The Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, and additionally amended by statute, imposes an excise tax commencing January 1, 2018, on the purchase of cannabis and cannabis products, as defined, at the rate of 15% of the average market price of any retail sale by a cannabis retailer. Commencing January 1, 2018, AUMA also imposes a cultivation tax upon all cultivators on all harvested cannabis that enters the commercial market, at specified rates per dry-weight ounce of cannabis flowers and leaves. Existing law requires the revenues from those taxes to be deposited into the California Cannabis Tax Fund and to be continuously appropriated for specified purposes pursuant to a specified schedule. AUMA authorizes the Legislature to amend its provisions with a ²/₃ vote of both houses to further its purposes and intent.

This bill would reduce that excise tax rate to 11% on and after the operative date of this bill until June 1, 2021, at which time the excise tax rate would revert back to 15%. This bill would suspend the imposition of the cultivation tax on and after the operative date of this bill until June 1, 2021.

This bill would make specified findings and declare that its provisions further the purposes and intent of the AUMA.

This bill would take effect immediately as a tax levy, but its operative date would depend on its effective date.

The Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, and additionally amended by statute, imposes an excise tax commencing January 1, 2018, on the purchase of cannabis and cannabis products, as defined, at the rate of 15% of the average market price of any retail sale by a cannabis retailer. Commencing January 1, 2018, AUMA also imposes a cultivation tax upon all cultivators on all harvested cannabis that enters the commercial market, at specified rates per dry-weight ounce of cannabis flowers and leaves. Existing law requires the revenues from those taxes to be deposited into the California Cannabis Tax Fund and to be continuously appropriated for specified purposes pursuant to a specified schedule. AUMA authorizes the Legislature to amend its provisions with a ²/₃ vote of both houses to further its purposes and intent.

This bill would reduce that excise tax rate to 11% on and after the effective operative date of this bill until June 1, 2021, at which time the excise tax rate would revert back to 15%. This bill would suspend the imposition of the cultivation tax on and after the effective operative date of this bill until June 1, 2021.

This bill would make specified findings and declare that its provisions further the purposes and intent of the AUMA.

Existing sales and use tax laws impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state. The Sales and Use Tax Law defines various terms for these purposes.

This bill would make a nonsubstantive change with respect to the definitions that govern the construction of the Sales and Use Tax Law.

Date of Hearing: May 16, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 3157

Author:(Lackey) – As Amended Ver:May 10, 2018

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

SUMMARY:

This bill reduces the excise tax on sales of cannabis and cannabis products from 15% to 11%, and suspends the tax on cannabis cultivation, until June 1, 2021.

FISCAL EFFECT:

Revenue loss of up to $297 million in 2018-19 compared to initial forecasts of excise and cultivation tax collections. However, revenue losses will be significantly lower if actual tax revenues continue to lag forecasts. (California Cannabis Tax Fund.)

COMMENTS:

1. Purpose. According to the author, AB 3157 will allow time for cannabis businesses and consumers to transition away from the unregulated cannabis market to the regulated market. The author argues that legal cannabis businesses face financial challenges due to increased prices and competition from black market operators not subject to taxes and the costs of complying with new state regulations.
2. Background. The Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA), enacted when voters approved Proposition 64 in 2016, created the statutory framework for the state to regulate cannabis and impose taxes on the sale of both medical and recreational cannabis. As of January 1, 2018, state law imposes a 15% excise tax on the gross receipts of any retail sale of marijuana and imposes a cultivation tax of $9.25 per dry-weight ounce on cannabis flowers and $2.75 per dry-weight ounce on cannabis leaves.
3. California Cannabis Tax Fund. Excise tax and cultivation tax revenues are deposited into the California Cannabis Tax Fund (Fund), and existing law requires that funds be allocated to various purposes in a specified order or priority. First, Fund moneys are used to cover the costs of state agencies responsible for implementing cannabis laws, but only when license fees do not cover these costs. After state agency cost reimbursement, $25 million in Fund revenue is next allocated to specific programs designated under Proposition 64. Following this allocation, Fund revenues are then allocated as follows: 60% to the Youth Education, Prevention, Early Intervention and Treatment Account; 20% to the Environmental Restoration and Protection Account; and 20% to the State and Local Government Law Enforcement Account.
4. Report requirement. Proposition 64 mandates that by January 1, 2020, the Legislative Analyst’s Office (LAO) must include in a report recommendations for adjustments to the tax rate to achieve the goals of undercutting illicit market prices and ensuring sufficient revenues are generated.
5. Revenue thus far. The LAO reports that in the first quarter of 2018, $34 million in cannabis excise tax revenue was collected. In its January budget proposal, the administration estimated that 2017-18 cannabis excise tax revenue would total $175 million.

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

Date of Hearing:

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 3157

Author:(Lackey) – As Amended Ver:April 25, 2018

SUBJECT: Taxation: cannabis.

SUMMARY: Reduces the excise tax on sales of cannabis and cannabis products from 15% to 11%, and suspends the tax on cannabis cultivation, until June 1, 2021.

EXISTING LAW:

