The Sales and Use Tax Law, which is administered by the State Board of Equalization, California Department of Tax and Fee Administration, requires any person whose estimated tax liability under that law averages $10,000 or more per month to remit amounts due by electronic funds transfer, as provided. That law authorizes, before January 1, 2022, a person issued a sellers permit for a place of business that is a dispensary, as defined in MCRSA, the Medical Cannabis Regulation and Safety Act, which was repealed, to remit amounts due for retail sales at the dispensary by a means other than electronic funds transfer.

This bill, until January 1, 2021, 2022, would instead authorize a person licensed under MCRSA or AUMA MAUCRSA whose estimated tax liability under that law averages $10,000 or more per month to remit amounts due by a means other than electronic funds transfer if the board deems it necessary to facilitate collection of amounts due.

AUMA requires the board to administer and collect taxes imposed by AUMA to be administered and collected pursuant to the Fee Collection Procedure Law, as specified. The Fee Collection Procedure Law requires any person whose estimated tax liability under that law averages $20,000 or more per month to remit amounts due by electronic funds transfer, as provided.

This bill, until January 1, 2021, 2022, would authorize the board to exempt a person required to pay or collect specified taxes imposed by AUMA, on a person licensed to engage in commercial cannabis activity under MAUCRSA whose estimated tax liability under that law averages $20,000 or more per month, month from the requirement to remit amounts due by electronic funds transfer if the board department deems it necessary to facilitate collection of amounts due.

AUMA authorizes the Legislature to amend the act to further the purposes and intent of the act with a ²/₃ vote of the membership of each house of the Legislature, except as provided.

This bill would declare that it furthers the purposes and intent of AUMA for a specified reason.

Existing law, the Medical Cannabis Regulation and Safety Act (MCRSA), establishes a program for the licensing and regulation of medical cannabis. Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act of 2016 (AUMA), added by the approval of Proposition 64 at the November 8, 2016, statewide general election, provides for the licensure and regulation of certain commercial nonmedical marijuana activities.

The Sales and Use Tax Law, which is administered by the State Board of Equalization, requires any person whose estimated tax liability under that law averages $10,000 or more per month to remit amounts due by electronic funds transfer, as provided. That law authorizes, before January 1, 2022, a person issued a sellers permit for a place of business that is a dispensary, as defined in MCRSA, to remit amounts due for retail sales at the dispensary by a means other than electronic funds transfer.

This bill bill, until January 1, 2021, would instead authorize a person licensed under MCRSA or AUMA whose estimated tax liability under that law averages $10,000 or more per month to remit amounts due by a means other than electronic funds transfer if the board deems it necessary to facilitate collection of amounts due.

AUMA requires the board to administer and collect taxes imposed by AUMA pursuant to the Fee Collection Procedure Law, as specified. The Fee Collection Procedure Law requires any person whose estimated tax liability under that law averages $20,000 or more per month to remit amounts due by electronic funds transfer, as provided.

This bill bill, until January 1, 2021, would authorize the board to exempt a person required to pay taxes imposed by AUMA, whose estimated tax liability under that law averages $20,000 or more per month, from the requirement to remit amounts due by electronic funds transfer if the board deems it necessary to facilitate collection of amounts due.

AUMA authorizes the Legislature to amend the act to further the purposes and intent of the act with a ²/₃ vote of the membership of each house of the Legislature, except as provided.

This bill would declare that it furthers the purposes and intent of AUMA for a specified reason.

Existing law, the Medical Cannabis Regulation and Safety Act, Act (MCRSA), establishes a program for the licensing and regulation of medical cannabis. Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act of 2016, 2016 (AUMA), added by the approval of Proposition 64 at the November 8, 2016, statewide general election, authorizes the consumption of nonmedical marijuana by persons over 21 years of age and provides for the licensure and regulation of certain commercial nonmedical marijuana activities.

Existing law, the Medical Cannabis Regulation and Safety Act, establishes a program for the licensing and regulation of medical cannabis. Existing law, the Control, Regulate and Tax Adult Use of Marijuana Act of 2016, added by the approval of Proposition 64 at the November 8, 2016, statewide general election, authorizes the consumption of nonmedical marijuana by persons over 21 years of age and provides for the licensure and regulation of certain commercial nonmedical marijuana activities.

This bill would state the intent of the Legislature to enact legislation relating to marijuana.

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

AB 948 (Bonta) - Cannabis: taxation: electronic funds transfer

This bill does not meet the criteria for referral to the Suspense File.

Bill Summary:

AB 948 would authorize the California Department of Tax and Fee Administration (CDFTA) to allow a person engaged in commercial marijuana activity to remit tax liability due in a method other than an electronic funds transfer (EFT) if CDFTA deems it necessary to facilitate the collection of amounts due.

Fiscal Impact:

CDFTA indicates that there would be no impact to EFT-related penalty revenue. CDFTA generally grants taxpayers who are unable to hold a bank account penalty relief when claims are made. Additionally, the bill could result in administrative savings to the department as a result of reduced workload associated with processing penalty relief claims from affected taxpayers.

