiving funds pursuant to Welfare and  








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               Institutions Code Section 5701.5.  


          23)Specifies that funds for the implementation and  
            administration of the Fee Act shall be advanced to the Fund as  
            a General Fund or special fund loan, and shall be repaid by  
            the initial revenues, less refunds, collected.  


          24)Authorizes the Director of Finance to provide an initial  
            operating loan from the General Fund to the Fund that does not  
            exceed $5 million.  


          25)Provides that, beginning in 2018, and at least every other  
            year thereafter, the Legislative Analyst must review and  
            evaluate the fee, and provide a report to specified Assembly  
            and Senate Committees making recommendations regarding the fee  
            rate and revenue allocations.  


          26)Provides that the Fee Act shall not be interpreted to  
            preclude a city, county, or city and county from enacting or  
            continuing to enforce a local ordinance that imposes any fees,  
            taxes, or other charges on the consumption or other use of  
            medical marijuana, as may be otherwise authorized by law. 


          27)Provides that the Fee Act shall only become operative if  
            Secretary of State Initiative Number 1762, also known as the  
            Control, Regulate and Tax Adult Use of Marijuana Act, is not  
            approved by the voters at the November 8, 2016, statewide  
            general election.  


          28)Contains legislative findings that edible cannabis products,  
            as defined in B&PC Section 19300.5 and as applicable to this  
            bill's provisions, are not considered a food product for  
            purposes of Section 34 of Article XIII of the California  








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            Constitution.  


          29)Modifies the state's existing Medical Marijuana Program to:


             a)   Require a person seeking an identification card to  
               provide documentation of the person's income to the county  
               health department or the county's designee;


             b)   Require, within 30 days of receipt of an application for  
               an identification card, a county health department or the  
               county's designee to determine whether the applicant has  
               low income.  Specifies that an applicant has low income if  
               the applicant's income is less than 200% of the federal  
               poverty guidelines; and, 


             c)   Require an identification card issued by the county  
               health department to contain an indication that the  
               cardholder has low income, if applicable.      


          EXISTING FEDERAL LAW prohibits the manufacture, possession,  
          sale, or distribution of marijuana.  [21 United States Code  
          Section 841 et seq.]      


          EXISTING STATE LAW:   


          1)Imposes a sales tax on retailers for the privilege of selling  
            tangible personal property (TPP), absent a specific exemption.  
             The tax is based upon the retailer's gross receipts from TPP  
            sales in this state.

          2)Imposes a complimentary use tax on the storage, use, or other  
            consumption of TPP purchased out-of-state and brought into  








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            California.  The use tax is imposed on the purchaser, and  
            unless the purchaser pays the use tax to an out-of-state  
            retailer registered to collect California's use tax, the  
            purchaser remains liable for the tax.  The use tax is set at  
            the same rate as the state's sales tax and must generally be  
            remitted to the BOE.

          3)Applies the sales and use tax (SUT) to retail sales of  
            marijuana, including medical marijuana, to the same extent as  
            any other retail sale of TPP. 

          4)Provides a SUT exemption for medicines, when the medicines  
            are:

             a)   Prescribed by an authorized person and dispensed on a  
               prescription filled by a pharmacist;

             b)   Furnished by a licensed physician to his or her own  
               patient; or,

             c)   Furnished by a health facility for treatment pursuant to  
               a licensed physician's order, or sold to a licensed  
               physician.  [Revenue and Taxation Code Section 6369]   

          5)Defines "cannabis" as all parts of the plant Cannabis sativa  
            Linnaeus, Cannabis indica, or Cannabis ruderalis, whether  
            growing or not;  the seeds thereof;  the resin, whether crude  
            or purified, extracted from any part of the plant;  and every  
            compound, manufacture, salt, derivative, mixture, or  
            preparation of the plant, its seeds, or resin.  [B&PC Section  
            19300.5]  


          FISCAL EFFECT:  The BOE's fiscal estimate for this bill is  
          currently pending.  


          COMMENTS:  









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          1)The author has provided the following statement in support of  
            this bill:


               For decades, state and local taxpayers have had to foot the  
               bill for the enormous costs associated with illegal and  
               rouge marijuana sales. 