1. Enacts the Medicinal and Adult-Use Cannabis Regulation and Safety Act to provide for a comprehensive regulatory framework for the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal and adult-use cannabis. (Business and Professions Code (BPC) §§ 26000 et al.)
2. Defines an “A-license” as a state license issued for cannabis or cannabis products intended for adults 21 years of age and older and “M-license” as a state license for commercial cannabis activity involving medicinal cannabis. (BPC § 26001)
3. Provides for twenty total types of cannabis licenses including subtypes for cultivation, manufacturing, testing, retail, distribution, and microbusiness; requires each licensee except for testing laboratories to clearly designate whether their license is for adult-use or medicinal cannabis. (BPC § 26050)
4. Establishes the Bureau of Cannabis Control (BCC) within the Department of Consumer Affairs, previously named the Bureau of Marijuana Control, the Bureau of Medical Cannabis Regulation, and the Bureau of Medical Marijuana Regulation, for purposes of regulating microbusinesses, transportation, storage, distribution, testing, and sale of cannabis and cannabis products within the state. (BPC § 26010)
5. Requires the BCC to convene an advisory committee to advise state licensing authorities on the development of standards and regulations for legal cannabis, including best practices and guidelines that protect public health and safety while ensuring a regulated environment for commercial cannabis activity that does not impose such barriers so as to perpetuate, rather than reduce and eliminate, the illicit market for cannabis. (BPC § 26014)
6. Provides the Department of Food and Agriculture (CDFA) with responsibility for regulating cannabis cultivators. (BPC § 26060)
7. Provides the Department of Public Health (CDPH) with responsibility for regulating cannabis manufacturers. (BPC § 26130)
8. Establishes grounds for disciplinary action against cannabis licensees, including failures to comply with state licensing requirements as well as local laws and ordinances. (BPC § 26030)
9. Subjects cannabis businesses operating without a license to civil penalties of up to three times the amount of the license fee for each violation in addition to any criminal penalties. (BPC § 26038)
10. Expresses that state cannabis laws shall not be interpreted to supersede or limit the authority of a local jurisdiction to adopt and enforce local ordinances to regulate cannabis businesses. (BPC § 26200)
11. Imposes a 15% excise tax upon purchasers of cannabis or cannabis products sold in this state in addition to the sales and use tax imposed by the state and local governments. (Revenue and Tax Code (RTC) § 34011)
12. Imposes a cultivation tax on all harvested cannabis that enters the commercial market at a rate of $9.25 per dry-weight ounce for cannabis flowers and $2.75 per dry-weight ounce for cannabis leaves. (RTC § 34012)
13. Provides the Department of Tax and Fee Administration (CDTFA) with responsibility for administering and collecting taxes on cannabis businesses. (RTC § 34013)
14. Establishes the California Cannabis Tax Fund (Tax Fund) in the State Treasury wherein cannabis tax revenues are deposited. (RTC § 34018)
15. Specifies that money in the Tax Fund shall be disbursed by the Controller in the following order of funding priority:
    1. Funds sufficient to reimburse departments for any reasonable costs incurred through the implementation of the state’s cannabis laws that are not otherwise reimbursed.
    2. $10 million to a public university in California annually to research and evaluate the implementation and effect of the state’s cannabis laws, including the impact of legal cannabis on public health; the public safety implications of legal cannabis; the effectiveness of certain drug treatment programs; whether additional antitrust protections are needed in the recreational cannabis market; the economic impacts of the state’s cannabis laws; and how to best tax cannabis based on potency, and the structure and function of licensed cannabis businesses; among other topics of study.
    3. $3 million to the Department of the California Highway Patrol annually to establish and adopt protocols to determine whether a driver is operating a vehicle while impaired by the use of cannabis.
    4. $10 million beginning with the 2018-19 fiscal year, then increasing by $10 million each year until reaching $50 million annually, to the Governor’s Office of Business and Economic Development to award community reinvestments grants to local health departments and at least 50% to qualified community-based nonprofit organizations to support job placement, mental health treatment, substance use disorder treatment, system navigation services, legal services to address barriers to reentry, and linkages to medical care for communities disproportionately affected by past federal and state drug policies.
    5. $2 million annually to the University of California San Diego Center for Medicinal Cannabis Research to further its objectives.
    6. Remaining funds deposited into sub-trust accounts as follows:
       1. 60% into the Youth Education, Prevention, Early Intervention and Treatment Account, disbursed to the Department of Health Care Services for programs for youth that are designed to educate about and to prevent substance use disorders and to prevent harm from substance use. The programs shall emphasize accurate education, effective prevention, early intervention, school retention, and timely treatment services for youth, their families, and their caregivers.
       2. 20% into the Environmental Restoration and Protection Account, disbursed to the Department of Fish and Wildlife and the Department of Parks and Recreation to fund activities related to the natural resources and wildlife implications of legal cannabis.
       3. 20% into the State and Local Government Law Enforcement Account, disbursed to the California Highway Patrol to fund education regarding cannabis-impaired driving and to the Board of State and Community Corrections to award grants to local law enforcement to address the public health and safety implications of locally legalized cannabis.

(RTC § 34019)

1. Prohibits the Legislature from changing the cannabis tax revenue funding allocations before July 1, 2028. (RTC § 34019(h))
2. Requires the Controller to periodically audit the Tax Fund to ensure that funds are used and accounted for in a manner consistent with what is required by law. (RTC § 34020)
3. States that cannabis taxes shall be in addition to any other tax imposed by a local government. (RTC § 34021)
4. Permits a county to impose a tax on the privilege of cultivating, manufacturing, producing, processing, preparing, storing, providing, donating, selling, or distributing cannabis or cannabis products. (RTC § 34021.5)
5. Authorizes the Legislature to enact laws to implement the state’s regulatory scheme for cannabis, provided those laws are consistent with the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Proposition 64). (BPC § 26000)

THIS BILL:

1. Finds and declares that high taxes on cannabis undermine the legal regulatory system when they cause retail prices to far exceed that what is purchasable on the black market, and that this may be addressed by temporarily adjusting the tax rate for the first three years of legal sales as legitimate cannabis businesses come into that market. Further states that this tax adjustment is therefore in furtherance of the intent of Proposition 64.
2. Lowers the cannabis excise tax from 15% to 11% for sales beginning on the operative date of the bill and ending on June 1, 2021.
3. Suspends the cannabis cultivation tax beginning on the operative date of the bill and ending on June 1, 2021.
4. Provides that the bill’s operative date is on the first day of the first calendar quarter commencing more than 30 days after the bill is signed.

FISCAL EFFECT: Unknown; this bill is keyed fiscal by the Legislative Counsel.

COMMENTS:

Purpose. This bill is sponsored by the author. According to the author:

As someone who spent 28 years in law enforcement, I know how sophisticated California’s black market for cannabis has become. Criminals do not pay business taxes, ensure consumers are of purchasing age, obtain licenses, or follow product safety regulations. This allows them to sell cannabis at significantly lower prices than legal businesses. By temporarily lowering the excise tax and suspending the cultivation tax, we are allowing time for cannabis businesses and consumers to transition away from the black market and into the regulated market.