Background:

In 2014, Board of Equalization field offices implemented a “no cash” policy for taxpayers paying their liabilities, with exceptions granted to taxpayers who could document their inability to obtain banking services. This policy proved to be problematic for persons licensed to engage in commercial marijuana activity under the Medical Cannabis Regulation and Safety Act (MCRSA), as they generally lack access to banking services. Although federal law does not expressly prohibit marijuana banking, the Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Consequently, banks are concerned that providing banking services to cannabis businesses could expose them to prosecution under the federal Bank Secrecy Act and anti-money laundering rules.

BOE (now CDFTA) recently reversed notified the Legislature that it will allow taxpayers to make cash payments if they are unable to pay by other means and at least one office in each district will accept cash payments on the premises. Nonetheless, state law governing tax administration imposes EFT requirements on certain taxpayers and imposes penalties for failure to comply.

Specifically, the Sales and Use Tax (SUT) law imposes certain reporting requirements on retailers that have substantial sales and use tax liabilities. Taxpayers with monthly tax liabilities that average $10,000 or more must remit their tax payments via EFT under prescribed procedures. Failure to remit the funds under those procedures subjects taxpayers to specified penalties.

CDFTA may relieve a taxpayer of the 10 percent penalty if that person's failure to utilize an EFT is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and in the absence of willful neglect. The taxpayer must file a request for relief after the mandatory penalty is billed, and the request must be signed under penalty of perjury setting forth the facts upon which he or she bases the claim for relief.

Legislation enacted last year (AB 821, Gipson, 2016) created an exemption from the EFT requirement for licensed marijuana dispensaries if the department deemed it necessary to facilitate the collection of amounts due. As a practical matter, AB 821 relieved dispensaries from having to file for penalty relief from the BOE for non EFT tax payments. This exemption sunsets on January 1, 2022.

The Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA), enacted when voters approved Proposition 64 in 2016, imposes a 15 percent 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. Unlike the sales tax on recreational or medical cannabis, these two taxes are subject to the Fee Collection Procedures Law (FCPL). FCPL also requires that taxpayer that meet certain tax liability thresholds remit their taxpayers via EFT or else face a 10 percent penalty. However, that threshold is $20,000 instead of $10,000.

Proposed Law:

This bill would allow all persons licensed to engage in commercial marijuana activity to remit sales tax, cultivation tax, and excise tax by means other than EFT if deemed necessary by CDFTA.

Related Legislation:

AB 821 (Gipson, Chapter 811, Statutes of 2016) created a specific exception for marijuana dispensaries by allowing them to remit tax liability in a method other than an EFT if the CDFTA deemed it necessary to facilitate the collection of amounts due.

Staff Comments: In the absence of this legislation, taxpayers subject to the EFT penalties under either the SUT or FCPL could petition for relief from the penalty due to reasonable cause (for cannabis businesses, the lack of banking service would be construed as reasonable cause), and relief would generally be granted. Thus, this bill essentially relieves marijuana businesses from going through the process of petitioning for relief from the EFT penalties.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Marijuana: taxation: electronic fund transfer

Authorizes the State Board of Equalization (BOE) to allow a person engaged in commercial marijuana activity to remit tax liability due in a method other than an electronic funds transfer (EFT) if the BOE deems it necessary to facilitate the collection of amounts due.

Background

In early 2014, BOE field offices implemented a “no cash” policy for taxpayers paying their tax obligations, with exceptions granted to taxpayers who could document their inability to obtain banking services This policy proved to be problematic for persons licensed to engage in commercial marijuana activity under the Medical Cannabis Regulation and Safety Act (MCRSA), who generally lack access to banking services. Although federal law does not expressly prohibit marijuana banking, the Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Banks are concerned that providing banking services to cannabis businesses could expose them to prosecution under the federal Bank Secrecy Act and anti-money laundering rules.

BOE recently reversed course on its “no cash” policy, informing the Legislature in a letter dated May 25, 2017 that it will allow taxpayers to make cash payments if they are unable to pay by other means and at least one office in each district will accept cash payments on the premises. Nonetheless, state law governing tax administration imposes electronic fund transfer (EFT) requirements on certain taxpayers and imposes penalties for failure to comply.

Sales and use tax law: EFT requirements. California’s sales and use tax (SUT) law requires retailers engaged in business in the state and applies to pay sales tax on all retail transactions involving sales of tangible personal property, except those the law specifically exempts or excludes. Retail sales of marijuana are subject to the tax to the same extent as any other retail sale of tangible personal property in this state.

The SUT law imposes certain reporting requirements on retailers that have substantial sales and use tax liabilities. Specifically, taxpayers with monthly tax liabilities that average $10,000 or more must remit their tax payments via EFT under BOE-prescribed procedures. Failure to remit the funds under those procedures subjects taxpayers to specified penalties: 10% for their quarterly remittance; and 6% for prepayments (required twice during the quarter).