               SB 987 implements a [10] percent User Fee on  all  medical  
               marijuana products - including edibles, tinctures, salves  
               and vapes.  [. . .] 





               And it comes only from people who are purchasing Marijuana  
               Products, no one else. 





               Some have expressed concern that this User Fee, combined  
               with sales tax and perhaps local fees, will create a rate  
               that keeps people in the black market.  We have spent a lot  
               of time researching this, and assure you that no one has  
               more incentive to get people out of the black market [than]  
               ourselves and people in my district. 













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               We have done our very best to learn from the mistakes of  
               other states on this issue . . . Sometimes it's good to be  
               number 3.





               Washington State started out with a total 75% levy.  





               They quickly learned that this rate was way too high.  
               Washington responded with a "Point of Sale" rate, (like  
               ours, but much higher) of 37 percent, and it has worked  
               very well ever since.  





               Colorado also started out with a complicated, multi-tier  
               formula that charged too much, and [has] since settled on a  
               more simple point of sale fee that is still nearly double  
               what we are proposing. 





               We have worked with individuals and groups who are  
               concerned about the "patient protection" aspects of our  
               bill, and have made the following adjustments:












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               1.     We made sure that patients who grow their own  
                 medicine for themselves and their families are not  
                 subject to this User Fee.  





               2.     We have specifically included language, at the  
                 request of the Drug Policy Alliance, that ensures that  
                 transactions between care givers and patients are also  
                 exempt from this User Fee. 





                 This includes many of the most financially and medically  
                 fragile people in this state, as well as some of its most  
                 passionate advocates. 





               3.     This User Fee will  not  apply to anyone who is not  
                 currently required to be licensed with the BOE and to pay  
                 Sales Tax under current law. In other words, if you are  
                 not required to have a Seller's Permit by the state, you  
                 don't have to charge or collect this User Fee.  Anyone  
                 who is required to pay sales tax now will have to pay it.  
                  Very fair and simple. This bill doesn't add a burden to  
                 anyone who is not already required to be in the system.













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               4.     AND - we have prepared an amendment for this  
                 committee that will exempt a  qualified patient  if they  
                 can prove that their income falls under 200% of the  
                 federal poverty guidelines to make sure that legitimate  
                 [patients] don't have a financial barrier. 





               For decades taxpayers have had to bear the cost of public  
               safety to deal with the black market and criminal element  
               of the industry.  





               Every police and fire chief and county sheriff in your  
               districts can detail the costs that they have had to cover.  
                





               In addition, our state general fund has had to pay the  
               immense costs to the Judicial, Human Services and other  
               functions over these same decades.  Every year we struggle  
               to make decisions on how to fund these crucial aspects of  
               our society, and every year we come up short. 





               And remember, only people who purchase Marijuana Products  
               will be paying this fee.









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          2)This bill is supported by the Rural County Representatives of  
            California, which notes the following:


               The issue of marijuana regulation and cultivation is of  
               great importance to California's rural counties.  In the  
               last several years, there has been a dramatic proliferation  
               of marijuana cultivation throughout many of the rural  
               counties and the scale and volume of individual grow sites  
               has enlarged. 


               In the final hours of the 2015 Regular Legislative Session,  
               the Legislature enacted a medical marijuana  
               licensing/regulatory framework.  RCRC has advocated that  
               any licensing scheme address a variety of  
               environmental-related issues - land conversion, grading,  
               pesticide use, agricultural discharges, water quality and  
               diversion, etc. for licensed marijuana cultivators.  In the  
               license/regulatory framework package adopted last year,  
               monies for environmental issues will be derived primarily  
               from fines and penalties and some regulatory license fees.   
               The revenue projections that are derived from these sources  
               are likely to be inadequate to fully address the scale of  
               environmental degradation associated with marijuana grows -  
               legal or otherwise.  As such, additional monies will be  
               needed.


          3)This bill is opposed by Americans for Safe Access, which notes  
            the following:


               This tax is an unfair burden on legal medical cannabis  
               patients, may serve to undermine the implementation of  
               state law and is being imposed prematurely.  ASA urges  
               lawmakers to delay a decision on any medical cannabis tax  
               measure until we have more clarity on the legal landscape  








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               and more information about the costs and revenue generated  
               by existing law related to commercial medical cannabis  
               activity.  