Background.

Early History of Cannabis Regulation in California. Consumption of cannabis (or “marijuana”) was first made lawful in California when voters approved Proposition 215 in 1996, also known as the Compassionate Use Act. Proposition 215 protected qualified patients and primary caregivers from prosecution related to the possession and cultivation of cannabis for medicinal purposes, if recommended by a physician. The initiative prohibited physicians from being punished or denied any right or privilege for making a medicinal cannabis recommendation to a patient. Proposition 215 also included findings and declarations, including encouragement of the federal and state government to implement a plan to provide for the safe and affordable distribution of cannabis to patients with medical needs.

The regulatory scheme for medicinal cannabis was further refined by SB 420 (Vasconcellos) in 2003, which established the state’s Medical Marijuana Program (MMP.) Under the MMP, qualified patients were eligible to obtain a voluntary medical marijuana patient card, which could be used to verify that the patient or a caregiver had authorization to cultivate, possess, transport, or use medicinal cannabis. Under the MMP, a patient would obtain a recommendation for medicinal cannabis from a physician and submit proof to their county of residence to receive a card. The MPP’s identification cards were intended to help law enforcement officers identify and verify that cardholders were allowed to cultivate, possess, and/or transport limited amounts of cannabis without being subject to arrest. The MMP also created protections for qualified patients and primary caregivers from prosecution for the formation of collectives and cooperatives for medicinal cannabis cultivation.

Since the state did not adopt a formal framework to provide for appropriate licensure and regulation of medicinal cannabis until late 2015, a proliferation of informally regulated cannabis collectives and cooperatives were largely left to the enforcement of local governments. As a result, a patchwork of local regulations was created with little statewide involvement. More restrictive laws and ordinances by cities and counties were ultimately upheld by the California Supreme Court in City of Riverside v. Inland Empire Patients (2013) 56 Cal. 4^th 729, which held that state law did not expressly or implicitly limit the inherent authority of a local jurisdiction, by its own ordinances, to regulate the use of its land, including the authority to provide that facilities for the distribution of medicinal cannabis be prohibited from operating within its borders.

Even after several years of legal cannabis cultivation and consumption under state law, a lack of a uniform regulatory framework led to persistent problems across the state. Cannabis’s continued illegality under the federal Controlled Substances Act, which classifies cannabis as a Schedule I drug ineligible for prescription, generated periodic enforcement activities by the United States Department of Justice. The constant threat of action by the federal government created apprehension among California’s cannabis community.

A document issued by the United States Attorney General in 2013 known as the “Cole memorandum” indicated that the existence of a strong and effective state regulatory system, and a cannabis operation’s compliance with such a system, could allay the threat of federal enforcement interests. Federal prosecutors were urged under the memo to review cannabis cases on a case-by-case basis and consider whether a cannabis operation was in compliance with a strong and effective state regulatory system prior to prosecution. The memo was followed by Congress’s passage of the Rohrabacher-Farr amendment, which generally prohibits the United States Department of Justice from interceding in state efforts to implement medicinal cannabis laws.

MCRSA. After several attempts to improve the state’s regulation of cannabis, the Legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA) in 2015. MCRSA consisted of a package of legislation: AB 243 (Wood); AB 266 (Bonta, Cooley, Jones-Sawyer, Lackey, and Wood); and SB 643 (McGuire). MCRSA established, for the first time, a comprehensive statewide licensing and regulatory framework for the cultivation, manufacture, transportation, testing, distribution, and sale of medicinal cannabis to be administered by the newly established Bureau of Cannabis Control (BCC) within Department of Consumer Affairs (DCA), the Department of Public Health (CDPH), and the Department of Food and Agriculture (CDFA), with implementation relying on each agency’s area of expertise.

MCRSA vested authority for:

• The Bureau of Cannabis Control to issue licenses and regulate dispensaries, distributors, and transporters, and to provide oversight for the state’s regulatory framework;
• The Department of Public Health to license and regulate testing laboratories and manufacturers; and
• The Department of Food and Agriculture to license and regulate cultivators.

While entrusting state agencies to promulgate extensive regulations governing the implementation of the state’s cannabis laws, MCRSA fully preserved local control. Under MCRSA, local governments may establish their own ordinances to regulate medicinal cannabis activity. Local jurisdictions may also choose to ban cannabis altogether.

AUMA. Not long after the Legislature enacted MCRSA, California voters passed Proposition 64, the Adult Use of Marijuana Act (AUMA). The passage of the AUMA legalized cannabis for non-medicinal adult use in a private home or licensed business, allowed adults 21 and over to possess and give away up to approximately one ounce of cannabis and up to eight grams of concentrate, and permitted the personal cultivation of up to six plants. The law sustained prohibitions against smoking in or operating a vehicle while under the effects of cannabis, possessing cannabis at a school or other child oriented facility while kids are present, growing in an unlocked or public place, and providing cannabis to minors.

The proponents of the AUMA sought to make use of much of the regulatory framework and authorities set out by MCRSA while making a few notable changes to the structure still being implemented. In addition, the AUMA approved by the voters adopted the January 1, 2018 deadline for state implementation of non-medicinal cannabis in addition to the regulations required in MCRSA that are scheduled to take effect on the same date. The same agencies given authority under MCRSA remain responsible for implementing regulations for adult use.

Under the AUMA, the BCC within the DCA continues to serve as the lead regulatory agency for all cannabis, both medicinal and non-medicinal. The AUMA includes 19 different license types compared to the 17 in MCRSA and provides the DCA (and the BCC) with the authority to create and regulate a license for transportation of cannabis. The AUMA also allows for vertical integration models which allow the holding of multiple license types previously prohibited under MCRSA. Additionally, while MCRSA requires both a state and local license to operate, the AUMA only stipulates a state license; however, the state is also directed not to issue a license to an applicant if it would “violate the provisions of any local ordinance or regulation.”

