The Medical Marijuana Cannabis Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Cannabis Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would would, for the privilege of doing business as a distributor in this state, impose a tax in specified amounts upon the distribution of medical cannabis flower, immature medical cannabis plant, and medical cannabis product. on every distributor upon all medical cannabis and medical cannabis products distributed to a dispensary in this state, as specified. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require a distributor to register for a permit with the board and would allow the board to suspend or revoke a permit. The bill would authorize the board to prescribe by regulation a method and manner for payment of the tax that utilizes tax stamps or state-issued product bags. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to, among other things, fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; to fund environmental cleanup restoration and protection of public and private lands that have been damaged by illegal cannabis cultivation; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund Regional Marijuana Enforcement Officers.

This bill, except as provided, would become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, Proposition 64, also known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect. This bill would repeal all of its provisions as of January 1, 2025.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts upon the distribution of medical cannabis flowers, flower, immature medical cannabis plants, plant, and medical cannabis product. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require a distributor to register for a permit with the board and would allow the board to suspend or revoke a permit. The bill would authorize the board to prescribe by regulation a method and manner for payment of the tax that utilizes tax stamps or state-issued product bags. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to, among other things, fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; to fund environmental cleanup restoration and protection of public and private lands that have been damaged by illegal cannabis cultivation; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund Regional Marijuana Enforcement Officers.

This bill, except as provided, would become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, also known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect. This bill would repeal all of its provisions as of January 1, 2025.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts upon the distribution of medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants. plants, and medical cannabis product. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require a distributor to register for a permit with the board and would allow the board to suspend or revoke a permit. The bill would authorize the board to prescribe by regulation a method and manner for payment of the tax that utilizes tax stamps or state-issued product bags. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to, among other things, fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; 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; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund Regional Marijuana Enforcement Officers. This bill would require the bureau or other state agencies and departments to submit reports to the Legislature on the results of those studies funded by this tax by January 1, 2020, and every 2 years thereafter.

This bill, except as provided, would become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, also known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect. This bill would repeal all of its provisions as of January 1, 2025.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts upon the distribution of medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require a distributor to register for a permit with the board and would allow the board to suspend or revoke a permit. The bill would authorize the board to prescribe by regulation a method and manner for payment of the tax that utilizes tax stamps or state-issued product bags. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to to, among other things, fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; 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; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund ongoing studies and reports of areas that may create challenges to compliance of the Medical Marijuana Regulation and Safety Act. Regional Marijuana Enforcement Officers. This bill would require the bureau or other state agencies and departments to submit reports to the Legislature on the results of those studies funded by this tax by January 1, 2020, and every 2 years thereafter.

This bill, except as provided, would become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, also known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect. This bill would repeal all of its provisions as of January 1, 2025.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts upon the distribution of medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require a distributor to register for a permit with the board and would allow the board to suspend or revoke a permit. The bill would authorize the board to prescribe by regulation a method and manner for payment of the tax that utilizes tax stamps or state-issued product bags. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; 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; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund ongoing studies and reports of areas that may create challenges to compliance of the Medical Marijuana Regulation and Safety Act. This bill would require the bureau or other state agencies and departments to submit reports to the Legislature on the results of those studies funded by this tax by January 1, 2020, and every 2 years thereafter.

This bill, except as provided, would become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, also known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts on upon the distribution in this state by a licensed cultivator, as defined, of medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants to a licensed distributor, as specified, and would require the licensed distributor to collect the tax from the cultivator and remit it to the State Board of Equalization. plants. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require a distributor to register for a permit with the board and would allow the board to suspend or revoke a permit. The bill would authorize the board to prescribe by regulation a method and manner for payment of the tax that utilizes tax stamps or state-issued product bags. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; 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; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund ongoing studies and reports of areas that may create challenges to compliance of the Medical Marijuana Regulation and Safety Act. This bill would require the bureau or other state agencies and departments to submit reports to the Legislature on the results of those studies funded by this tax by January 1, 2020, and every 2 years thereafter.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts on the distribution in this state by a licensed cultivator, as defined, of medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants to a licensed distributor, as specified, and would require the licensed distributor to collect the tax from the cultivator and remit it to the State Board of Equalization. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; 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; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund ongoing studies and reports of areas that may create challenges to compliance of the Medical Marijuana Regulation Safety Act. This bill would require the bureau or other state agencies and departments to submit reports to the Legislature on the results of those studies funded by this tax by January 1, 2020, and every 2 years thereafter.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature.

The Medical Marijuana Regulation and Safety Act, administered by the director of the Bureau of Medical Marijuana Regulation, provides for the licensure of persons engaged in specified activities relating to medical cannabis, including cultivation and distribution.

The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax in specified amounts on the distribution in this state by a licensed cultivator, as defined, of medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants to a licensed distributor, as specified, and would require the licensed distributor to collect the tax from the cultivator and remit it to the State Board of Equalization. The bill would require the State Board of Equalization to administer and collect the tax pursuant to the procedures set forth in the Fee Collection Procedures Law. The bill would require all moneys, less refunds and costs of administration, to be deposited into the Cannabis Production and Environment Mitigation Fund, which this bill would establish in the State Treasury.

This bill would continuously appropriate the moneys in that fund in specified percentages to fund competitive grants for local law enforcement-related activities pertaining to illegal cannabis cultivation; 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; to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and to fund ongoing studies and reports of areas that may create challenges to compliance of the Medical Marijuana Regulation Safety Act. This bill would require the bureau or other state agencies and departments to submit reports to the Legislature on the results of those studies funded by this tax by January 1, 2020, and every 2 years thereafter.

By expanding the application of the Fee Collection Procedures Law, which imposes criminal penalties for various acts, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature.

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 2243 (Wood) - Medical cannabis: taxation: cannabis production and environment mitigation

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2243 would require every distributor to pay tax upon the distribution of medical cannabis flowers, immature medical cannabis plants, and medical cannabis products.

Fiscal Impact:

• The Board of Equalization (BOE) would incur annual costs of $25,000 in 2016-17, $747.000 in 2017-18, $1.3 million for FY 2018-19, and $1.6 million in the out-years to implement the provisions of the bill (special fund). Administrative costs would include taxpayer identification, notification, and registration; regulation development; manual and publication revisions; tax return design; computer programming; return, payment, and refund claim processing; audit and collection tasks; staff training; and public inquiry responses.
• BOE estimates that the bill would result in annual revenue increases ranging from $71 million to $286 million (special fund). The range is provided because the nature of this market makes the assumptions used to develop the estimates subject to considerable uncertainty.
• The Department of Justice (DOJ) would incur annual costs in excess of $10 million by 2018-19 to fund six marijuana investigative teams (special fund). Additionally, DOJ would incur unknown, reimbursable expenses to conduct research and advise client agencies regarding the bill’s interactions with requirements under the California Environmental Quality Act.

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 (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.
• 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 of medical marijuana is subject to both the state and local sales and use tax.

Proposed Law:

This bill would do, among other things, the following:

• Impose upon every distributor a tax on all distributions of medical cannabis flowers, medical cannabis products, and immature medical cannabis plants to a dispensary at the following rates:
  • For medical cannabis flowers, (1) four dollars and seventy-five cents ($4.75) per ounce of medical cannabis flowers cultivated by a licensee with, or subject to, a Type 1, Type 1A, or Type 1B classification, (2) nine dollars and twenty-five cents ($9.25) per ounce of medical cannabis flowers cultivated by a licensee with, or subject to, a Type 2, Type 2A, or Type 2B classification, and (3) thirteen dollars and twenty-five cents ($13.25) amount per ounce of medical cannabis flowers cultivated by a licensee with, or subject to, a Type 3, Type 3A, or Type 3B classification.
  • For immature medical cannabis plants, one dollar and twenty five cents ($1.25) per immature medical cannabis plant.
  • For medical cannabis products, the rate equivalent to the combined rate of taxes on the privilege of selling tangible personal property at retail in this state that are imposed by the Sales and Use Tax Law and the California Constitution, upon the wholesale cost of any medical cannabis product manufactured by a licensee with a Type 6 or Type 7 classification. The current rate would be 6.25 percent.
• Require distributor to maintain record-keeping requirements, as specified for the medical cannabis product tax to document “wholesale cost.”
• Specify that the tax rates imposed apply proportionately to quantities of less than one ounce.
• Require BOE to administer and collect the tax from medical marijuana distributers. The 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.
• Allow 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 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 the bill, unless the retailer has entered into an installment agreement with BOE.
• Require BOE to collect the tax quarterly, on or before the last day of the month succeeding each quarterly period.
• Authorize BOE to prescribe, adopt, and enforce regulations relating to administration and enforcement. In addition, the Law authorizes BOE to prescribe, adopt, and enforce any emergency regulations as necessary for implementation, including utilizing tax stamps or state-issued product bags.
• Establish the Marijuana Value Tax Fund in the State Treasury. The bill would require that all revenues, less refunds, collected from the Marijuana Value Tax must be deposited into the Marijuana Value Tax Fund, for continuous appropriations, as follows:
  • 30 percent to the Board of State and Community Corrections for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. Funds must be allocated on a competitive grant process. Applicants may include local entities that support enforcement activities related to unpermitted activity.
  • 2 percent to the Department of Justice to fund and create Regional Marijuana Enforcement Officers who shall coordinate enforcement efforts, related to illegal cannabis cultivation, between the Department of Fish and Wildlife’s Marijuana Enforcement Team, the Department of Justice’s Bureau of Narcotic Enforcement, the United States Drug Enforcement Administration, and local law enforcement.
  • 30 percent to the Natural Resources Agency for environmental cleanup restoration and protection of public and private lands that have been damaged by illegal cannabis cultivation.
  • 8 percent to the Open Space Subvention Payment Account of the California Land Conservation Act of 1965.
  • 30 percent to the Department of Fish and Wildlife and the State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation.

The bill would only become operative if Proposition 64 is not approved by the voters on November 8, 2016. It would take immediate effect as an urgency measure, and would sunset on January 1, 2025.

Related Legislation:

SB 987 (McGuire) would impose a 10 percent fee on medical marijuana purchased from a retailer of medical marijuana, beginning January 1, 2018. The bill failed passage in the Assembly Revenue and Taxation Committee.