               [. . .]


               SB 987 places an unnecessary burden on law-abiding  
               patients.  Medical cannabis is already very expensive, and  
               it is not covered by insurance.  Unlike prescription  
               medicines, medical cannabis is already subject to sales tax  
               of between 7.5% and 10%.  Furthermore, a number of cities  
               have imposed an additional tax of between 5% and 15% on  
               medical cannabis.  The bill provides for an exemption for  
               patients who pay a fee to obtain an ID card pursuant to the  
               Medical Marijuana Program Act and have an income that is  
               less than 200% of the federal poverty guidelines.  This  
               limited gesture will do little to address the economic  
               impact of SB 987 on the large majority of legal medical  
               cannabis patients who do not meet those criteria. 


          4)The BOE notes the following in its staff analysis of this  
            bill:


              a)   Marijuana User Fee not subject to sales tax :  "Under  
               existing [SUT] Law, [R&TC] Section 6012(a)(2) provides that  
               taxable gross receipts include all amounts received with  
               respect to the sale, with no deduction for the cost of the  
               materials used, labor or service cost, or any other expense  
               of the retailer passed on to the customer.  


               "This bill imposes the Marijuana User Fee on the purchasers  
               of medical marijuana, not on the retailers who sell the  
               item.  When retailers separately state the Marijuana User  
               Fee on the receipts they issue to purchasers, the retailers  








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               are not passing on expenses to the purchaser but are  
               instead collecting the fee from the purchaser as required  
               by statute. Therefore, the Marijuana User Fee is not  
               included in gross receipts."


              b)   This bill could complicate marijuana retailers' records  
               and reporting  :  "Medical marijuana retailers already must  
               collect and remit [SUT] on the retail sale of medical  
               marijuana in California.  Medical marijuana retailers most  
               likely sell other [TPP] subject to [SUT].  Adding an  
               additional assessment that would be collected from  
               purchasers would require retailers to keep track of  
               marijuana product sales separately from other sales of  
               [TPP]."


              c)   Bill could set precedent :  "Imposing varying taxes or  
               fees on specific commodities complicates tax and fee  
               administration and could set a precedent for establishing  
               multiple taxes or fees on other classes of [TPP].  This  
               results in increasing BOE administrative costs and an  
               increased record-keeping burden on taxpayers."


              d)   Point of fee imposition  :  "Typically, BOE staff  
               recommends that excise taxes and fees be imposed as high in  
               the distribution chain as possible since there are fewer  
               taxpayers and therefore less potential for evasion.  This  
               concern is magnified with respect to the cannabis industry,  
               as historically it has been unregulated with low rates of  
               tax compliance.  The industry is currently substantially  
               noncompliant.  Increasing taxes or fees due at the retail  
               level will likely increase diversion; however, that may be  
               reduced due to the track-and-trace requirements set forth  
               in the MMRSA.  Auditing will be more difficult at the  
               retail level than at the distribution level. 










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               "The highest point in the cannabis distribution chain would  
               be the grower.  However, BOE staff understands that due to  
               the high number of growers, imposing a fee at that level  
               would be inefficient.  Therefore, the distributor level,  
               similar to the taxation of cigarettes, may be a more  
               appropriate point of fee imposition, as auditing is less  
               difficult with fewer feepayers."


              e)   Cash Payments  :  "Collecting cash payments from cannabis  
               retailers currently is challenging both from a compliance  
               and public safety standpoint.  Under existing law,  
               retailers must report sales taxes ranging from 7.50 percent  
               to 10.00 percent.  Collecting cash payments from these  
               retailers on sales taxes alone has created administrative  
               and safety issues for BOE staff and retailers.  By imposing  
               [a] marijuana user fee at the retail level, retailers will  
               be responsible for remitting up to three times their  
               current payments. This significant increase in the level of  
               cash payments from cannabis retailers will lead to enhanced  
               public safety concerns."


              f)   Primary caregiver exemption  :  "This bill defines a  
               'primary caregiver' as a person exempt from licensure under  
               the MMRSA.  The MMRSA exempts a primary caregiver that has  
               no more than five specified qualified patients for whom he  
               or she is the primary caregiver within the meaning of the  
               Medical Marijuana Program.  The bill prohibits a primary  
               caregiver from receiving payment for their activities,  
               except for compensation for actual expenses, including  
               reasonable compensation incurred for qualified patient  
               services or for payment for out-of-pocket expenses in  
               providing services. 