The language of the AUMA allows for legislative modifications that “implement” or “give practical effect” to the law by a majority vote. However, the interpretation of what constitutes “implementing” has been interpreted to be very limited. Consequently, proposed changes on the whole, require a two-thirds vote and of those, some may be deemed to require subsequent voter approval.

MAUCRSA. In the spring of 2017, SB 94 (Committee on Budget and Fiscal Review) reconciled the distinct systems for the regulation, licensing, and enforcement of cannabis established under the authorities of MCRSA and the AUMA. The single consolidated system established by the bill—known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA)—created a unified series of cannabis laws and deleted redundant code sections no longer necessary due to the combination of the two systems. MAUCRSA also clarified a number of components, including but not limited to licensing, local control, taxation, testing, and edibles.

As of January 1, 2018, the state has begun issuing temporary licenses (adult-use and medicinal) to cannabis businesses as the state’s regulatory agencies worked toward the finalization of their regulations. While an electronic Track-and-Trace system was implemented pursuant to MAUCRSA, it is not currently being used for temporary licensees. The state’s emergency regulations require temporary licensees to document all sales and transfers of cannabis and cannabis products between temporary licensees—or between temporary licensees and annual licensees—by using paper sales invoices or shipping manifests. Other licensing requirements will not be enforced until the completion of a grace period later in the year. Collectives and cooperatives previously authorized to engage in unlicensed cannabis cultivation are allowed to continue operating until January 9, 2019.

Tax Revenue Allocations. Under MAUCRSA, a 15% excise tax is imposed on sales of cannabis and a tax on cannabis cultivation is imposed at a rate of $9.25 per dry-weight ounce of cannabis flowers and $2.75 per dry-weight ounce of cannabis leaves that are harvested and brought to market. These taxes are distinct from state sales and use taxes, which apply to recreational cannabis, as well as any taxes imposed by local governments. Excise tax and cultivation tax revenues are deposited into a special fund referred to as the California Cannabis Tax Fund and are then allocated for a variety of purposes in order of priority.

First, expenditures incurred by state agencies responsible for implementing cannabis laws are to be paid for through the Tax Fund. This includes reasonable costs incurred by the CDTFA for administering and collecting the taxes, not to exceed 4% revenue; reasonable costs incurred by the BCC, DCA, CDFA, and CDPH for licensing and enforcement programs; reasonable costs incurred by the Department of Fish and Wildlife, the State Water Resources Control Board, and the Department of Pesticide Regulation for carrying out their environmental protection duties under the state’s cannabis laws; and other state agencies. Allocations to reimburse these state entities shall only be made to the extent the entities are not otherwise reimbursed for their costs—e.g., the BCC, CDFA, and CDPH are largely reimbursed for their costs through the collection of cannabis license fees. (However, these fees are currently not being collected for temporary licenses.)

After state agency cost reimbursement, Tax Fund revenue is next allocated to fund a series of specific programs designated under Proposition 64. These programs are to be provided with precise amounts of funding totaling $25 million and are to be appropriated annually until the 2028-29 fiscal year. In order of priority, the disbursements are as follows:

1. $10 million to a public university in California selected by the BCC to research and evaluate the implementation and effect of legal cannabis and make recommendations to the Legislature and Governor regarding possible changes to the law. Universities receiving these funds shall publicly report on their findings at least every two years. The research topics may include but are not limited to:
   • Impacts on public health, including health costs associated with cannabis use, as well as whether cannabis use is associated with an increase or decrease in use of alcohol or other drugs.
   • The impact of treatment for maladaptive cannabis use and the effectiveness of different treatment programs.
   • Public safety issues related to cannabis use, including studying the effectiveness of the packaging and labeling requirements and advertising and marketing restrictions contained in the act at preventing underage access to and use of cannabis and cannabis products, and studying the health-related effects among users of varying potency levels of cannabis and cannabis products.
   • Cannabis use rates, maladaptive use rates for adults and youth, and diagnosis rates of cannabis-related substance use disorders.
   • Cannabis market prices, illicit market prices, tax structures and rates, including an evaluation of how to best tax cannabis based on potency, and the structure and function of licensed cannabis businesses.
   • Whether additional protections are needed to prevent unlawful monopolies or anti-competitive behavior from occurring in the adult-use cannabis industry and, if so, recommendations as to the most effective measures for preventing such behavior.
   • The economic impacts in the private and public sectors, including, but not necessarily limited to, job creation, workplace safety, revenues, taxes generated for state and local budgets, and criminal justice impacts, including, but not necessarily limited to, impacts on law enforcement and public resources, short and long term consequences of involvement in the criminal justice system, and state and local government agency administrative costs and revenue.
   • Whether the regulatory agencies tasked with implementing and enforcing the state’s cannabis laws are doing so consistent with the purposes of Proposition 64, and whether different agencies might do so more effectively.
   • Environmental issues related to cannabis production and the criminal prohibition of cannabis production.
   • The geographic location, structure, and function of licensed cannabis businesses, and demographic data, including race, ethnicity, and gender, of license holders.
   • The outcomes achieved by the changes in criminal penalties made under Proposition 64 for cannabis-related offenses, and the outcomes of the juvenile justice system, in particular, probation-based treatments and the frequency of up-charging illegal possession of cannabis or cannabis products to a more serious offense.
2. $3 million to the California Highway Patrol (CHP) to establish and adopt protocols to determine whether a driver is operating a vehicle while impaired, including impairment by the use of cannabis or cannabis products, and to establish and adopt protocols setting forth best practices to assist law enforcement agencies. The CHP may hire personnel to establish the protocols specified in this subdivision. In addition, the CHP may make grants to public and private research institutions for the purpose of developing technology for determining when a driver is operating a vehicle while impaired, including impairment by the use of cannabis or cannabis products.
3. $10 million to the Governor’s Office of Business and Economic Development (GO-Biz), which subsequently increases by an additional $10 million each fiscal year until reaching a total disbursement of $50 million annually beginning in the 2022-23 fiscal year. GO-Biz is instructed to use this money to, in consultation with the Labor and Workforce Development Agency and the State Department of Social Services, administer a community reinvestments grants program to local health departments and at least 50% to qualified community-based nonprofit organizations to support job placement, mental health treatment, substance use disorder treatment, system navigation services, legal services to address barriers to reentry, and linkages to medical care for communities disproportionately affected by past federal and state drug policies. GO-Biz is required to solicit input from community-based job skills, job placement, and legal service providers with relevant expertise as to the administration of the grants program. In addition, GO-Biz is required to periodically evaluate the programs it is funding to determine the effectiveness of the programs, shall not spend more than 4% for administrative costs related to implementation, evaluation, and oversight of the programs, and shall award grants annually, beginning no later than January 1, 2020.
4. $2 million to the University of California San Diego Center for Medicinal Cannabis Research to further the objectives of the center, including the enhanced understanding of the efficacy and adverse effects of cannabis as a pharmacological agent.