Staff Comments:

BOE research staff employed the following assumptions in developing its revenue estimate: (1) 3.2 million ounces are produced and regulated by Type 1 licensees, (2) 6.4 million ounces are produced and regulated by Type 2 licensees, and (3) 6.4 million ounces are produced and regulated by Type 3 licensees. Assuming full compliance, BOE estimates that resulting revenues under the bill would total $159 million per year. In addition, BOE cites an industry estimate of 2016 California medical marijuana sales to be about $2.7 billion. BOE obtained dispensary recent dispensary prices and “street prices” for 34 selected cities across the State. BOE assumes that the average street price percentage of the dispensary prices for these cities is a reasonable estimate of the wholesale percentage of retail sales. This average is about 75 percent. At a tax rate of 6.25 percent, revenues would be $126 million with one hundred percent compliance. Thus, total revenues from the measure (assuming full compliance) would be about $286 million. However, full compliance is unlikely, especially in the near-term. Accordingly, BOE notes that revenues would fall as compliance drops, and would be $71 million annually with 25 percent compliance.

Any local government costs resulting from the mandate in this measure are not state-reimbursable because the mandate only involves the definition of a crime or the penalty for conviction of a crime.

Recommended Amendments:

Staff recommends deleting the bill’s continuous appropriation authority, as continuous appropriations limit legislative oversight.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Medical cannabis: taxation: cannabis production and environment mitigation

Enacts the Medical Cannabis Tax Law, and imposes, for the privilege of distributing medical cannabis, an excise tax upon all licensed distributors.

Background

Prior to 1996, both federal and state law prohibited the possession, possession with intent to sell, cultivation, sale, transportation, importation, or furnishing of marijuana. However, in 1996, California voters approved Proposition 215, known as 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 the written or oral recommendation or approval of an attending physician. Thus, CUA allowed qualified patients and primary caregivers to obtain and use medical marijuana.

The Legislature clarified CUA in 2003 by enacting SB 420 (Vasconcellos, 2003). SB 420 exempted qualified patients and caregivers from prosecution for using or from collectively or cooperatively cultivating medical marijuana, and established a medical marijuana card program for patients to use on a voluntary basis. SB 420 provides a safe harbor for qualified patients as to 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. Thus, California’s estimated one billion dollar medical marijuana industry exists amid a conflict between federal and state law, and within state law itself. The industry remained largely unregulated at the same level until 2015.

Medical Marijuana Regulation and Safety Act. In 2015, the Legislature enacted the Medical Marijuana Regulation and Safety Act (MMRSA), a package of legislation that comprehensively regulates many aspects of medical marijuana including cultivation, manufacturing, transportation, distribution, sale, and product safety. The MMRSA comprises three bills—SB 643 (McGuire, 2015), AB 243 (Wood, 2015), and AB 266 (Bonta, 2015). Among other provisions, MMRSA:

• Creates the Bureau of Medical Marijuana Regulation (the 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.
• 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 this state. Generally, medicine is exempt from the sales and use tax, but medical marijuana does not satisfy the following elements to qualify for the exemption. To be exempt, medication must be:

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

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

Furnished by a health facility for treatment pursuant to a licensed physician’s order, or sold to a licensed physician.

Thus, the sale of medical marijuana is subject to both the state and local sales and use tax.

Proposed Law

Assembly Bill 2243 enacts the Medical Cannabis Tax Law (Law), and imposes, for the privilege of distributing medical cannabis, an excise tax upon all licensed distributors. Specifically, AB 2243:

• Imposes a tax of an unspecified amount on medical cannabis flowers cultivated by a small specialty cultivator.
• Imposes a tax of $9.25 per ounce of medical cannabis flowers cultivated by a small cultivator.
• Imposes a tax of an unspecified amount on medical cannabis flowers cultivated by a medium cultivator.
• Imposes a tax of $1.25 per immature medical cannabis plant.
• Requires BOE to administer and collect the tax from medical marijuana distributers. The 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.
• 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 time and place for a hearing so the retailer may have an opportunity to show why the permit should not be revoked or suspended.
• Allows BOE to refuse to issue a permit if the retailer has an outstanding final liability due for any amount under the bill, unless the retailer has entered into an installment agreement with BOE.
• Requires BOE to collect the tax quarterly, on or before the last day of the month succeeding each quarterly period.
• Authorizes BOE to prescribe, adopt, and enforce regulations relating to administration and enforcement. In addition, the Law authorizes BOE to prescribe, adopt, and enforce any emergency regulations as necessary for implementation, including utilizing tax stamps or state-issued product bags.
• Establishes 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 deposited into the Marijuana Value Tax Fund, as follows:
  
  • 30% to the Board of State and Community Corrections for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. Funds must be allocated on a competitive grant process. Applicants may include local entities that support enforcement activities related to unpermitted activity.
  • 2% to the Department of Justice to fund and create Regional Marijuana Enforcement Officers who shall coordinate enforcement efforts, related to illegal cannabis cultivation, between the Department of Fish and Wildlife’s Marijuana Enforcement Team, the Department of Justice’s Bureau of Narcotic Enforcement, the United States Drug Enforcement Administration, and local law enforcement.
  • 30% to the Natural Resources Agency for environmental cleanup restoration and protection of public and private lands that have been damaged by illegal cannabis cultivation.
  • 8% to the Open Space Subvention Payment Account of the California Land Conservation Act of 1965.
  • 30% to the Department of Fish and Wildlife and the State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation.

AB 2243 defines terms for purposes of the Medical Cannabis Tax Law, and only becomes operative if Secretary of State Initiative Number 1762 is not approved by the voters on November 8, 2016. AB 2243 takes immediate effect as an urgency measure and sunsets on January 1, 2025.

State Revenue Impact

Unknown.

Comments

1. Purpose of the bill. According to the author, “We are seeing unpermitted land grading and road construction, illegal stream diversions, discharge of sediments, and pollutants into waterways, as well as contamination of water and soil by pesticides, rodenticides, fertilizers and fuels. Mammals, birds and fish are dying horrible deaths from poisons used to protect crops and left behind long after the growers leave an area. These toxins seep into our water supply. Water is being held from traditional agriculture to ensure there is water in the streams for endangered fish, but instead it is being pumped onto illegal marijuana farms and poisoned by chemicals. Last year, Sproul Creek, in Humboldt County, ran dry for the first time and officials believe it was due in large part to illegal diversions of water for marijuana. The Medical Marijuana Regulation Safety Act, specifically AB 243, created an environmental regulatory structure to address many of these environmental damages, such as the establishment of a permanent and statewide Watershed Enforcement Team (WET), but the funding component was removed in AB 243 before the bill reached the Governor's desk. AB 2243 reestablishes an excise tax for medical marijuana that is charged to a licensed medical cannabis cultivator and collected by a licensed medical marijuana distributor. The funds collected will pay for environmental remediation, local law enforcement, and the WET program to address illegal marijuana related activities.”

2. 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 Denver, CO 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.

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.

3. Medical versus recreational. Although informative, the Colorado and Washington experiences are distinguishable from AB 2243 in one crucial way: California has not legalized the use of recreational marijuana. AB 2243 imposes an excise tax on medical marijuana, while Colorado and Washington currently exempt medical marijuana from almost all taxes imposed on recreational marijuana. However, in July of this year, Washington plans to exempt medical marijuana from that state sales tax but impose the recreational 37% excise tax. While this bill will not go into effect if marijuana is legalized this November, if legalization does not occur, how will having a high tax rate impact patients, especially those who are low-income? If legalization occurs in the future, should taxation apply to recreational use only? What incentive exists for marijuana users to purchase recreational marijuana if medical marijuana is vastly cheaper?

4. How high is too high? Both Washington and Colorado have reduced their marijuana tax rates, which can serve as a lesson to California when attempting to determine the right tax rate. Taxes increase product prices, and higher prices can exacerbate tax evasion and foster illegal marijuana sales. Tax evasion will also reduce state revenues that marijuana products taxes generate. Alternatively, setting the rate too low may be a missed opportunity to generate new state and local revenue. Under Article XIII A Section 3 of the California Constitution, a 2/3 vote is required to enact a new tax or to raise an existing tax. Thus, if AB 2243 sets the excise tax too high, the Legislature can reduce the rate with a majority vote, but, if the rate is too low, a 2/3 vote is required to raise the rate. Additionally, setting a tax rate that is too high can diminish revenues for local entities if they are unable to tax the same base as a result. On the other hand, local entities and the state already tax the same base in many instances.

5. Point of Taxation. It is important to consider the point of taxation in the distribution chain. Generally, the higher the tax is imposed in the distribution chain, the fewer the taxpayers. This is advantageous because the fewer the taxpayers collection is less burdensome, and tax evasion is reduced. But in a new previously unregulated, quasi-legal market such as marijuana cultivation, determining the new taxpayers, and establishing a relationship between the taxpayer and BOE can be difficult. Also, when a tax is imposed on a distributer, the tax can be passed on in the purchase price to the retailer. The consumer pays a sales tax with the distributer tax included in the sale price, leading to a tax on a tax. Imposing the tax at the retail level can be advantageous for the consumer by eliminating the hidden tax. Also, BOE currently collects sales tax from dispensaries, so BOE already has a relationship with the intended taxpayers. However, currently dispensaries are not isolating medical marijuana sales versus other sales subject to sales tax, thus a point of sale excise tax would require separating the amount of medical marijuana sales versus other sales.

6. November ballot. AB 2243 only becomes operative if Secretary of State Initiative Number 1762, also known as the Control, Regulate and Tax Adult Use of Marijuana Act is not approved the voters on November 8, 2016.

The initiative imposes a marijuana excise tax upon purchasers of marijuana or marijuana products sold in this state at the rate of fifteen percent (15%) of the gross receipts of any retail sale by a dispensary. The sales and use tax would not apply to the sale of medical marijuana. Additionally, the initiative would establish a cultivation tax at the following rates:

• The tax for marijuana flowers shall be $9.25 per dry-weight ounce.
• The tax for marijuana leaves shall be $2.75 per dry-weight ounce.
• BOE may adjust the tax rate for marijuana leaves annually to reflect fluctuations in the relative price of marijuana flowers to marijuana leaves.

The cultivation tax would not apply to marijuana cultivated for personal use or cultivated by a qualified patient or primary caregiver in accordance with the Compassionate Use Act.

7. Related Legislation. SB 987 (McGuire) establishes the Marijuana User Fee Act, which imposes a 10% excise tax on medical marijuana. SB 987 (McGuire) is currently pending in the Assembly Committee on Revenue and Taxation.

8 Missing something? AB 2243 does not specify all of the tax rates for medical cannabis flowers. The author’s intent is to create a tiered tax system for small versus medium cultivators. The author intends to continue working with stakeholders to determine the appropriate tax rate amounts.

9. Let’s get clear. Several terms in the bill may need to be clarified. For example, “distribution” is defined as both of the following in AB 2243:

• The sale of untaxed medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, and medical cannabis product in this state
• The use or consumption of untaxed medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, and medical cannabis product in this state.

However, under MMRSA “distribution” is defined as the procurement, sale, and transport of medical cannabis and medical cannabis products between licensed entities. The Committee may wish to consider amending the bill to reduce potential disagreements between taxpayers and BOE.