               "This bill makes clear that a 'sale' or 'purchase' does not  
               include the transfer of title or possession, exchange, or  
               barter of medical marijuana for a consideration between a  








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               qualified patient and his or her primary caregiver, as that  
               is already limited to compensation for actual expenses."


          5)Committee staff comments:


              a)   An overview of federal law  :  Federal law prohibits the  
               manufacture, possession, sale, or distribution of  
               marijuana.  Congress enacted the Controlled Substances Act  
               (CSA) as part of the Comprehensive Drug Abuse Prevention  
               and Control Act of 1970.  The CSA sets forth five  
               "schedules" of specified drugs and other substances  
               designated "controlled substances."  For a drug or other  
               substance to be designated as a "Schedule I" controlled  
               substance, it must be found that the substance "has a high  
               potential for abuse", and has "no currently accepted  
               medical use in treatment in the United States".  Federal  
               law lists marijuana as a Schedule I controlled substance,  
               deemed to have no accepted medical use.


                i)     The Cole Memo  :  On August 29, 2013, the U.S.  
                 Department of Justice issued guidance to federal  
                 prosecutors regarding cannabis enforcement under the CSA  
                 (referred to as the "Cole Memo").  The Cole Memo  
                 reiterated the Department's commitment to enforcing the  
                 CSA consistent with Congress' determination that cannabis  
                 is a dangerous drug that provides a significant source of  
                 revenue to large-scale criminal enterprises, gangs, and  
                 cartels.  In furtherance of this objective, the Cole Memo  
                 instructed Department attorneys and law enforcement  
                 officials to focus on the following eight enforcement  
                 priorities:


                  (1)       Preventing the distribution of marijuana to  
                    minors;









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                  (2)       Preventing revenue from marijuana sales from  
                    going to criminal enterprises, gangs, and cartels;


                  (3)       Preventing the diversion of marijuana from  
                    states where it is legal under state law in some form  
                    to other states;


                  (4)       Preventing state-authorized marijuana activity  
                    from being used as a cover or pretext for the  
                    trafficking of other illegal drugs or other illegal  
                    activity;


                  (5)       Preventing violence and the use of firearms in  
                    the cultivation and distribution of marijuana;


                  (6)       Preventing drugged driving and the  
                    exacerbation of other adverse public health  
                    consequences associated with marijuana use;


                  (7)       Preventing the growing of marijuana on public  
                    lands and the attendant public safety and  
                    environmental dangers posed by marijuana production on  
                    public lands; and,


                  (8)       Preventing marijuana possession or use on  
                    federal property.  


                 Under the Cole Memo, these priorities will guide the  
                 Department's enforcement of the CSA against  
                 marijuana-related conduct.  While the Cole Memo's  
                 guidance was issued in response to recent marijuana  








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                 legalization initiatives in other states, it applies to  
                 all Departmental marijuana enforcement nationwide.  


                ii)    Public Law 113-235  :  Operative December 16, 2014,  
                 Public Law 113-235 prohibits the U.S. Department of  
                 Justice from using funds to prevent specified states,  
                 including California, from implementing laws that  
                 authorize the use, distribution, possession, or  
                 cultivation of medical marijuana.  


              b)   An overview of state law :  The California Uniform  
               Controlled Substances Act prohibits, except as authorized,  
               the possession, cultivation, transportation, and sale of  
               marijuana and marijuana derivatives.  Under Proposition  
               215, however, existing law does authorize a patient (or the  
               patient's primary caregiver) to cultivate or possess  
               marijuana for the patient's medical use when recommended by  
               a physician, as specified.