After each of the above allocations have been made in sequential order, totaling $25 million, any remaining revenue in the Tax Fund is divided into sub-trust accounts according to a percentage outlined by Proposition 64. The division is as follows:

1. 60% of the remaining revenue is deposited in the Youth Education, Prevention, Early Intervention and Treatment Account, and disbursed by the Controller to the Department of Health Care Services for programs for youth that are designed to educate about and to prevent substance use disorders and to prevent harm from substance use.
2. 20% of the remaining revenue is deposited in the Environmental Restoration and Protection Account, and disbursed by the Controller as follows:
   1. To the Department of Fish and Wildlife and the Department of Parks and Recreation for the cleanup, remediation, and restoration of environmental damage in watersheds affected by cannabis cultivation and related activities including, but not limited to, damage that occurred prior to enactment of Proposition 64, and to support local partnerships for this purpose. The Department of Fish and Wildlife and the Department of Parks and Recreation may distribute a portion of the funds they receive from the Environmental Restoration and Protection Account through grants.
   2. To the Department of Fish and Wildlife and the Department of Parks and Recreation for the stewardship and operation of state-owned wildlife habitat areas and state park units in a manner that discourages and prevents the illegal cultivation, production, sale, and use of cannabis and cannabis products on public lands, and to facilitate the investigation, enforcement, and prosecution of illegal cultivation, production, sale, and use of cannabis or cannabis products on public lands.
   3. To the Department of Fish and Wildlife to assist in funding the watershed enforcement program and multiagency taskforce to facilitate the investigation, enforcement, and prosecution of these offenses and to ensure the reduction of adverse impacts of cannabis cultivation, production, sale, and use on fish and wildlife habitats throughout the state.
3. 20% of the remaining revenue is deposited in the State and Local Government Law Enforcement Account and disbursed by the Controller as follows:
   1. To the CHP for conducting training programs for detecting, testing and enforcing laws against driving under the influence of alcohol and other drugs, including driving under the influence of cannabis.
   2. To the CHP to fund internal programs and grants to qualified nonprofit organizations and local governments for education, prevention, and enforcement of laws related to driving under the influence of alcohol and other drugs, including cannabis; programs that help enforce traffic laws, educate the public in traffic safety, provide varied and effective means of reducing fatalities, injuries, and economic losses from collisions; and for the purchase of equipment related to enforcement of laws related to driving under the influence of alcohol and other drugs, including cannabis.
   3. To the Board of State and Community Corrections (BSCC) for making grants to local governments to assist with law enforcement, fire protection, or other local programs addressing public health and safety associated with the implementation of Proposition 64. The BSCC shall not make any grants to local governments which have banned the cultivation, including personal cultivation or retail sale of cannabis.
   4. The Department of Finance shall determine the allocation of revenues between the agencies; provided, however, beginning in the 2022–23 fiscal year the amount allocated to CHP for training programs shall not be less than $10 million annually and the amount allocated to the CHP for grants shall not be less than $40 million.

Projected Tax Revenue Estimates. In its analysis of Proposition 64, the Legislative Analyst’s Office (LAO) stated that the initiative’s fiscal effects were “subject to significant uncertainty.” The Department of Tax and Fee Administration has not yet reported how much tax revenue has been generated from the cultivation and sale of cannabis. The Governor’s Budget Summary for the 2018-19 fiscal year stated that “cannabis excise taxes are expected to generate $175 million in 2017-18 and $643 million in 2018-19.” However, due to the lack of confidence in how much tax revenue will actually be realized, the Department of Finance deferred all cannabis-related budget proposals until the upcoming May Revision, when more data will be available.

Current Related Legislation. AB 2980 (Gipson) would redefine “premises” for purposes of licensed cannabis businesses to allow for the sharing of common use areas, such as bathrooms, breakrooms, locker rooms, or hallways, wherein no license privileges are exercised.

AB 3261 (Committee on Business and Professions) would make various clarifying and technical changes to the state’s cannabis laws.

Prior Related Legislation. SB 94 (Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2017) combined AUMA and MCRSA into one system for the regulation of cannabis, resulting in MAUCRSA.

ARGUMENTS IN SUPPORT:

The California Cannabis Delivery Alliance (CCDA) supports this bill. The CCDA states that “given the large illicit market that still exists in California, high tax rates on cannabis present a challenge to California’s efforts to establish a legal and regulated market. Compliant, state licensed, tax paying businesses are at a significant disadvantage due to their inability to compete with illicit actors who often do not pay similar taxes, which is counter to the intent of Proposition 64. To reduce the illicit market, California must encourage cannabis operators to come into the legal and regulated system. One way to entice them to is by temporarily lowering the state’s tax on cannabis so their prices are more competitive with illicit market prices.”

The California Cannabis Industry Association (CCIA) is also in support. The CCIA argues that the bill furthers the intent and purpose of Proposition 64 by looking to “control, regulate, and reasonably tax cannabis businesses so as to promote responsible and legal cannabis business growth.” The CCIA further argues that “under the current tax scheme, compliant products have increased in price by as much as 45%. This has discouraged many cannabis operators from entering the compliant market. Reducing the current tax burdens will promote greater entry into regulated the new market and eased the financial burdens on existing licensed cannabis businesses who are currently completing against a disproportionately higher illicit market.”