10. Technical amendments.

• Replace “medical cannabis flowers” with “medical cannabis flower” throughout the bill.
• Replace “immature medical cannabis plants” with “immature medical cannabis plant” throughout the bill.
• On page 9, line 37, strike out “the multiagency task force,”
• On page 9, line 38, strike out “Wildlife,” and replace with “Wildlife’s”
• On page 9, line 38, strike out “Board,” and replace with “Board’s”
• On page 9, line 38, add “multiagency task force, the Watershed Enforcement Team,” after “Board.”

Assembly Actions

Assembly Revenue and Taxation 8-0
Assembly Appropriations 13-1
Assembly Floor 60-12

Support and Opposition

(6/16/16)

Support: Andrew Mills, Eureka Police Chief; Bill Dobberstein, Fortuna Police Chief; Butte County Sheriff’s Office; California Association of Professional Scientists; California Cattleman's Association; California Growers Association; California League of Conservation Voters; California Trout; Center for Biological Diversity; Central Coast Forest Association; Environmental Protection Information Center; George Runner, Board of Equalization Member; Gerardo Gonzalez, Willits Police Chief; Humboldt County Sheriff's Office ; Lassen County Sheriff’s Office; Mendocino County Sheriff's Office; Monterey County Sheriff’s Office; Professional Engineers in California Government; Rural County Representatives of California; Sierra Club California ; Sonoma County Sheriff’s Office; The Nature Conservancy; Trust for Public Land.

Opposition: Americans for Safe Access; California NORML; Legal Services for Prisoners with Children; UCBA Trade Association.

-- END --

(Without Reference to File)

ASSEMBLY THIRD READING

ATR Bill Id:AB 2243

Author:(Wood)

As Amended Ver:June 2, 2016

2/3 vote. Urgency

SUMMARY: Enacts the Medical Cannabis Tax Law (MCTL). Specifically, this bill:

1. Imposes, for the privilege of distributing "medical cannabis flowers", "medical cannabis leaves", and "immature medical cannabis plants", a tax upon every "distributor" at the following rates:
   1. Nine dollars twenty five cents ($9.25) per ounce of "medical cannabis flowers";
   2. Two dollars seventy five cents ($2.75) per ounce of "medical cannabis leaves"; and,
   3. One dollar twenty five cents ($1.25) per "immature medical cannabis plant".
2. Requires the Legislative Analyst's Office to review regularly the tax levels established by this bill, at a minimum of every other year, beginning in 2020, and to make recommendations to the Legislature on appropriate adjustments that would further the goals of addressing public safety and the environmental impacts caused by the proliferation of cannabis cultivation.
3. Defines "medical cannabis flowers" as the flowers of a cannabis plant, excluding the leaves and stems, that are intended to be sold for use by medical cannabis patients in California under the Compassionate Use Act of 1996 (Proposition 215), found in Health and Safety Code Section 11362.5.
4. Defines "medical cannabis leaves" as all parts of a cannabis plant, other than cannabis flowers, that are intended to be sold for use by medical cannabis patients in California under Proposition 215.
5. Defines an "immature medical cannabis plant" as a cannabis plant with no observable flowers or buds, that is intended to be sold for use by medical cannabis patients in California under Proposition 215.
6. Defines a "distributor" as a "distributor" under Business and Professions Code (B&PC) Section 19300.5.
7. Charges the State Board of Equalization (BOE) with administering and collecting the new tax under the Fee Collection Procedures Law, found in Revenue and Taxation Code (R&TC) Section 55001 et seq., except as specified.
8. Authorizes the BOE to prescribe, adopt, and enforce regulations relating to the implementation, administration, and enforcement of the MCTL, including applicant requirements, collections, reporting, refunds, and appeals.
9. Authorizes the BOE to prescribe, adopt, and enforce any emergency regulations as necessary to implement the MCTL.
10. Provides that the tax is due and payable to the BOE quarterly on or before the last day of the month following each calendar quarter.
11. Requires a return for the preceding calendar quarter to be filed with the BOE on or before the last day of the month following each calendar quarter. Returns shall be authenticated in a form or pursuant to methods as the BOE prescribes.
12. Establishes the Cannabis Production and Environment Mitigation Fund (Fund) in the State Treasury. All taxes, interest, penalties, and other amounts collected and paid to the BOE, less payments of refunds and costs of administration, shall be deposited in the Fund.
13. Provides that, notwithstanding Government Code Section 13340, all moneys deposited in the Fund are to be continuously appropriated, without regard to fiscal year, in the following manner:
    1. Thirty percent (30%) to the Board of State and Community Corrections for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. The Board of State and Community Corrections shall give priority of funds to applicants that demonstrate that the area within the applicant's jurisdiction has a high rate of criminal activities from organized crime, as defined, related to illegal cannabis cultivation. Such funds shall be allocated on a competitive grant application process administered by the Board of State and Community Corrections;
    2. Two percent (2%) to the Department of Justice to fund and create Regional Marijuana Enforcement Officers who shall coordinate enforcement efforts, related to illegal cannabis cultivation, between the Department of Fish and Wildlife's Marijuana Enforcement Team, the Department of Justice's Bureau of Narcotic Enforcement, the United States Drug Enforcement Administration, and local law enforcement. The Department of Justice shall prioritize creation of Regional Marijuana Enforcement Officers in counties that have demonstrated that the area within the county's jurisdiction has a high rate of criminal activities from organized crime related to illegal cannabis cultivation.
    3. Thirty percent (30%) to the Natural Resources Agency 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, as specified. Such funds shall be prioritized to restoration and cleanup projects, on public or private lands, based on the level of damages that have occurred. At least 35% of the funds shall be used for these purposes related to public lands, including parks managed by the California Department of Parks and Recreation, and at least 20% of the funds shall be used for these purposes related to private lands;
    4. Eight percent (8%) to the Open Space Subvention Payment Account of the California Land Conservation Act of 1965. Administrative costs to the Department of Conservation shall be no more than the reasonable costs to administer the program and shall be no more than 0.5% of the 8%; and,
    5. 30% to the multiagency task force, the Department of Fish and Wildlife and the State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation.
14. Requires the BOE to submit a report to the Legislature on the total amount of revenue that was collected for the two-year period beginning on this tax's operative date. The report shall be due on or before the last day of the month commencing 180 days after the two-year period.
15. Provides that this act shall become operative on or after [sic] the first day of the first calendar quarter commencing more than 270 days after adequate funding has been received by the BOE to implement and administer this bill. The BOE shall post a notice on its Internet Web site when this condition has been satisfied.
16. Specifies that funds for the establishment and support of the activities required under this bill shall be advanced as a General Fund or special fund loan, and shall be repaid by the BOE from the initial proceeds from taxes collected, no later than six months after the bill's operative date.
17. Provides that the MCTL shall become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect.
18. Provides that the tax shall be in addition to, and shall not limit, any taxes or fees imposed by a county or city and county.
19. Takes immediate effect as an urgency measure.
20. Sunsets on January 1, 2025.

EXISTING STATE LAW:

1. 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]
2. Defines "distribution" as the procurement, sale, and transport of medical cannabis and medical cannabis products between licensed entities. [B&PC Section 19300.5]

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Increased revenue of up to $77 million annually.
2. Significant administrative costs to the BOE of approximately $3.5 million annually.

COMMENTS:

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

We are seeing unpermitted land grading and road construction, illegal stream diversions, discharge of sediments, and pollutants into waterways, as well as contamination of water and soil by pesticides, rodenticides, fertilizers and fuels. Mammals, birds and fish are dying horrible deaths from poisons used to protect crops and left behind long after the growers leave an area. These toxins seep into our water supply.

Water is being held from traditional agriculture to ensure there is water in the streams for endangered fish, but instead it is being pumped onto illegal marijuana farms and poisoned by chemicals. Last year, Sproul Creek, in Humboldt County, ran dry for the first time and officials believe it was due in large part to illegal diversions of water for marijuana.

The Medical Marijuana Regulation Safety Act, specifically AB 243 (Wood), Chapter 688, Statutes of 2015, created an environmental regulatory structure to address many of these environmental damages, such as the establishment of a permanent and statewide Watershed Enforcement Team (WET), but the funding component was removed in AB 243 before the bill reached the Governor's desk.

1. Committee staff comments:
   1. 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.
      1. 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.
      2. Medical Marijuana Regulation and Safety Act (MMRSA): 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 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,
      5. Any other information the BOE deems necessary for the taxation and regulation of marijuana and marijuana products.
  1. What would this bill do? This bill would impose, for the privilege of distributing medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, a tax on distributors of cannabis. Funds generated from the new tax would be used for, among other things, both cannabis-related law enforcement activities and efforts to address the environmental impacts of cannabis cultivation on public and private lands in California.

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0003404

ASSEMBLY THIRD READING

ATR Bill Id:AB 2243

Author:(Wood)

As Amended Ver:May 31, 2016

2/3 vote. Urgency

SUMMARY: Enacts the Medical Cannabis Tax Law (MCTL). Specifically, this bill:

