BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 626 HEARING: 5/4/11
AUTHOR: Calderon FISCAL: Yes
VERSION: 4/25/11 TAX LEVY: No
CONSULTANT: Miller
CANNABIS CERTIFICATION & REGULATION STUDY
Proposes that the Board of Equalization (BOE) study ways
for cannabis sellers to comply with the state's sales and
use tax laws.
Background and Existing Law
Existing 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 establishes five "schedules" of certain
drugs and other substances designated "controlled
substances." For a drug or other substance to be
designated a schedule I controlled substance, it must be
found that the substance "has a high potential for abuse,"
have "no currently accepted medical use in treatment in the
United States," and "lack accepted safety for use under
medical supervision." Federal law lists marijuana as a
schedule I controlled substance, deemed to have no accepted
medical use.
Existing law, the California Uniform Controlled Substances
Act prohibits, except as authorized by law, the possession,
cultivation, transportation, and sale of marijuana and
derivatives of marijuana. Existing law authorizes, under
the Compassionate Use Act of 1996 (Proposition 215, 1996),
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.
There is currently no statewide regulatory or licensing
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program for the sale and distribution of marijuana.
Under the existing Sales and Use Tax Law, except where
specifically exempted by statute, a tax is imposed on all
retailers for the privilege of selling tangible personal
property at retail in this state. Tangible personal
property is defined in law to mean any personal property
which may be seen weighed, measured, felt, or touched, or
which is in any other manner perceptible to the senses.
Therefore, under the law, retail sales of marijuana,
including medical marijuana, and any other illegal drugs,
are subject to tax to the same extent as any other lawful
retail sale of tangible personal property.
The Sales and Use Tax Law exempts from sales and use tax
retail sales of medicines, as defined, when furnished by a
health facility for patient treatment pursuant to the order
of a certificated physician, or when prescribed by a
certificated physician and dispensed on a prescription
filled by a registered pharmacist in accordance with law.
Medical marijuana dispensaries do not meet the definition
of health care facilities provided in that section. As
such, sales of medical marijuana by dispensaries and
primary caregivers do not qualify for the exemption,
whether or not those purchasers possess a medical marijuana
identification card. And since caregivers and medical
marijuana dispensaries generally are not registered
pharmacists, their sales of medical marijuana also do not
meet the conditions for the exemption.
Under the law, every person engaged in the business of
selling tangible personal property which are subject to tax
is required to apply to the BOE for a seller's permit on a
form prescribed by the BOE. Wholesalers, suppliers, as
well as retailers, must obtain a seller's permit. Any
person that engages in business as a seller in this state
without a seller's permit and each officer of any
corporation which so engages in business, is guilty of a
misdemeanor, punishable by a fine of not less than $1,000
and not more than $5,000, or imprisonment not exceeding one
year in the county jail, or both the fine and imprisonment
in the discretion of the court.
Also, under existing law, persons who fail to file a sales
and use tax return and pay their tax obligations may be
held liable for past tax obligations, together with
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interest and penalties, for up to eight prior years (except
in the case of fraud which has no limitation period in
which to assess past tax obligations).
Proposed Law
Senate Bill 626 requires the Board of Equalization to
study the most efficient means to create a licensing
program for cannabis products in this state in order to
collect all the sales and use tax due and owed pursuant
to the laws established by Proposition 215, 1996. Among
other considerations, the BOE is required to:
Discuss the advantages and disadvantages of a
stamping program, similar to the tobacco licensing
program.
Strategies to identify sellers and encourage them
to pay the taxes owed.
Strategies to provide incentives to sellers to
pay the tax.
SB 626 also provides various findings and declarations that
focus on the issues surrounding Proposition 215: the
patients, dispensaries, law enforcement and local
government and state the bills intent to mitigate these
issues through a state licensing and enforcement practice.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . The author introduced this bill
to create a mechanism for studying the best ways to
control, regulate and test medical marijuana cultivation
and distribution.
2. What's So Great About Short-Term Memory Anyway?
Existing state law, as authorized under the Compassionate
Use Act (Proposition 215 of 1996), allows persons or
primary caregivers to cultivate or possess marijuana for
medical use when recommended by a physician. Despite
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California's law, the sale of medical cannabis is strictly
illegal under federal law. SB 420 (Vasconcellos, 2003)
established statewide guidelines for Proposition 215 sales
and enforcement. For example, non-profit distribution is
allowed in certain cases for patient cultivation co-ops and
small-scale caregiver gardeners.