The California Growers Association (CGA) also writes in support. The CGA cites reports that when “other states, like Oregon and Washington, reduced their tax rates they saw significant growth in cannabis tax revenues after ushering in reforms to their tax system. Given the large black market that still exists in California, high tax rates on cannabis present a serious barrier for cultivators, manufacturers and distributors to enter the legal and regulated market. Compliant businesses are at a significant disadvantage due to their inability to compete with unlicensed entities who are not participating in the licensed marketplace and are not remitting any state or local tax obligations.” The CGA further advocates for additional reforms to the state’s cannabis laws to establish a tiered system of taxation on cultivation based on the size of the operation.

Board of Equalization (BOE) Member Fiona Ma is in support of AB 3157. BOE Member Ma writes: “California’s voters approved the legalization and taxation of adult-use cannabis in November 2016 as an attempt to eliminate the black market, while generating revenue for state and local government through taxes on an industry that has the capacity to generate $8-20 billion in revenue for the state annually.” However, BOE Member Ma points out that because the estimated cumulative tax rate is high, many black market businesses have not sought licensure. BOE Member Ma argues that “AB 3157 is imperative to temporarily lessen California’s total tax on cannabis, and give these businesses and the State enough time to fully implement Prop 64.”

ARGUMENTS IN OPPOSITION:

Drug Policy Alliance (DPA) is in formal opposition to this bill. DPA, whose 501(c)(4) partner “played a key role in the drafting and funding of Proposition 64,” argues “AB 3157 is premature, undercuts the intended purposes of Proposition 64, and has the potential to reduce revenue to important state funds enacted by the voters of California.” DPA points out that the LAO reviewed the tax rate enacted in Proposition 64 and projected revenues “that could eventually collect net additional revenues that could range from the high hundreds of millions of dollars to over $1 billion annually.” DPA says the rate should not be changed without further LAO review.

DPA argues that creating new funds for programs outlined in the initiative through new tax revenue was one of the primary arguments in favor of the ballot measure, and that “lowering the state tax revenue is likely to reduce the amount of revenue in these funds, and reduce the funding for state regulatory positions. Additionally, Proposition 64 and existing state law allows for localities to establish local taxes on cannabis in addition to the state tax. Reducing the state tax would allow a larger margin for localities to thereby increase local taxes. This would result in the same tax burden overall for businesses, but less revenue going into the Proposition 64 funds mandated by the voters.”

Finally, DPA argues that “AB 3157 is simply too broad. There may be legitimate policy arguments as to why the tax burden should be temporarily reduced on smaller cultivators to help bring them into the legal market and ease the tax burden on the smallest businesses, or to eliminate the taxes entirely for the narrow category of businesses and organizations that are providing medicine for free to seriously ill patients. But this bill reduces the taxes for everyone before the LAO has had the chance to advise and recommend to the Legislature as to how to adjust the tax structure to best achieve the goals of Proposition 64.”

POLICY ISSUE(S) FOR CONSIDERATION:

Impact on Tax Revenues. Given that fewer businesses have entered into the newly licensed cannabis industry than anticipated and many jurisdictions still currently ban cannabis locally, the black market continues to widely operate. This has led many to prognosticate that actual tax revenue will be far less than the $643 million projected by the Department of Finance for 2018-19. In April of 2018 it was reported that data from BDS Analytics, an analytics firm based in Boulder, Colorado, estimated taxable sales in the first two months of legalization to be at a 13% lower rate than expected. Actual revenue for the first quarter of 2018 will not be available until the release of the Governor’s May Revision. However, it is highly unlikely that the first year of legalized cannabis will result in the scale of state and local tax revenues the LAO said “could eventually range from the high hundreds of millions of dollars to over $1 billion annually” in the Proposition 64 voter guide. Lowering the current tax rate on cannabis cultivation and sale would arguably diminish these revenues even further.

Supporters of this bill argue that because the high tax rate on cannabis businesses is a leading cause for this slow industry growth, the tax levy would ultimately lead to a larger scale of taxable activity and thus greater revenue. Specifically, the author argues that when the State of Washington first legalized cannabis, it initially had higher tax rates; when that state lowered their rate and simplified their system, the state eventually began generating greater revenue. Writing from a neutral, purely technical perspective on the bill, New Frontier Data estimates that “a 4% reduction in the state excise tax would expect to see an increase in legal participation by 119,000 consumers, generating an estimated additional $278 million in retail revenue.” The author provided the following chart from New Frontier Data to support this claim:

However, the State of Washington is not a perfect allegory for California. Originally, Initiative 502 levied a 25% tax on cannabis at three separate points in the supply chain: a 25% tax on producer sales to processors, another 25% tax on processor sales to retailers, and a third 25% tax on retailer sales to customers. The change made in Washington was to replace this three-tiered system of taxation with a single 37% tax on final sales of cannabis. Not only was this a much more significant reform to the state’s legal scheme for cannabis, but both the resulting excise tax rate of 37% remains much higher than California’s 15% rate.

It is also worth noting that state-level taxes on the cultivation and sale of cannabis represent only a portion of the overall effective tax rate for any given cannabis operation. Under Proposition 64 and MAUCRSA, local governments are permitted to levy their own taxes on a cannabis business, and many jurisdictions have imposed additional taxes that greatly exceed the assessments adjusted by this bill. For example, the County of Monterey imposes its own cultivation tax of $15 per square foot. The City of Berkeley recently cut its local excise tax on cannabis sales from 10% to 5%. In 2017, the City of Campbell approved a measure to impose an initial tax of 7% on cannabis businesses that could be raised through local ordinance to a tax rate as high as 15%.

Impact on State’s Ability to Fund Regulatory Obligations and Proposition 64 Programs. In order to fund the state’s regulatory scheme for cannabis prior to the collection of license fees and taxes, the State of California transferred $135 million in General Fund loans to the Cannabis Control Fund. These loans must be paid back. While much of the state agency regulatory costs are intended to be reimbursed through license fees, these fees are not currently being collected while temporary licenses are being issued. It is anticipated that the language regarding cannabis excise taxes making state agency reimbursement a priority for the Tax Fund will be relied upon for these obligations. A total of $91.7 million in costs is anticipated for regulatory agencies in the 2018/19 fiscal year, not including any new proposals that may included in the May Revision.