1. Imposes, for the privilege of distributing "medical cannabis flowers", "medical cannabis leaves", and "immature medical cannabis plants", a tax upon every "distributor" at the following rates:
   1. $9.25 per ounce of "medical cannabis flowers";
   2. $2.75 per ounce of "medical cannabis leaves"; and,
   3. $1.25 per "immature medical cannabis plant".
2. Requires the Legislative Analyst's Office to review regularly the tax levels established by this bill, at a minimum of every other year, beginning in 2020, and to make recommendations to the Legislature on appropriate adjustments that would further the goals of addressing public safety and the environmental impacts caused by the proliferation of cannabis cultivation.
3. Defines "medical cannabis flowers" as the flowers of a cannabis plant, excluding the leaves and stems, that are intended to be sold for use by medical cannabis patients in California under the Compassionate Use Act of 1996 (Proposition 215), found in Health and Safety Code Section 11362.5.
4. Defines "medical cannabis leaves" as all parts of a cannabis plant, other than cannabis flowers, that are intended to be sold for use by medical cannabis patients in California under Proposition 215.
5. Defines an "immature medical cannabis plant" as a cannabis plant with no observable flowers or buds, that is intended to be sold for use by medical cannabis patients in California under Proposition 215.
6. Defines a "distributor" as a "distributor" under Business and Professions Code (B&PC) Section 19300.5.
7. Charges the State Board of Equalization (BOE) with administering and collecting the new tax under the Fee Collection Procedures Law, found in Revenue and Taxation Code (R&TC) Section 55001 et seq., except as specified.
8. Authorizes the BOE to prescribe, adopt, and enforce regulations relating to the implementation, administration, and enforcement of the MCTL, including applicant requirements, collections, reporting, refunds, and appeals.
9. Authorizes the BOE to prescribe, adopt, and enforce any emergency regulations as necessary to implement the MCTL.
10. Provides that the tax is due and payable to the BOE quarterly on or before the last day of the month following each calendar quarter.
11. Requires a return for the preceding calendar quarter to be filed with the BOE on or before the last day of the month following each calendar quarter. Returns shall be authenticated in a form or pursuant to methods as the BOE prescribes.
12. Establishes the Cannabis Production and Environment Mitigation Fund (Fund) in the State Treasury. All taxes, interest, penalties, and other amounts collected and paid to the BOE, less payments of refunds and costs of administration, shall be deposited in the Fund.
13. Provides that, notwithstanding Government Code Section 13340, all moneys deposited in the Fund are to be continuously appropriated, without regard to fiscal year, in the following manner:
    1. 30% to the Board of State and Community Corrections for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. Such funds shall be allocated on a competitive grant application process administered by the Board of State and Community Corrections;
    2. 30% to the Natural Resources Agency 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, as specified. Such funds shall be prioritized to restoration and cleanup projects, on public or private lands, based on the level of damages that have occurred. At least 35% of the funds shall be used for these purposes related to public lands, including parks managed by the California Department of Parks and Recreation, and at least 20% of the funds shall be used for these purposes related to private lands;
    3. 30% to the multiagency task force, the Department of Fish and Wildlife and the State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and,
    4. 10% to the Bureau of Medical Marijuana Regulation, and other state agencies or departments that the bureau determines are appropriate, to conduct ongoing studies of areas that may create challenges to compliance of the MMRSA, including financial transactions, allowable tax deductions, and the public safety implications of a cash industry. The bureau or other state agencies or departments shall prepare reports on the results of those studies and submit those reports to the Legislature on or before January 1, 2020, and on or before January 1, every two years thereafter.
14. Requires the BOE to submit a report to the Legislature on the total amount of revenue that was collected for the two-year period beginning on this tax's operative date. The report shall be due on or before the last day of the month commencing 180 days after the two-year period.
15. Provides that this act shall become operative on or after [sic] the first day of the first calendar quarter commencing more than 270 days after adequate funding has been received by the BOE to implement and administer this bill. The BOE shall post a notice on its Internet Web site when this condition has been satisfied.
16. Specifies that funds for the establishment and support of the activities required under this bill shall be advanced as a General Fund or special fund loan, and shall be repaid by the BOE from the initial proceeds from taxes collected, no later than six months after the bill's operative date.
17. Provides that the MCTL shall become inoperative on January 1, 2018, if the Secretary of State Initiative Number 1762, known as the Control, Regulate and Tax Adult Use of Marijuana Act, is approved by the voters at the November 8, 2016, statewide general election and takes effect.
18. Provides that the tax shall be in addition to, and shall not limit, any taxes or fees imposed by a county or city and county.
19. Takes immediate effect as an urgency measure.

EXISTING STATE LAW:

1. 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]
2. Defines "distribution" as the procurement, sale, and transport of medical cannabis and medical cannabis products between licensed entities. [B&PC Section 19300.5]

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Increased revenue of up to $77 million annually.
2. Significant administrative costs to the BOE of approximately $3.5 million annually.

COMMENTS:

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

We are seeing unpermitted land grading and road construction, illegal stream diversions, discharge of sediments, and pollutants into waterways, as well as contamination of water and soil by pesticides, rodenticides, fertilizers and fuels. Mammals, birds and fish are dying horrible deaths from poisons used to protect crops and left behind long after the growers leave an area. These toxins seep into our water supply.

Water is being held from traditional agriculture to ensure there is water in the streams for endangered fish, but instead it is being pumped onto illegal marijuana farms and poisoned by chemicals. Last year, Sproul Creek, in Humboldt County, ran dry for the first time and officials believe it was due in large part to illegal diversions of water for marijuana.

The Medical Marijuana Regulation Safety Act, specifically AB 243 (Wood), Chapter 688, Statutes of 2015, created an environmental regulatory structure to address many of these environmental damages, such as the establishment of a permanent and statewide Watershed Enforcement Team (WET), but the funding component was removed in AB 243 before the bill reached the Governor's desk.

1. Committee staff comments:
   1. 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.
      1. 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.
      2. 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 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,
      5. Any other information the BOE deems necessary for the taxation and regulation of marijuana and marijuana products.
  1. What would this bill do? This bill would impose, for the privilege of distributing medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, a tax on distributors of cannabis. Funds generated from the new tax would be used for, among other things, both cannabis-related law enforcement activities and efforts to address the environmental impacts of cannabis cultivation on public and private lands in California.

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0003336

Date of Hearing: May 11, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2243

Author:(Wood) – As Amended Ver:May 3, 2016

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill creates a Medical Cannabis Tax Law, which is tax on medical cannabis distributors that is administered by the Board of Equalization (BOE). Specifically, this bill:

1. Defines key terms, including “cultivator” and “distribution,” for the purposes of the Medical Cannabis Tax Law.
2. Requires every distributor to pay a tax upon any distribution of medical cannabis flowers, medical leaves, and immature cannabis plants at the following rates:
3. $9.25 per ounce of medical cannabis flowers, or a proportional rate on quantities of less than one ounce.
4. $2.75 per ounce of medical cannabis leaves, or a proportional rate on quantities of less than one ounce.
5. $1.25 per immature medical cannabis plant.
6. Authorizes BOE to establish, by regulation, a method and manner for payment of the tax that utilizes tax stamps or product bags that indicate all required tax has been paid and to adopt regulations related to implementation, administration, and enforcement of the tax.
7. Requires the Legislative Analyst’s Office (LAO) to review the tax levels established in this bill every other year beginning in 2020.
8. Establishes the Cannabis Production and Environment Mitigation Fund (Fund) and requires all taxes, interest, and penalties, less payments of refunds and costs of administration, to be deposited into it. Moneys in the Fund will be allocated as follows:
9. 30% to the Board of State and Community Corrections (BSCC) for disbursement for local law enforcement activities related to illegal cannabis cultivation, to be allocated through a competitive grant process administered by BSCC.
10. 30% to the Natural Resources Agency to fund a competitive grant program for environmental cleanup restoration and protection of lands that have been damaged by illegal cannabis cultivation.
11. 30% to the multiagency task force, the Department of Fish and Wildlife and the State Water Resources Control Board to address environmental impacts of cannabis cultivation on California land.
12. 10% to the bureau of Medical Marijuana Regulations and other qualified state agencies to conduct ongoing studies of areas that may create challenges to compliance of medical marijuana regulations, such as financial transactions and the public safety implications of a cash industry.
13. Sunsets the bill on January 1, 2018, if the Control, Regulate and Tax Adult Use of Marijuana Act is approved by voters at the November 9, 2016 statewide election

FISCAL EFFECT:

1. Increased revenue of up to $77 million annually. (Marijuana Production and Environment Mitigation Fund)
2. Significant administrative costs to BOE of approximately $3.5 million annually. (Marijuana Production and Environment Mitigation Fund)

COMMENTS:

1. Purpose. According to the author, AB 2243 will provide funds necessary to help fund the environmental regulatory structure that addresses many of the environmental damages caused by marijuana cultivation.
2. Background. In 2015, the Legislature enacted the Medical Marijuana Regulation and Safety Act (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 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.

MMRSA created a comprehensive state licensing system for the commercial cultivation, manufacture, retail sale, transport, distribution, delivery, and testing of medical cannabis. In addition, the bills affirm local control and require licensure by both a local government and the state in order for a licensee to operate. MMRSA went into effect on January 1, 2016, although licensure requirements will not go into effect until the regulatory entities responsible for implementing MMRSA pass necessary regulations.

Among other things, MMRSA establishes the new Bureau under the DCA, which is responsible for licensing and regulating dispensaries, transporters, and distributors. In addition, the CDPH is responsible for regulating manufacturers, testing laboratories and the production and labeling of edible medical marijuana products. The CDFA is responsible for regulating cultivation, and other state agencies, such as the Department of Pesticide Regulation and the State Water Resources Control Board, are responsible for developing environmental standards.

1. Taxing distributors. This bill imposes a tax on distributors of certain medical cannabis products for sale (medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants).

The May 3^rd amendments to AB 2443 changed the imposition of the proposed tax from the cultivator to the distributor. The introduced version of this bill required the distributor to collect the tax from the cultivator upon purchase of medical cannabis products. In their analysis of the introduced version of AB 2443, BOE noted two administrative challenges with this approach:

1. Not all cultivators will sell their product directly to a distributor. Cultivators may opt to send their product directly to a manufacturer, who then sells their product to a distributor.
2. The collection of taxes on the cultivator by the distributor would be very complex to administer. Unlike other distributor-level tax structures, the introduced version of the bill would have the purchaser of the product (the distributor) collect the tax from the cultivator.

The most recent amendments imposes the tax on the distributors themselves, which puts AB 2243 in line with the cigarette tax, where the tax is imposed on whoever distributes the product for first sale.

1. Senate bill. SB 987, which is currently pending in the Senate Appropriations Committee, also imposes a tax on medical marijuana. Unlike AB 2243, the tax imposed is a 15% excise tax on medical marijuana sold to consumers. This bill is projected to raise up to $126 million in FY 2016-17.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 21, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2243 (

Author:Wood) – As Introduced Ver:February 18, 2016

RECONSIDERATION/VOTE ONLY

2/3 vote. Fiscal committee.