Until 2005, the BOE's longstanding policy was to not issue
a seller's permit to a person whose sole selling activity
is "the unlawful sale of tangible personal property, so as
not to confer permissive authority or condone an illegal
activity." Under existing law, the sales tax applies to
all retail sales of even illegal substances in this state
and the BOE may audit and make assessments of any
unreported tax on such sales.
After hearing a case that came before the Members of the
BOE involving medical marijuana sales, and recognizing the
difficulty in reconciling the BOE's authority to issue
assessments for taxes due from a seller's marijuana sales
while not issuing seller's permits to such sellers, as well
as taking into account the legality of some sales of
marijuana as authorized in SB 420, the BOE changed its
policy and began issuing seller's permits to sellers of
medical marijuana. The BOE's current practice is to issue
seller's permits to those medical marijuana sellers that
apply and will also issue seller's permits to any other
sellers even those making unlawful sales. In order to
reduce concerns about confidentiality and
self-incrimination, the BOE allows an applicant of a
seller's permit to omit information normally requested on
the application, such as the products the applicant intends
to sell, the names and addresses of suppliers, and the
products the applicant intends to purchase. As such, the
exact number of dispensaries registered with the BOE is
unknown.
3. Just Doob It. Unlike marijuana products, cigarettes
are strictly regulated through a "stamping" program in this
state. AB 71 (J. Horton, 2003) enacted the Cigarette and
Tobacco Products Licensing Act of 2003 that established a
statewide licensure program administered by the BOE to
mitigate untaxed distributions and illegal sales of
cigarettes and tobacco products. The Licensing Act, which
generates an estimated $153 million annually in additional
sales and use, and excise tax, requires the licensure of
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all persons engaging in the sale of cigarettes and tobacco
products. The Licensing Act provides recordkeeping
requirements, prohibitions on sales and purchases, seizure
and inspection authority, and penalties and fines for
violations.
3. Up in smoke. AB 390 (Amiano, 2009) imposed a fee of
$50 per ounce of marijuana sold in this state. The BOE
would have administered and collected the fee, with the
revenues dedicated to drug education, awareness, and
rehabilitation programs. The bill also required the
Department of Alcoholic Beverage Control (ABC) to license
both commercial cultivators of marijuana and wholesalers of
marijuana, who would be allowed to package and prepare
marijuana for sale and would be authorized to sell
marijuana to licensed sales outlets. The bill died in the
Assembly Committee on Health without being heard. AB 2254
(Amiano, 2010) was similar to AB 390. That bill was never
heard in the Assembly Committee on Public Safety.
SB 6X 17 (Calderon, 2010) enacted a cannabis licensing
program similar to the Cigarette and Tobacco Products
Licensing Act of 2003. That bill was never referred to a
policy committee for hearing. SB 1131 (Calderon, 2010),
enacted the Sales Tax Enforcement Act of 2010, with the
intent to better assist the BOE in collecting the sales tax
generated by marijuana sales. That bill died in Assembly
Rules without referral to a policy committee.
4. Learn to focus better. Despite multiple attempts to
regulate the sales and use tax of medical marijuana, there
is still no simple method to invoice the product much less
know exactly who the sellers are. Furthermore, the state
still does not fully understand all of the implications of
Proposition 215 vis-�-vis state law requirements especially
how to ensure that sellers do not incriminate themselves at
the federal level by complying with state law. Due to the
complicated nature of the issue, it makes sense to study
the best ways to enforce the law instead of creating a new
law that would not only be costly to administer but also
impossible to enforce.
5. Go to the experts. In order to make sure that the
study is vetted and comprehensive, the Committee may wish
to consider amending the bill to include an advisory
committee of experts on the topic of medical marijuana,
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including law enforcement experts, to assist in the
compilation of the study. This advisory committee should
not be paid for out of state funds but rather be a
volunteer service. The following representatives should
make up the advisory committee: A representative from the
California Police Chiefs' Association
1. A representative from the California Narcotics
Officers' Association
2. A representative from the California District
Attorneys' Association
3. A representative from the California Medical
Association
4. A representative appointed by the Attorney General
5. A representative from the California Cannabis
Association
6. A representative from Americans for Safe Access
7. Two representatives appointed by the Chair of the
BOE
6. Technical amendments. The author will offer technical
amendments in committee to correct spelling errors and
provide for a study of wholesale and retail dispensaries.
Support and Opposition (4/28/11)
Support : CA Cannabis Association.
Opposition : Drug Policy Alliance