                i)     SB 420  :  SB 420 (Vasconcellos), Chapter 875,  
                 Statutes of 2003, established statewide guidelines for  
                 Proposition 215 enforcement.  Specifically, SB 420 called  
                 for the establishment of a voluntary program for the  
                 issuance of identification cards to qualified patients.   
                 SB 420 further specified that no patient or primary  
                 caregiver in possession of a valid identification card  
                 shall be subject to arrest for possession,  
                 transportation, delivery, or cultivation of medical  
                 marijuana, as specified.    


                ii)    Medical Marijuana Regulation and Safety Act  :  In  
                 2015, the Legislature enacted the MMRSA through a package  
                 of bills establishing a comprehensive licensing and  
                 regulatory framework for medical marijuana.   
                 Specifically, the MMRSA consists of three bills:  (1) SB  








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                 643 (McGuire), Chapter 719, Statutes of 2015; (2) AB 243  
                 (Wood), Chapter 688, Statutes of 2015; and, (3) AB 266  
                 (Bonta), Chapter 689, Statutes of 2015.  


                 Among its provisions, the MMRSA established the Bureau of  
                 Medical Marijuana Regulation within the Department of  
                 Consumer Affairs to oversee and enforce the state's  
                 medical marijuana regulations, in collaboration with the  
                 California Department of Public Health and the California  
                 Department of Food and Agriculture (CDFA).  Additionally,  
                 the law established categories of licenses for various  
                 medical marijuana activities, such as cultivation,  
                 manufacturing, distribution, transportation, and sale.   
                 AB 266 also added R&TC Section 31020 to require the BOE,  
                 in consultation with the CDFA, to adopt a system to  
                 report commercial cannabis and cannabis product movement  
                 throughout the distribution chain (i.e., "track and  
                 trace").  The adopted system must employ secure packaging  
                 and provide information to the BOE.  Section 31020 also  
                 requires the system to capture, at a minimum, all of the  
                 following:


                  (1)       The amount of tax due by the designated  
                    entity;


                  (2)       The name, address, and license number of the  
                    designated entity that remitted the tax;  


                  (3)       The name, address, and license number of the  
                    succeeding entity receiving the product;


                  (4)       The transaction date; and, 










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                  (5)       Any other information the BOE deems necessary  
                    for the taxation and regulation of marijuana and  
                    marijuana products.


              c)   What would this bill do  ?  This bill would impose a fee  
               on the consumption or other use in California of medical  
               marijuana purchased from any retailer at the rate of 10% of  
               the sales price.  The fee would apply on and after January  
               1, 2018.  The BOE would be charged with administering the  
               new fee and promulgating regulations to aid in  
               administration.  Revenues from the new fee would be  
               deposited into a newly established Fund, and thereafter  
               allocated pursuant to a statutory formula.  Specifically,  
               30% of revenues would be allocated to the state General  
               Fund, 30% would be allocated to the Bureau of Medical  
               Marijuana Regulation for the administration of a grant  
               program, 20% would be allocated to the Department of Parks  
               and Recreation, and the remaining 20% would be allocated to  
               counties for drug and alcohol treatment programs. 


              d)   Determining the appropriate point of taxation  :  This  
               bill would impose a new fee on the purchasers of medical  
               marijuana.  In other words, while medical marijuana  
               retailers would be tasked with collecting and remitting the  
               fee, the legal incidence of the fee would fall on the  
               consumer.  


               Imposing the legal incidence of the fee on consumers raises  
               a number of policy issues this Committee may wish to  
               consider.  As the BOE notes, it is generally advisable to  
               impose any new tax or fee of this nature as high up in the  
               distribution chain as is feasible.  This eases the BOE's  
               administrative responsibilities by limiting the number of  
               tax or feepayers with whom the BOE must interact.  Limiting  
               the pool of tax or feepayers also eases the BOE's audit and  
               enforcement functions.  