SUBJECT: Medical cannabis: taxation: cannabis production and environment mitigation

SUMMARY: Enacts the Medical Cannabis Tax Law (MCTL). Specifically, this bill:

1. Imposes, for the privilege of distributing "medical cannabis flowers", "medical cannabis leaves", and "immature medical cannabis plants", a tax upon all "licensed cultivators" at the following rates:
   1. $9.25 per ounce of "medical cannabis flowers";
   2. $2.75 per ounce of "medical cannabis leaves"; and,
   3. $1.25 per "immature medical cannabis plant".
2. Specifies that the "licensed distributor" shall collect the tax from the "licensed cultivator" and separately state the amount of tax imposed on the purchase order, which shall be given by the "licensed distributor" to the "licensed cultivator" at the time of sale.
3. Exempts from the tax sales by a "licensed cultivator" that the state is prohibited from taxing under the Constitution or laws of the United States (U.S.) or the Constitution of this state. Any claim for exemption from the tax shall be made to the State Board of Equalization (BOE) in the manner prescribed by the BOE.
4. Requires the Legislative Analyst's Office to review regularly the tax levels established by this bill, at a minimum of every other year, beginning in 2018, and to make recommendations to the Legislature on appropriate adjustments that would further the goals of addressing public safety and the environmental impacts caused by the proliferation of cannabis cultivation.
5. Defines "medical cannabis flowers" as the flowers of a cannabis plant, excluding the leaves and stems, that are intended to be sold for use by medical cannabis patients in California under the Compassionate Use Act of 1996 (Proposition 215), found in Health and Safety Code Section 11362.5.
6. Defines "medical cannabis leaves" as all parts of a cannabis plant, other than cannabis flowers, that are intended to be sold for use by medical cannabis patients in California under Proposition 215.
7. Defines an "immature medical cannabis plant" as a cannabis plant with no observable flowers or buds, that is intended to be sold for use by medical cannabis patients in California under Proposition 215.
8. Defines a "licensed cultivator" as a person licensed as a cultivator under the Medical Marijuana Regulation and Safety Act (MMRSA), found in Business and Professions Code (B&PC) Section 19300 et seq.
9. Defines a "licensed distributor" as a "distributor" under B&PC Section 19300.5.
10. Charges the BOE with administering and collecting the new tax under the Fee Collection Procedures Law, found in Revenue and Taxation Code (R&TC) Section 55001 et seq.
11. Specifies that a licensed cultivator is liable for the tax until it has been paid to the state, except that payment to the licensed distributor relieves the licensed cultivator from further liability for the tax.
12. Authorizes the BOE to prescribe, adopt, and enforce regulations relating to the implementation, administration, and enforcement of the MCTL, including applicant requirements, collections, reporting, refunds, and appeals.
13. Authorizes the BOE to prescribe, adopt, and enforce any emergency regulations as necessary to implement the MCTL.
14. Provides that the tax is due and payable to the BOE quarterly on or before the last day of the month following each calendar quarter.
15. Requires a return for the preceding calendar quarter to be filed with the BOE on or before the last day of the month following each calendar quarter. Returns shall be authenticated in a form or pursuant to methods as the BOE prescribes.
16. Establishes the Cannabis Production and Environment Mitigation Fund (Fund) in the State Treasury. All taxes, interest, penalties, and other amounts collected and paid to the BOE, less payments of refunds and costs of administration, shall be deposited in the Fund.
17. Provides that, notwithstanding Government Code Section 13340, all moneys deposited in the Fund are to be continuously appropriated, without regard to fiscal year, in the following manner:
    1. 30% to an unspecified entity for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. Such funds shall be allocated on a competitive grant application process administered by the unspecified entity;
    2. 30% to the Natural Resources Agency 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, as specified. Such funds shall be prioritized to restoration and cleanup projects, on public or private lands, based on the level of damages that have occurred. At least 35% of the funds shall be used for these purposes related to public lands, including parks managed by the California Department of Parks and Recreation, and at least 20% of the funds shall be used for these purposes related to private lands;
    3. 30% to the multiagency task force, the Department of Fish and Wildlife and State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and,
    4. 10% to the Bureau of Medical Marijuana Regulations, and other state agencies or departments that the bureau determines are appropriate, to conduct ongoing studies of areas that may create challenges to compliance of the MMRSA, including financial transactions, allowable tax deductions, and the public safety implications of a cash industry. The bureau or other state agencies or departments shall prepare reports on the results of those studies and submit those reports to the Legislature on or before January 1, 2020, and on or before January 1, every two years thereafter.
18. Requires the BOE to submit a report to the Legislature on the total amount of revenue that was collected for the two-year period beginning on this tax's operative date. The report shall be due on or before the last day of the month commencing 180 days after the two-year period.
19. Provides that this act shall become operative on or after [sic] the first day of the first calendar quarter commencing more than 270 days after adequate funding has been received by the BOE to implement and administer this bill. The BOE shall post a notice on its Internet Web site when this condition has been satisfied.
20. Specifies that funds for the establishment and support of the activities required under this bill shall be advanced as a General Fund or special fund loan, and shall be repaid by the BOE from the initial proceeds from taxes collected, no later than six months after the bill's operative date.

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 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:
   
   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. [R&TC 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]
6. Defines "distribution" as the procurement, sale, and transport of medical cannabis and medical cannabis products between licensed entities. [B&PC Section 19300.5]

FISCAL EFFECT: The BOE estimates that this bill's new tax would generate roughly $77 million in revenues annually. Additionally, BOE staff estimates that this bill would generate roughly $6.3 million in state and local SUT revenues annually. Committee staff notes, however, that these estimates assume a 100% compliance rate.

COMMENTS:

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

We are seeing unpermitted land grading and road construction, illegal stream diversions, discharge of sediments, and pollutants into waterways, as well as contamination of water and soil by pesticides, rodenticides, fertilizers and fuels. Mammals, birds and fish are dying horrible deaths from poisons used to protect crops and left behind long after the growers leave an area. These toxins seep into our water supply.

Water is being held from traditional agriculture to ensure there is water in the streams for endangered fish, but instead it is being pumped onto illegal marijuana farms and poisoned by chemicals. Last year, Sproul Creek, in Humboldt County, ran dry for the first time and officials believe it was due in large part to illegal diversions of water for marijuana.

The Medical Marijuana Regulation Safety Act, specifically AB 243, created an environmental regulatory structure to address many of these environmental damages, such as the establishment of a permanent and statewide Watershed Enforcement Team (WET), but the funding component was removed in AB 243 before the bill reached the Governor's desk.

AB 2243 reestablishes an excise tax for medical marijuana that is charged to a licensed medical cannabis cultivator and collected by a licensed medical marijuana distributor. The funds collected will pay for environmental remediation, local law enforcement, and the WET program to address illegal marijuana related activities.

1. This bill is supported by the California Association of Professional Scientists, which notes the following:

The Legislature recently passed, and the Governor signed, the Medical Marijuana Regulation and Safety Act (the Act), which created a state regulatory licensing structure for medical marijuana. The Act brings sensible regulation, oversight and environmental protections to California's medical marijuana industry. Irresponsible marijuana cultivation is threatening California's environment; it is threatening the state's water supply, the state's water quality and the lives and habitat of endangered and other sensitive species. In an effort to protect the environment, the State Water Resources Control Board and the California Department of Fish and Wildlife requested funding from the Governor to create a taskforce to address the damages to natural resources from marijuana cultivation. [. . .]

The Act will help ensure that watersheds and wildlife habitat throughout the state will be protected and, while proposed funding is helpful, there are still gaps that need to be addressed to fully protect the environment.

The Act did not include environmental remediation funding to combat illegal marijuana activities and there is a dire need for another funding mechanism focused on illegal marijuana activities. AB 2243 will address that oversight and provide that funding.

1. This bill is opposed by California NORML, which notes the following:

We urge the committee to reject AB 2243 (Wood), which would impose a new $9.75/ounce tax on the cultivation of medical-only marijuana. At current wholesale prices of ̴ $1,500 / lb, this is tantamount to a 10% tax on the value of marijuana. This would be in addition to the current 7.5+% sales tax plus various local business taxes imposed by some localities.

The proposed tax is unreasonably high and burdensome to low-income patients who need marijuana for medicine. No other state has a comparably high tax on medical (only) marijuana.

The proposed tax will also likely be counterproductive insofar as it will encourage the diversion of marijuana to the untaxed, unregulated adult-use market.

[. . .]

At this time when providers already face burdensome new costs and regulations under MMRSA, it is unwise and unfair to impose further costs on those trying to comply with the law. It is unfair to tax the minority of law-abiding, medical-only suppliers for all of the costs due to illicit, black-market recreational use traffickers. And it is unfair to the many low-income patients who have legitimate medical need for marijuana to impose such a tax on their medicine.

1. The BOE notes the following in its staff analysis of this bill:
   1. Proposed tax is complicated: "This bill proposes a complicated tax scheme that departs from other distributor-level tax structures administered by the BOE. [. . .] The MCTL requires a licensed distributor to issue a purchase order to document the tax imposed. However, a purchase order is simply a merchandise order and not documentation of a sale or distribution. This method could be problematic when the distributor does not purchase the quantity specified on the purchase order. Further, it is unclear how a distributor, who makes the payment rather than receives a payment, can collect the tax. Does the distributor "short" his or her payment to the cultivator by the tax amount?

BOE staff suggests imposing the tax on the "first sale" or "distribution" of flowers, leaves, and immature plants in this state. The taxpayer in this case would be defined as the person who makes the first sale or distribution of cannabis flowers, leaves, and immature plants in this state. A sale from a cultivator to a distributor would be excluded from the definition of sale or distribution thus imposing the tax on the distributor's sale or distribution. This mechanism closely follows the imposition of the cigarette and tobacco products tax. In addition to the suggested revisions to the proposed tax, BOE staff also suggests revising the MCTL's definitions to conform to the imposition and collection change."

• 1. Lack of license should not exclude tax liability: "This bill imposes the medical cannabis tax upon a cultivator. The bill defines licensed cultivator to mean: a person that is licensed as a cultivator under the MMRSA. The bill requires tax collection by a licensed distributor. Does a cultivator or distributor escape the tax if they do not comply with the MMRSA's licensing requirements? (Emphasis in original)"
  2. Do cultivators always sell to distributors? "Under the MMRSA, [B&PC] Section 19326 specifies certain restrictions on medical cannabis. For example, the statute requires a licensed cultivator or licensed manufacturer "to send" all medical cannabis to a distributor for quality assurance, inspection, and batch testing prior to distribution to a dispensary. Accordingly, the MMRSA allows a cultivator to sell medical cannabis directly to a manufacturer. That manufacturer must send the finished product to a distributor prior to distribution to a dispensary. Since the MMRSA does not require a cultivator to sell to a distributor, how would the tax be imposed and collected if a cultivator sells directly to a manufacturer or if the cultivator "sends" (does not sell) the medical cannabis to the distributor for testing?"
  3. Proposed tax is subject to sales tax: "The total retail sales price of [TPP] is subject to the sales or use tax, unless specifically exempted or excluded by law.

To be reimbursed for the proposed new tax, a distributor would likely incorporate the additional tax into the sales price of the medical cannabis. The sales tax applies to the entire sales price of medical cannabis, including any increase in the retail sales price to the consumer due to the prior imposition of the medical cannabis tax."

• 1. Future track and trace tax program: "The bill requires a licensed distributor to collect and remit the tax and a return to the BOE quarterly. The bill does not specifically allow tax payment through the use of stamps, other markings capable of encrypting certain tax information, or track and trace technology.

BOE staff suggests amending the bill to provide the BOE authority to prescribe by regulation a method and manner for the medical cannabis tax payment. This suggestion builds upon existing requirements for the BOE to adopt a track and trace system ([R&TC] Section 31020) and for the CDFA to establish a unique identifier program ([B&PC] Section 19335)."