Following the reimbursement of reasonable costs incurred by regulatory entities, Proposition 64 was passed by the voters with the promise that new programs would receive specified amounts of funding. As previously discussed, a total of $25 million is allocated for research, education, substance use disorder treatment, and public safety programs. If cannabis tax revenues are insufficient to fund this $25 million, it could be argued that the intent of the voters in favor of Proposition 64 is not being fulfilled. This is not including the funding intended for additional programs funded through revenue in excess of the $25 million in specified allocations.

AMENDMENTS:

1. To safeguard the voters’ expectation that Proposition 64 implementation would ensure a robust regulatory framework for legal cannabis and provide dedicated funding for new programs specified in the initiative:

Amend Section 1 of the bill to include intent language stating that in the event that annual revenues from the adjusted cannabis tax structure are projected to be insufficient to adequately fund both reasonable agency costs and the $25 million in program funding envisioned in Proposition 64, the Legislature shall consider restoring the original tax rate prior to June 1, 2021.

REGISTERED SUPPORT:

Black American Political Association of California

Board of Equalization Member Fiona Ma

California Asian Pacific Chamber of Commerce

California Cannabis Delivery Alliance

California Cannabis Industry Association

California Growers Association

California NORML

California Teamsters Public Affairs Council

Caliva

Cannabis Distribution Association

CannaCraft

City of Emeryville

County of Monterey

County of Riverside

Cultivation Technologies, Inc.

Cura Cannabis Solutions

Eaze

Flow Kana

Humble Root

Kudu Technologies

Law Offices of Omar Figueroa

North Bay Leadership Council

Purple Lotus Patient Center

River Collective

Save the Redwoods League

WeDrop

REGISTERED OPPOSITION:

Drug Policy Alliance

Analysis Prepared by: Robert Sumner / B. & P. / (916) 319-3301

Date of Hearing: April 23, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 3157 (

Author:Lackey) – As Amended Ver:March 22, 2018

2/3 vote. Tax levy. Fiscal committee.

SUBJECT: Taxation: cannabis

SUMMARY: Reduces the excise tax rate on cannabis and cannabis products from 15% to 11%, and suspend the imposition of the cultivation tax for a period of about three years. Specifically, this bill:

1. Makes findings and declarations that the provisions of this bill further the purpose and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA).
2. Reduces, on and after the effective date of this bill, and before June 1, 2021, the excise tax from 15% to 11% of the average market price of any retail sale by a cannabis retailer. The excise tax rate reverts back to 15% on and after June 1, 2021.
3. Suspends the cultivation tax, on and after the effective date of this bill, and before June 1, 2021. The cultivation tax rates, which may be adjusted by the California Department of Tax and Fee Administration (DTF) for inflation, apply to the excise tax on flowers and leaves on or after January 1, 2020.
4. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Authorizes the consumption of recreational cannabis by individuals over 21 years of age, referred to as adult-use cannabis, under AUMA.
2. Authorizes the Legislature to amend AUMA to further the purposes and intent of the act with a 2/3 vote of the Legislature, except as provided.
3. 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 California.
4. Imposes a complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to a retailer registered to collect the California use tax, the purchaser remains liable for the tax, unless the use is exempted. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the DTF.
5. Imposes a cannabis excise tax upon purchasers of cannabis or cannabis products sold in this state at the rate of 15% of the average market price of any retail sale by a cannabis retailer.
6. Imposes a cultivation tax on all harvested cannabis that enters the commercial market upon all cultivators. The tax for cannabis flowers is $9.25 per dry-weight ounce, and the tax on cannabis leaves is set at $2.75 per dry-weight ounce. DTF may adjust the tax rate for cannabis leaves annually to reflect fluctuations in the relative price of cannabis flowers to cannabis leaves.

FISCAL EFFECT: Unknown

COMMENTS:

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

AB 3157 is a bipartisan measure aimed at reducing the cannabis black market in California. It will ease the burden for businesses who want to be compliant and join the regulated market by temporarily lowering the state's taxes on cannabis. It provides a three year, temporary tax relief by reducing the state excise tax from 15% to 11% and suspending the cultivation tax.

After going over 20 years without a statewide regulatory system, California's cannabis market is undergoing a massive transition as Proposition 64's main provisions went into effect on January 1, 2018. With this transition come increased costs for legal businesses including new taxes, fees, licenses and compliance with regulations. For an industry being regulated for the first time, the difficulty of absorbing higher costs and complying with complex rules is a significant challenge.

New Frontier Data estimates that prices rose 44% when the taxes and regulations went into effect on January 1st. Legal cannabis businesses are facing financial challenges due to sticker shock from increased prices and competition from black market operators that are not subjected to taxes or the cost of complying with regulations. Many licensed businesses have already laid workers off and some well-established operators are concerned about going bankrupt before the end of the year.

As someone who spent 28 years in law enforcement, I know how sophisticated California's black market for cannabis has become. Criminals do not pay business taxes, ensure consumers are of purchasing age, obtain licenses, or follow product safety regulations. This allows them to sell cannabis at significantly lower prices than legal businesses.

By temporarily lowering the excise tax and suspending the cultivation tax, we are allowing time for cannabis businesses and consumers to transition away from the black market and into the regulated market.

AB 3157 will ultimately increase cannabis tax revenues to California by decreasing the amount of activity in the black market and increasing the share of cannabis products that are taxed in the legal market.