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               In the case of medical marijuana, the distribution chain  
               begins with cultivators.  Given the large number of  
               marijuana growers, the BOE has suggested that it may be  
               more appropriate to impose a new marijuana tax or fee at  
               the distributor level.  Critics of such an approach,  
               however, contend that while the MMRSA is working to impose  
               order on a previously unregulated industry, the industry,  
               at present, does not follow traditional lines of production  
               and distribution.  Thus, it may take some time for the  
               industry to become "regularized" to a degree where  
               imposition of a tax at the distribution level is  
               practicable.  Thus, they argue for a point-of-sale exaction  
               similar to the state's sales tax.  It should be noted,  
               however, that the state's sales tax is technically imposed  
               on retailers, who are then authorized to collect  
               reimbursement from their customers.  In this manner, the  
               BOE limits the number of taxpayers with whom it interacts.   
               As such, it is not entirely clear to Committee staff why  
               this bill's exaction is not structured in a similar way,  
               with the fee legally imposed on retailers of medical  
               cannabis, and explicit authorization granted to recoup the  
               fee from cannabis consumers.  


              e)   Taxing medicine  :  As noted above, the existing SUT Law  
               provides an exemption for medicines when those medicines  
               are prescribed by an authorized person and dispensed by a  
               pharmacist.  This exemption recognizes that the SUT is a  
               relatively regressive tax, imposing a disproportionate  
               financial burden on those with modest means.  Moreover,  
               this exemption recognizes that individuals should have  
               access to necessities of life, such as food and  
               prescription medications, at affordable prices.  This bill,  
               however, takes a slightly different tact by imposing a new  
               exaction specifically on consumers of medical marijuana. 










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               Proponents of such an approach might argue that  
               California's medical marijuana regime has resulted in de  
               facto legalization of recreational marijuana use, and that  
               this growing industry and its consumers should be required  
               to pay for some of the industry's negative externalities.   
               Critics of such an approach, however, might point out that  
               Proposition 215 was designed to provide individuals with  
               severe illnesses a degree of comfort and relief.  Thus,  
               increasing the cost of marijuana for such patients might  
               serve as a barrier to such relief.  The author has  
               attempted to address this concern, albeit indirectly, by  
               providing an exemption for consumers of low income.  All of  
               this, however, raises the question of whether it might be  
               appropriate to defer the establishment of a tax regime  
               until after the voters have had a chance to decide whether  
               to legalize recreational marijuana.      





              f)   How does this bill fit in with the changing legal  
               landscape  ?  There is at least one marijuana legalization  
               initiative currently pending signature verification.   
               Specifically, Initiative Number 1762 would legalize both  
               marijuana and hemp under state law.  The initiative would  
               also impose a state excise tax on retail sales of marijuana  
               equal to 15% of the sales price, along with state  
               cultivation taxes on marijuana of $9.25 per ounce of  
               flowers and $2.75 per ounce of leaves.  In addition, the  
               proposed initiative would exempt medical marijuana from  
               some taxation.


               To prevent inconsistencies, this bill provides that the Fee  
               Act shall only become operative if Initiative Number 1762  
               is not approved by the voters at the November 8, 2016,  
               statewide general election.  








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              g)   Related legislation  :  AB 2243 (Wood) would impose a tax  
               in specified amounts upon the distribution of medical  
               cannabis flowers, medical cannabis leaves, and immature  
               medical cannabis plants.  Revenues from the tax would be  
               continuously appropriated to, among other things, fund  
               competitive grants for local law enforcement-related  
               activities pertaining to illegal cannabis cultivation.   
               Revenues would also be used to fund a competitive grant  
               program for environmental cleanup restoration and  
               protection of public and private lands that have been  
               damaged by illegal cannabis cultivation.  AB 2243 passed  
               the Assembly Floor by a vote of 60 to 12 and is pending  
               hearing by the Senate Committee on Governance and Finance.   



              h)   Suggested technical amendments  :  Committee staff  
               suggests adoption of the following technical amendments:


               i)     On page 6, in line 29, after "county," insert "city  
                 and county,"; 


               ii)    On page 8, in line 16, strike "tax" and insert  
                 "fee"; and, 


               iii)   On page 8, in line 29, strike "tax" and insert  
                 "fee". 


          REGISTERED SUPPORT / OPPOSITION:












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          Support


          California State Association of Counties


          Rural County Representatives of California




          Opposition


          Americans for Safe Access


          California NORML


          Fresno Cannabis Association


          UCBA Trade Association 




          Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)  
          319-2098

















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