• 1. Suggested technical amendments: "The BOE staff recommends the following amendments:
     1. The bill specifies two distinct points of tax imposition: sale and distribution. The bill should specify only one point of taxation to eliminate confusion.
     2. The bill should require licensed distributors to file electronic returns, consistent with other BOE-administered tax programs.
     3. The bill should allow licensed distributors to remit the medical cannabis tax by means other than an electronic funds transfer (EFT) when they are unable to obtain a bank account. Under the law [citation omitted], certain reporting requirements are imposed on tax and feepayers that have substantial tax or fee liabilities. Specifically, tax and feepayers with monthly tax liabilities that average $20,000 or more must remit their tax and fee payments via an EFT under BOE-prescribed procedures."

1. Committee staff comments:
   1. 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.
      1. 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 these objectives, 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;
         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 legalization initiatives in other states, it applies to all Departmental marijuana enforcement nationwide.

• • 1. 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.
  1. 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.
     1. 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.
     2. 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 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,
      5. Any other information the BOE deems necessary for the taxation and regulation of marijuana and marijuana products.
  1. What would this bill do? This bill would impose, for the privilege of distributing medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, a tax on all licensed cultivators of cannabis. Specifically, this bill would require
     licensed distributors to collect the tax from licensed cultivators, and separately state the amount of tax imposed on each purchase order. Funds generated from the new tax would be used for, among other things, both cannabis-related law enforcement activities and efforts to address the environmental impacts of cannabis cultivation on public and private lands in California.
  2. How does this bill fit in with the changing legal landscape? There is at least one marijuana legalization initiative currently being circulated for signatures. Specifically, Proposed Initiative 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. As such, it is unclear to Committee staff how the present bill's tax regime would be impacted by the enactment of a subsequent initiative establishing a new tax regime for cannabis in California.
  3. Related legislation: SB 987 (McGuire), of the current Legislative Session, would impose a 15% tax on medical marijuana purchased from a retailer of medical marijuana, beginning January 1, 2018. SB 987 would only become operative, however, if Proposed Initiative 1762 referenced above is not approved by the voters at the November 8, 2016 statewide general election.
  4. Suggested technical amendments: Committee staff recommends the following technical amendments be adopted:
     1. On page 7, in line 9, strike "is" and insert "are";
     2. On page 7, in line 10, strike "of" and insert "with";
     3. On page 7, in line 16, strike "report" and insert "reports"; and,
     4. On page 7, in line 34, strike "or" and insert "and".

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Professional Scientists

California Cattlemen's Association

California League of Conservation Voters

California Trout

Central Coast Forest Association

The Trust for Public Land

Opposition

Americans for Safe Access

California NORML

Consortium Management Group

UCBA Trade Association

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

Date of Hearing: April 18, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2243 (

Author:Wood) – As Introduced Ver:February 18, 2016

SUSPENSE

2/3 vote. Fiscal committee.

SUBJECT: Medical cannabis: taxation: cannabis production and environment mitigation

SUMMARY: Enacts the Medical Cannabis Tax Law (MCTL). Specifically, this bill:

1. Imposes, for the privilege of distributing "medical cannabis flowers", "medical cannabis leaves", and "immature medical cannabis plants", a tax upon all "licensed cultivators" at the following rates:
   1. $9.25 per ounce of "medical cannabis flowers";
   2. $2.75 per ounce of "medical cannabis leaves"; and,
   3. $1.25 per "immature medical cannabis plant".
2. Specifies that the "licensed distributor" shall collect the tax from the "licensed cultivator" and separately state the amount of tax imposed on the purchase order, which shall be given by the "licensed distributor" to the "licensed cultivator" at the time of sale.
3. Exempts from the tax sales by a "licensed cultivator" that the state is prohibited from taxing under the Constitution or laws of the United States (U.S.) or the Constitution of this state. Any claim for exemption from the tax shall be made to the State Board of Equalization (BOE) in the manner prescribed by the BOE.
4. Requires the Legislative Analyst's Office to review regularly the tax levels established by this bill, at a minimum of every other year, beginning in 2018, and to make recommendations to the Legislature on appropriate adjustments that would further the goals of addressing public safety and the environmental impacts caused by the proliferation of cannabis cultivation.
5. Defines "medical cannabis flowers" as the flowers of a cannabis plant, excluding the leaves and stems, that are intended to be sold for use by medical cannabis patients in California under the Compassionate Use Act of 1996 (Proposition 215), found in Health and Safety Code Section 11362.5.
6. Defines "medical cannabis leaves" as all parts of a cannabis plant, other than cannabis flowers, that are intended to be sold for use by medical cannabis patients in California under Proposition 215.
7. Defines an "immature medical cannabis plant" as a cannabis plant with no observable flowers or buds, that is intended to be sold for use by medical cannabis patients in California under Proposition 215.
8. Defines a "licensed cultivator" as a person licensed as a cultivator under the Medical Marijuana Regulation and Safety Act (MMRSA), found in Business and Professions Code (B&PC) Section 19300 et seq.
9. Defines a "licensed distributor" as a "distributor" under B&PC Section 19300.5.
10. Charges the BOE with administering and collecting the new tax under the Fee Collection Procedures Law, found in Revenue and Taxation Code (R&TC) Section 55001 et seq.
11. Specifies that a licensed cultivator is liable for the tax until it has been paid to the state, except that payment to the licensed distributor relieves the licensed cultivator from further liability for the tax.
12. Authorizes the BOE to prescribe, adopt, and enforce regulations relating to the implementation, administration, and enforcement of the MCTL, including applicant requirements, collections, reporting, refunds, and appeals.
13. Authorizes the BOE to prescribe, adopt, and enforce any emergency regulations as necessary to implement the MCTL.
14. Provides that the tax is due and payable to the BOE quarterly on or before the last day of the month following each calendar quarter.
15. Requires a return for the preceding calendar quarter to be filed with the BOE on or before the last day of the month following each calendar quarter. Returns shall be authenticated in a form or pursuant to methods as the BOE prescribes.
16. Establishes the Cannabis Production and Environment Mitigation Fund (Fund) in the State Treasury. All taxes, interest, penalties, and other amounts collected and paid to the BOE, less payments of refunds and costs of administration, shall be deposited in the Fund.
17. Provides that, notwithstanding Government Code Section 13340, all moneys deposited in the Fund are to be continuously appropriated, without regard to fiscal year, in the following manner:
    1. 30% to an unspecified entity for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. Such funds shall be allocated on a competitive grant application process administered by the unspecified entity;
    2. 30% to the Natural Resources Agency 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, as specified. Such funds shall be prioritized to restoration and cleanup projects, on public or private lands, based on the level of damages that have occurred. At least 35% of the funds shall be used for these purposes related to public lands, including parks managed by the California Department of Parks and Recreation, and at least 20% of the funds shall be used for these purposes related to private lands;
    3. 30% to the multiagency task force, the Department of Fish and Wildlife and State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and,
    4. 10% to the Bureau of Medical Marijuana Regulations, and other state agencies or departments that the bureau determines are appropriate, to conduct ongoing studies of areas that may create challenges to compliance of the MMRSA, including financial transactions, allowable tax deductions, and the public safety implications of a cash industry. The bureau or other state agencies or departments shall prepare reports on the results of those studies and submit those reports to the Legislature on or before January 1, 2020, and on or before January 1, every two years thereafter.
18. Requires the BOE to submit a report to the Legislature on the total amount of revenue that was collected for the two-year period beginning on this tax's operative date. The report shall be due on or before the last day of the month commencing 180 days after the two-year period.
19. Provides that this act shall become operative on or after [sic] the first day of the first calendar quarter commencing more than 270 days after adequate funding has been received by the BOE to implement and administer this bill. The BOE shall post a notice on its Internet Web site when this condition has been satisfied.
20. Specifies that funds for the establishment and support of the activities required under this bill shall be advanced as a General Fund or special fund loan, and shall be repaid by the BOE from the initial proceeds from taxes collected, no later than six months after the bill's operative date.

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 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:
   
   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. [R&TC 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]
6. Defines "distribution" as the procurement, sale, and transport of medical cannabis and medical cannabis products between licensed entities. [B&PC Section 19300.5]

FISCAL EFFECT: The BOE estimates that this bill's new tax would generate roughly $77 million in revenues annually. Additionally, BOE staff estimates that this bill would generate roughly $6.3 million in state and local SUT revenues annually. Committee staff notes, however, that these estimates assume a 100% compliance rate.

COMMENTS:

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

We are seeing unpermitted land grading and road construction, illegal stream diversions, discharge of sediments, and pollutants into waterways, as well as contamination of water and soil by pesticides, rodenticides, fertilizers and fuels. Mammals, birds and fish are dying horrible deaths from poisons used to protect crops and left behind long after the growers leave an area. These toxins seep into our water supply.

Water is being held from traditional agriculture to ensure there is water in the streams for endangered fish, but instead it is being pumped onto illegal marijuana farms and poisoned by chemicals. Last year, Sproul Creek, in Humboldt County, ran dry for the first time and officials believe it was due in large part to illegal diversions of water for marijuana.

The Medical Marijuana Regulation Safety Act, specifically AB 243, created an environmental regulatory structure to address many of these environmental damages, such as the establishment of a permanent and statewide Watershed Enforcement Team (WET), but the funding component was removed in AB 243 before the bill reached the Governor's desk.

AB 2243 reestablishes an excise tax for medical marijuana that is charged to a licensed medical cannabis cultivator and collected by a licensed medical marijuana distributor. The funds collected will pay for environmental remediation, local law enforcement, and the WET program to address illegal marijuana related activities.

1. This bill is supported by the California Association of Professional Scientists, which notes the following:

The Legislature recently passed, and the Governor signed, the Medical Marijuana Regulation and Safety Act (the Act), which created a state regulatory licensing structure for medical marijuana. The Act brings sensible regulation, oversight and environmental protections to California's medical marijuana industry. Irresponsible marijuana cultivation is threatening California's environment; it is threatening the state's water supply, the state's water quality and the lives and habitat of endangered and other sensitive species. In an effort to protect the environment, the State Water Resources Control Board and the California Department of Fish and Wildlife requested funding from the Governor to create a taskforce to address the damages to natural resources from marijuana cultivation. [. . .]

The Act will help ensure that watersheds and wildlife habitat throughout the state will be protected and, while proposed funding is helpful, there are still gaps that need to be addressed to fully protect the environment.

The Act did not include environmental remediation funding to combat illegal marijuana activities and there is a dire need for another funding mechanism focused on illegal marijuana activities. AB 2243 will address that oversight and provide that funding.

1. This bill is opposed by California NORML, which notes the following:

We urge the committee to reject AB 2243 (Wood), which would impose a new $9.75/ounce tax on the cultivation of medical-only marijuana. At current wholesale prices of ̴ $1,500 / lb, this is tantamount to a 10% tax on the value of marijuana. This would be in addition to the current 7.5+% sales tax plus various local business taxes imposed by some localities.