1. Supporters state that "[g]iven the large illicit market that still exists in California, high tax rates on cannabis present a challenge to California's efforts to establish a legal and regulated market. Compliant, state licensed, tax paying businesses are at a significant disadvantage due to their inability to compete with illicit actors who often do not pay similar taxes, which is counter to the intent of Proposition 64. To reduce the illicit market, California must encourage cannabis operators to come into the legal and regulated system. One way to entice them to is by temporarily lowering the state's tax on cannabis so their prices are more competitive with illicit market prices." According to supporters "[t]his short-term tax reduction will encourage cannabis operators and consumers to enter and remain in the legal market, rather than obtaining untaxed, untested, and unregulated products on the illicit market."
2. Committee Staff Comments:
   1. Background: In November 2016, California voters approved Proposition 64, the AUMA, which legalized the recreational use of cannabis. AUMA created a statutory framework for the state to regulate recreational cannabis and imposed taxes on the sale of both medical and recreational cannabis. Specifically, beginning on or after January 1, 2018, a 15% excise tax is imposed upon purchasers of cannabis and cannabis products, and a cultivation tax is imposed upon cannabis cultivators on all harvested cannabis that enters the commercial market. The cultivation tax is set at $9.25 per dry ounce of cannabis flowers, $2.75 per dry ounce of cannabis leaves, and $1.29 per ounce of fresh cannabis plant. Immature plants, including clones and seeds are excluded from the cultivation tax. Additionally, beginning on November 9, 2016, medical cannabis, which was subject to the sales tax, is now exempt from the sales tax if a patient furnishes a valid Medical Marijuana Identification Card (MMIC).
   2. California's Cannabis Market: According to a report recently published by Arcview Market Research, California cultivators produced about 13.5 million pounds of cannabis in 2016, but California only consumed about 2.5 million pounds^[1]. The remaining 11 million pounds is believed to have been shipped to illicit markets elsewhere. It is estimated that California consumers will spend about $9.2 billion on cannabis products in 2018, but only an estimated $3.7 billion will be spent on legal cannabis products. Clearly, most of the California cannabis market is still illegal; California has the largest and the most developed illicit market in the nation. This could create problems as California attempts to bring the black market under regulation. According to the report, a significant problem facing the legalization of the market is the high tax burden on cannabis products and the complex regulatory scheme. It is believed that these two factors will disadvantage legal sellers by as much as 77% on pricing compared to well established illicit sellers.
   3. Consumer Sensitivity: If a consumer's behavior changes significantly with a change in price, the demand for that product is considered to be elastic. If a consumer's demand changes little when prices change, the demand for that product is considered inelastic. It has been assumed that the demand for cannabis is inelastic, and in fact studies have shown that it is^[2]. However, when comparing the regulated market to the illicit market, a report by Whitney Economics shows that consumers are extremely sensitive to prices. Consumers will purchase cannabis products from the illicit market if the price difference between the regulated and illicit markets begins to diverge, even slightly. In fact, Whitney Economics found that the elasticity calculated in Oregon, Washington, and California ranges between -2.24 to -2.4, meaning that a 5% change in price will decrease demand in the regulated market by 11.2% to 12.0%.

The Sacramento Bee recently reported that California is not meeting revenue projections for commercial cannabis^[3]. In the first two months of legalization, Californians bought $339 million worth of cannabis products, about 13% less than expected. Many in the industry are blaming high taxes, regulation, and the ease with which consumers can buy products from the gray market. According to Kristi Knoblich, board president of the California Cannabis Industry Association and co-founder of Kiva Confections, a manufacturer of edible cannabis products, "sales are happening but they're not happening in the regulated market." As an example of how large the illicit market is, the Sacramento Bee reported that in February of this year, 6,000 dispensaries and delivery services were listed on Weed Maps^[4], but the state had only issued licenses for 580 dispensaries and delivery services at that time.

• 1. What does this bill do? This bill suspends the cultivation tax and reduces the excise tax from 15% to 11% for a period of about three years. The goal, as stated by the author, is to allow time for cannabis businesses and consumers to transition from the black market into the regulated market. The elasticity of cannabis suggests that such a reduction could have a positive effect in encouraging more consumers to purchase from regulated dispensaries since the price difference between the illicit and regulated markets would be smaller as a result of this bill. However, as noted in Arcview Market's research, California's tax is in line with other states allowing for the use of cannabis. However, a big factor in the 77% premium on legal cannabis is the cost of regulatory compliance. If the goal is to encourage broader regulation of the market, the author may also wish to consider making changes to the regulatory scheme.
  2. Administrative Concerns: As a tax levy, the revised cannabis excise tax rate and cultivation tax suspension in this bill would become effective immediately upon enactment. Lead time is necessary to successfully implement the proposed rate changes. A delayed operative date provides time to interact with taxpayers, assess the need for regulatory actions, and revise tax returns and publications. As such, the author may wish to take amendments to make this bill's provisions operative on the first day of the first calendar quarter commencing more than 30 days after this bill is enacted.
  3. Furthering the purpose of AUMA? To properly amend the AUMA, changes require a 2/3rds vote of the Legislature and the amendments must further the purpose and intent of the AUMA. Despite having findings and declarations that the changes made by this bill further the AUMA's purpose, it is not clear that suspending the cultivation tax and reducing the excise tax, even for a specified period of time, is in line with the intent of the voters to tax and regulate recreational use of cannabis. As such, the changes made by this bill may be subject to legal challenges.

REGISTERED SUPPORT / OPPOSITION:

Support

Board of Equalization Member, 2^nd District

California Asian Pacific Chamber of Commerce

California Cannabis Delivery Alliance

California Growers Association

California NORML

California Teamsters

Cannabis Distribution Association

CMG/Caliva

Cultivation Technologies

Flow Kana

River Collective

Riverside County Board of Supervisors

Southern California Coalition

WeDrop

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. Arcview Market Research, California: The Golden Opportunity? ↑

2. Davis, A., and Nichols, M. The Price Elasticity of Marijuana Demand, University of Nevada, Reno. ↑

3. http://www.sacbee.com/news/state/california/california-weed/article208196024.html. ↑

4. Weedmaps is an online legal cannabis community that allows users to review and discuss cannabis strains and local dispensaries. Weedmaps provides listing services for medical canncabis dispensaries, doctors’ offices and delivery services throughout the United States. The site accepts reviews from any patient in medical cannabis states. ↑