The proposed tax is unreasonably high and burdensome to low-income patients who need marijuana for medicine. No other state has a comparably high tax on medical (only) marijuana.

The proposed tax will also likely be counterproductive insofar as it will encourage the diversion of marijuana to the untaxed, unregulated adult-use market.

[. . .]

At this time when providers already face burdensome new costs and regulations under MMRSA, it is unwise and unfair to impose further costs on those trying to comply with the law. It is unfair to tax the minority of law-abiding, medical-only suppliers for all of the costs due to illicit, black-market recreational use traffickers. And it is unfair to the many low-income patients who have legitimate medical need for marijuana to impose such a tax on their medicine.

1. The BOE notes the following in its staff analysis of this bill:
   1. Proposed tax is complicated: "This bill proposes a complicated tax scheme that departs from other distributor-level tax structures administered by the BOE. [. . .] The MCTL requires a licensed distributor to issue a purchase order to document the tax imposed. However, a purchase order is simply a merchandise order and not documentation of a sale or distribution. This method could be problematic when the distributor does not purchase the quantity specified on the purchase order. Further, it is unclear how a distributor, who makes the payment rather than receives a payment, can collect the tax. Does the distributor "short" his or her payment to the cultivator by the tax amount?

BOE staff suggests imposing the tax on the "first sale" or "distribution" of flowers, leaves, and immature plants in this state. The taxpayer in this case would be defined as the person who makes the first sale or distribution of cannabis flowers, leaves, and immature plants in this state. A sale from a cultivator to a distributor would be excluded from the definition of sale or distribution thus imposing the tax on the distributor's sale or distribution. This mechanism closely follows the imposition of the cigarette and tobacco products tax. In addition to the suggested revisions to the proposed tax, BOE staff also suggests revising the MCTL's definitions to conform to the imposition and collection change."

• 1. Lack of license should not exclude tax liability: "This bill imposes the medical cannabis tax upon a cultivator. The bill defines licensed cultivator to mean: a person that is licensed as a cultivator under the MMRSA. The bill requires tax collection by a licensed distributor. Does a cultivator or distributor escape the tax if they do not comply with the MMRSA's licensing requirements? (Emphasis in original)"
  2. Do cultivators always sell to distributors? "Under the MMRSA, [B&PC] Section 19326 specifies certain restrictions on medical cannabis. For example, the statute requires a licensed cultivator or licensed manufacturer "to send" all medical cannabis to a distributor for quality assurance, inspection, and batch testing prior to distribution to a dispensary. Accordingly, the MMRSA allows a cultivator to sell medical cannabis directly to a manufacturer. That manufacturer must send the finished product to a distributor prior to distribution to a dispensary. Since the MMRSA does not require a cultivator to sell to a distributor, how would the tax be imposed and collected if a cultivator sells directly to a manufacturer or if the cultivator "sends" (does not sell) the medical cannabis to the distributor for testing?"
  3. Proposed tax is subject to sales tax: "The total retail sales price of [TPP] is subject to the sales or use tax, unless specifically exempted or excluded by law.

To be reimbursed for the proposed new tax, a distributor would likely incorporate the additional tax into the sales price of the medical cannabis. The sales tax applies to the entire sales price of medical cannabis, including any increase in the retail sales price to the consumer due to the prior imposition of the medical cannabis tax."

• 1. Future track and trace tax program: "The bill requires a licensed distributor to collect and remit the tax and a return to the BOE quarterly. The bill does not specifically allow tax payment through the use of stamps, other markings capable of encrypting certain tax information, or track and trace technology.

BOE staff suggests amending the bill to provide the BOE authority to prescribe by regulation a method and manner for the medical cannabis tax payment. This suggestion builds upon existing requirements for the BOE to adopt a track and trace system ([R&TC] Section 31020) and for the CDFA to establish a unique identifier program ([B&PC] Section 19335)."

• 1. Suggested technical amendments: "The BOE staff recommends the following amendments:
     1. The bill specifies two distinct points of tax imposition: sale and distribution. The bill should specify only one point of taxation to eliminate confusion.
     2. The bill should require licensed distributors to file electronic returns, consistent with other BOE-administered tax programs.
     3. The bill should allow licensed distributors to remit the medical cannabis tax by means other than an electronic funds transfer (EFT) when they are unable to obtain a bank account. Under the law [citation omitted], certain reporting requirements are imposed on tax and feepayers that have substantial tax or fee liabilities. Specifically, tax and feepayers with monthly tax liabilities that average $20,000 or more must remit their tax and fee payments via an EFT under BOE-prescribed procedures."

1. Committee staff comments:
   1. 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.
      1. 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 these objectives, 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;
         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 legalization initiatives in other states, it applies to all Departmental marijuana enforcement nationwide.

• • 1. 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.
  1. 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.
     1. 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.
     2. 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 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,
      5. Any other information the BOE deems necessary for the taxation and regulation of marijuana and marijuana products.
  1. What would this bill do? This bill would impose, for the privilege of distributing medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, a tax on all licensed cultivators of cannabis. Specifically, this bill would require
     licensed distributors to collect the tax from licensed cultivators, and separately state the amount of tax imposed on each purchase order. Funds generated from the new tax would be used for, among other things, both cannabis-related law enforcement activities and efforts to address the environmental impacts of cannabis cultivation on public and private lands in California.
  2. How does this bill fit in with the changing legal landscape? There is at least one marijuana legalization initiative currently being circulated for signatures. Specifically, Proposed Initiative 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. As such, it is unclear to Committee staff how the present bill's tax regime would be impacted by the enactment of a subsequent initiative establishing a new tax regime for cannabis in California.
  3. Related legislation: SB 987 (McGuire), of the current Legislative Session, would impose a 15% tax on medical marijuana purchased from a retailer of medical marijuana, beginning January 1, 2018. SB 987 would only become operative, however, if Proposed Initiative 1762 referenced above is not approved by the voters at the November 8, 2016 statewide general election.
  4. Suggested technical amendments: Committee staff recommends the following technical amendments be adopted:
     1. On page 7, in line 9, strike "is" and insert "are";
     2. On page 7, in line 10, strike "of" and insert "with";
     3. On page 7, in line 16, strike "report" and insert "reports"; and,
     4. On page 7, in line 34, strike "or" and insert "and".

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Professional Scientists

California Cattlemen's Association

California League of Conservation Voters

California Trout

Central Coast Forest Association

The Trust for Public Land

Opposition

Americans for Safe Access

California NORML

Consortium Management Group

UCBA Trade Association

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

Date of Hearing: April 4, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 2243 (

Author:Wood) – As Introduced Ver:February 18, 2016

2/3 vote. Fiscal committee.

SUBJECT: Medical cannabis: taxation: cannabis production and environment mitigation

SUMMARY: Enacts the Medical Cannabis Tax Law (MCTL). Specifically, this bill:

1. Imposes, for the privilege of distributing "medical cannabis flowers", "medical cannabis leaves", and "immature medical cannabis plants", a tax upon all "licensed cultivators" at the following rates:
   1. $9.25 per ounce of "medical cannabis flowers";
   2. $2.75 per ounce of "medical cannabis leaves"; and,
   3. $1.25 per "immature medical cannabis plant".
2. Specifies that the "licensed distributor" shall collect the tax from the "licensed cultivator" and separately state the amount of tax imposed on the purchase order, which shall be given by the "licensed distributor" to the "licensed cultivator" at the time of sale.
3. Exempts from the tax sales by a "licensed cultivator" that the state is prohibited from taxing under the Constitution or laws of the United States (U.S.) or the Constitution of this state. Any claim for exemption from the tax shall be made to the State Board of Equalization (BOE) in the manner prescribed by the BOE.
4. Requires the Legislative Analyst's Office to review regularly the tax levels established by this bill, at a minimum of every other year, beginning in 2018, and to make recommendations to the Legislature on appropriate adjustments that would further the goals of addressing public safety and the environmental impacts caused by the proliferation of cannabis cultivation.
5. Defines "medical cannabis flowers" as the flowers of a cannabis plant, excluding the leaves and stems, that are intended to be sold for use by medical cannabis patients in California under the Compassionate Use Act of 1996 (Proposition 215), found in Health and Safety Code Section 11362.5.
6. Defines "medical cannabis leaves" as all parts of a cannabis plant, other than cannabis flowers, that are intended to be sold for use by medical cannabis patients in California under Proposition 215.
7. Defines an "immature medical cannabis plant" as a cannabis plant with no observable flowers or buds, that is intended to be sold for use by medical cannabis patients in California under Proposition 215.
8. Defines a "licensed cultivator" as a person licensed as a cultivator under the Medical Marijuana Regulation and Safety Act (MMRSA), found in Business and Professions Code (B&PC) Section 19300 et seq.
9. Defines a "licensed distributor" as a "distributor" under B&PC Section 19300.5.
10. Charges the BOE with administering and collecting the new tax under the Fee Collection Procedures Law, found in Revenue and Taxation Code (R&TC) Section 55001 et seq.
11. Specifies that a licensed cultivator is liable for the tax until it has been paid to the state, except that payment to the licensed distributor relieves the licensed cultivator from further liability for the tax.
12. Authorizes the BOE to prescribe, adopt, and enforce regulations relating to the implementation, administration, and enforcement of the MCTL, including applicant requirements, collections, reporting, refunds, and appeals.
13. Authorizes the BOE to prescribe, adopt, and enforce any emergency regulations as necessary to implement the MCTL.
14. Provides that the tax is due and payable to the BOE quarterly on or before the last day of the month following each calendar quarter.
15. Requires a return for the preceding calendar quarter to be filed with the BOE on or before the last day of the month following each calendar quarter. Returns shall be authenticated in a form or pursuant to methods as the BOE prescribes.
16. Establishes the Cannabis Production and Environment Mitigation Fund (Fund) in the State Treasury. All taxes, interest, penalties, and other amounts collected and paid to the BOE, less payments of refunds and costs of administration, shall be deposited in the Fund.
17. Provides that, notwithstanding Government Code Section 13340, all moneys deposited in the Fund are to be continuously appropriated, without regard to fiscal year, in the following manner:
    1. 30% to an unspecified entity for disbursement for local law enforcement-related activities pertaining to illegal cannabis cultivation. Such funds shall be allocated on a competitive grant application process administered by the unspecified entity;
    2. 30% to the Natural Resources Agency 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, as specified. Such funds shall be prioritized to restoration and cleanup projects, on public or private lands, based on the level of damages that have occurred. At least 35% of the funds shall be used for these purposes related to public lands, including parks managed by the California Department of Parks and Recreation, and at least 20% of the funds shall be used for these purposes related to private lands;
    3. 30% to the multiagency task force, the Department of Fish and Wildlife and State Water Resources Control Board, to address the environmental impacts of cannabis cultivation on public and private lands in California and fund other state enforcement-related activities pertaining to illegal cannabis cultivation; and,
    4. 10% to the Bureau of Medical Marijuana Regulations, and other state agencies or departments that the bureau determines are appropriate, to conduct ongoing studies of areas that may create challenges to compliance of the MMRSA, including financial transactions, allowable tax deductions, and the public safety implications of a cash industry. The bureau or other state agencies or departments shall prepare reports on the results of those studies and submit those reports to the Legislature on or before January 1, 2020, and on or before January 1, every two years thereafter.
18. Requires the BOE to submit a report to the Legislature on the total amount of revenue that was collected for the two-year period beginning on this tax's operative date. The report shall be due on or before the last day of the month commencing 180 days after the two-year period.
19. Provides that this act shall become operative on or after [sic] the first day of the first calendar quarter commencing more than 270 days after adequate funding has been received by the BOE to implement and administer this bill. The BOE shall post a notice on its Internet Web site when this condition has been satisfied.
20. Specifies that funds for the establishment and support of the activities required under this bill shall be advanced as a General Fund or special fund loan, and shall be repaid by the BOE from the initial proceeds from taxes collected, no later than six months after the bill's operative date.

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 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:
   
   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. [R&TC 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]
6. Defines "distribution" as the procurement, sale, and transport of medical cannabis and medical cannabis products between licensed entities. [B&PC Section 19300.5]

FISCAL EFFECT: The BOE estimates that this bill's new tax would generate roughly $77 million in revenues annually. Additionally, BOE staff estimates that this bill would generate roughly $6.3 million in state and local SUT revenues annually. Committee staff notes, however, that these estimates assume a 100% compliance rate.

COMMENTS:

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

We are seeing unpermitted land grading and road construction, illegal stream diversions, discharge of sediments, and pollutants into waterways, as well as contamination of water and soil by pesticides, rodenticides, fertilizers and fuels. Mammals, birds and fish are dying horrible deaths from poisons used to protect crops and left behind long after the growers leave an area. These toxins seep into our water supply.

Water is being held from traditional agriculture to ensure there is water in the streams for endangered fish, but instead it is being pumped onto illegal marijuana farms and poisoned by chemicals. Last year, Sproul Creek, in Humboldt County, ran dry for the first time and officials believe it was due in large part to illegal diversions of water for marijuana.

The Medical Marijuana Regulation Safety Act, specifically AB 243, created an environmental regulatory structure to address many of these environmental damages, such as the establishment of a permanent and statewide Watershed Enforcement Team (WET), but the funding component was removed in AB 243 before the bill reached the Governor's desk.

AB 2243 reestablishes an excise tax for medical marijuana that is charged to a licensed medical cannabis cultivator and collected by a licensed medical marijuana distributor. The funds collected will pay for environmental remediation, local law enforcement, and the WET program to address illegal marijuana related activities.

1. This bill is supported by the California Association of Professional Scientists, which notes the following:

The Legislature recently passed, and the Governor signed, the Medical Marijuana Regulation and Safety Act (the Act), which created a state regulatory licensing structure for medical marijuana. The Act brings sensible regulation, oversight and environmental protections to California's medical marijuana industry. Irresponsible marijuana cultivation is threatening California's environment; it is threatening the state's water supply, the state's water quality and the lives and habitat of endangered and other sensitive species. In an effort to protect the environment, the State Water Resources Control Board and the California Department of Fish and Wildlife requested funding from the Governor to create a taskforce to address the damages to natural resources from marijuana cultivation. [. . .]

The Act will help ensure that watersheds and wildlife habitat throughout the state will be protected and, while proposed funding is helpful, there are still gaps that need to be addressed to fully protect the environment.

The Act did not include environmental remediation funding to combat illegal marijuana activities and there is a dire need for another funding mechanism focused on illegal marijuana activities. AB 2243 will address that oversight and provide that funding.

1. This bill is opposed by California NORML, which notes the following:

We urge the committee to reject AB 2243 (Wood), which would impose a new $9.75/ounce tax on the cultivation of medical-only marijuana. At current wholesale prices of ̴ $1,500 / lb, this is tantamount to a 10% tax on the value of marijuana. This would be in addition to the current 7.5+% sales tax plus various local business taxes imposed by some localities.

The proposed tax is unreasonably high and burdensome to low-income patients who need marijuana for medicine. No other state has a comparably high tax on medical (only) marijuana.

The proposed tax will also likely be counterproductive insofar as it will encourage the diversion of marijuana to the untaxed, unregulated adult-use market.

[. . .]

At this time when providers already face burdensome new costs and regulations under MMRSA, it is unwise and unfair to impose further costs on those trying to comply with the law. It is unfair to tax the minority of law-abiding, medical-only suppliers for all of the costs due to illicit, black-market recreational use traffickers. And it is unfair to the many low-income patients who have legitimate medical need for marijuana to impose such a tax on their medicine.

1. The BOE notes the following in its staff analysis of this bill:
   1. Proposed tax is complicated: "This bill proposes a complicated tax scheme that departs from other distributor-level tax structures administered by the BOE. [. . .] The MCTL requires a licensed distributor to issue a purchase order to document the tax imposed. However, a purchase order is simply a merchandise order and not documentation of a sale or distribution. This method could be problematic when the distributor does not purchase the quantity specified on the purchase order. Further, it is unclear how a distributor, who makes the payment rather than receives a payment, can collect the tax. Does the distributor "short" his or her payment to the cultivator by the tax amount?

BOE staff suggests imposing the tax on the "first sale" or "distribution" of flowers, leaves, and immature plants in this state. The taxpayer in this case would be defined as the person who makes the first sale or distribution of cannabis flowers, leaves, and immature plants in this state. A sale from a cultivator to a distributor would be excluded from the definition of sale or distribution thus imposing the tax on the distributor's sale or distribution. This mechanism closely follows the imposition of the cigarette and tobacco products tax. In addition to the suggested revisions to the proposed tax, BOE staff also suggests revising the MCTL's definitions to conform to the imposition and collection change."

• 1. Lack of license should not exclude tax liability: "This bill imposes the medical cannabis tax upon a cultivator. The bill defines licensed cultivator to mean: a person that is licensed as a cultivator under the MMRSA. The bill requires tax collection by a licensed distributor. Does a cultivator or distributor escape the tax if they do not comply with the MMRSA's licensing requirements? (Emphasis in original)"
  2. Do cultivators always sell to distributors? "Under the MMRSA, [B&PC] Section 19326 specifies certain restrictions on medical cannabis. For example, the statute requires a licensed cultivator or licensed manufacturer "to send" all medical cannabis to a distributor for quality assurance, inspection, and batch testing prior to distribution to a dispensary. Accordingly, the MMRSA allows a cultivator to sell medical cannabis directly to a manufacturer. That manufacturer must send the finished product to a distributor prior to distribution to a dispensary. Since the MMRSA does not require a cultivator to sell to a distributor, how would the tax be imposed and collected if a cultivator sells directly to a manufacturer or if the cultivator "sends" (does not sell) the medical cannabis to the distributor for testing?"
  3. Proposed tax is subject to sales tax: "The total retail sales price of [TPP] is subject to the sales or use tax, unless specifically exempted or excluded by law.

To be reimbursed for the proposed new tax, a distributor would likely incorporate the additional tax into the sales price of the medical cannabis. The sales tax applies to the entire sales price of medical cannabis, including any increase in the retail sales price to the consumer due to the prior imposition of the medical cannabis tax."

• 1. Future track and trace tax program: "The bill requires a licensed distributor to collect and remit the tax and a return to the BOE quarterly. The bill does not specifically allow tax payment through the use of stamps, other markings capable of encrypting certain tax information, or track and trace technology.

BOE staff suggests amending the bill to provide the BOE authority to prescribe by regulation a method and manner for the medical cannabis tax payment. This suggestion builds upon existing requirements for the BOE to adopt a track and trace system ([R&TC] Section 31020) and for the CDFA to establish a unique identifier program ([B&PC] Section 19335)."

• 1. Suggested technical amendments: "The BOE staff recommends the following amendments:
     1. The bill specifies two distinct points of tax imposition: sale and distribution. The bill should specify only one point of taxation to eliminate confusion.
     2. The bill should require licensed distributors to file electronic returns, consistent with other BOE-administered tax programs.
     3. The bill should allow licensed distributors to remit the medical cannabis tax by means other than an electronic funds transfer (EFT) when they are unable to obtain a bank account. Under the law [citation omitted], certain reporting requirements are imposed on tax and feepayers that have substantial tax or fee liabilities. Specifically, tax and feepayers with monthly tax liabilities that average $20,000 or more must remit their tax and fee payments via an EFT under BOE-prescribed procedures."

1. Committee staff comments:
   1. 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.
      1. 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 these objectives, 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;
         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 legalization initiatives in other states, it applies to all Departmental marijuana enforcement nationwide.

• • 1. 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.
  1. 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.
     1. 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.
     2. 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 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,
      5. Any other information the BOE deems necessary for the taxation and regulation of marijuana and marijuana products.
  1. What would this bill do? This bill would impose, for the privilege of distributing medical cannabis flowers, medical cannabis leaves, and immature medical cannabis plants, a tax on all licensed cultivators of cannabis. Specifically, this bill would require
     licensed distributors to collect the tax from licensed cultivators, and separately state the amount of tax imposed on each purchase order. Funds generated from the new tax would be used for, among other things, both cannabis-related law enforcement activities and efforts to address the environmental impacts of cannabis cultivation on public and private lands in California.
  2. How does this bill fit in with the changing legal landscape? There is at least one marijuana legalization initiative currently being circulated for signatures. Specifically, Proposed Initiative 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. As such, it is unclear to Committee staff how the present bill's tax regime would be impacted by the enactment of a subsequent initiative establishing a new tax regime for cannabis in California.
  3. Related legislation: SB 987 (McGuire), of the current Legislative Session, would impose a 15% tax on medical marijuana purchased from a retailer of medical marijuana, beginning January 1, 2018. SB 987 would only become operative, however, if Proposed Initiative 1762 referenced above is not approved by the voters at the November 8, 2016 statewide general election.
  4. Suggested technical amendments: Committee staff recommends the following technical amendments be adopted:
     1. On page 7, in line 9, strike "is" and insert "are";
     2. On page 7, in line 10, strike "of" and insert "with";
     3. On page 7, in line 16, strike "report" and insert "reports"; and,
     4. On page 7, in line 34, strike "or" and insert "and".

REGISTERED SUPPORT / OPPOSITION:

Support

California Association of Professional Scientists

Opposition

California NORML

UCBA Trade Association

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