BOE may relieve a taxpayer of the 10% penalty if that person's failure to utilize an EFT is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and in the absence of willful neglect. The taxpayer must file a request for relief after the mandatory penalty is billed, and the request must be signed under penalty of perjury setting forth the facts upon which he or she bases the claim for relief.

Legislation enacted last year (AB 821, Gipson, 2016) created an exemption from the EFT requirement for licensed marijuana dispensaries if the BOE deemed it necessary to facilitate the collection of amounts due. As a practical matter, AB 821 relieved dispensaries from having to file for penalty relief from the BOE for non EFT tax payments. This exemption sunsets on January 1, 2022.

Proposition 64 exempts from the sales and use tax patients with a Medical Cannabis ID card and a valid government-issued ID card.

Fee Collection Procedures Law (FCPL): EFT requirements. The voter approval of Proposition 64 in 2016 enacted The Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA). Effective January 1, 2018, the AUMA 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.

The cultivation tax and excise tax are subject to the Fee Collection Procedures Law (FCPL). The FCPL, similar to the SUT law, requires taxpayers that meet certain tax liability thresholds remit their taxpayers via EFT or face a 10% penalty, except that the threshold is $20,000 of monthly tax liabilities under the FCPL, rather than $10,000 as under the SUT law. As under the SUT law, a taxpayer may under the FCPL file for penalty relief if the failure to remit tax by EFT is due to reasonable cause and circumstances beyond the taxpayer’s control. But the FCPL does not offer an exemption from the EFT requirement for cannabis businesses comparable to that provided to dispensaries under the SUT law by AB 821.

The author wants to delete the sunset on the exemption from the EFT requirement for sales tax for dispensaries and extend to it to persons licensed under the AUMA and to the cultivation and excise taxes collected under the FCPL.

Proposed Law

Assembly Bill 948 allows all persons licensed to engage in commercial marijuana activity to remit sales tax, cultivation tax, and excise tax by means other than EFT if deemed necessary by BOE.

State Revenue Impact

BOE estimates no state or local revenue loss, since it routinely has provided penalty relief to taxpayers that are unable to hold a bank account.

Comments

1. Purpose of the bill. According to the author: “Currently, the State Board of Equalization (BOE) is required to collect payments of over $10,000 from businesses via Electronic Funds Transfer (EFT) payments, and impose a 10% fee on all payments that are not made through this method.

‘Federal law classifies cannabis as a schedule 1 drug. Since cannabis is a schedule 1 drug, nearly all banks refuse to provide accounts to marijuana-related businesses for fear that they will be shut down by federal authorities. Without a bank account, marijuana businesses mandated to make payments by EFT are not able to do so. As a result, these businesses pay their sales and use tax liability in cash at Board of Equalization district offices. However, by doing so, they face a 10 percent tax penalty for making a payment by means other than appropriate EFT.

‘To fix this unfair disadvantage to medical marijuana and other cash-based businesses, the Legislature passed AB 821 (Gipson) last year with bipartisan support, which removed the 10 percent fee on all non-EFT payments over 10 thousand dollars made to BOE offices.

‘AB 821 only applied to sales and use taxes on medical cannabis. However, on November 8, 2016, voters passed Proposition 64, which created a cultivation and excise tax on medical and ‘recreational cannabis. AB 821 doesn’t apply to the new taxes imposed by Proposition 64.

‘AB 948 will create equity for the taxpayers in this industry by extending the provisions of AB 821 to cultivation and excise taxes passed by Proposition 64. AB 948 will also prevent an unfair penalty on cash tax payments made by cannabis businesses to the State BOE. AB 948 further incentivizes the cannabis industry.”

2. What does this bill do? This bill deletes the sunset on the exemption from the SUT EFT requirement (for taxpayers with monthly SUT liabilities of $10,000 or more) extended to dispensaries under AB 821 and expands eligibility to include all persons licensed to engage in commercial marijuana activity under the AUMA. Additionally, this bill exempts persons licensed under the AUMA from the EFT requirement under the FCPL (for taxpayers with average monthly tax liabilities of $20,000 or more) which governs the collection of the new marijuana cultivation and excise taxes imposed under Prop 64.

In the absence of this legislation, taxpayers subject to the EFT penalties under either the SUT or FCPL could petition the BOE for relief from the penalty due to reasonable cause (for cannabis businesses, the lack of banking service would be construed as reasonable cause by BOE), and the BOE generally would grant that relief. Thus, this bill essentially relieves marijuana businesses from going through the process of petitioning BOE for relief from the EFT penalties.

3. Technical Amendments. The committee recommends several technical amendments to ensure that the sunset extension of the SUT EFT exemption does not expire after one year, and to correct several cross references to the dispensary licensing protocol that has been supplanted by a trailer bill to the 2017 State Budget Act that conforms MCRSA and the AUMA into a single regulatory framework (SB 94, Committee on Budget and Fiscal Review, 2017).

Assembly Actions

Assembly Revenue and Taxation 8-1

Assembly Appropriations 12-4

Assembly Floor 64-9

Support and Opposition

(6/29/17)

Support: State Board of Equalization Member Fiona Ma; Consortium Management Group.

Opposition: Unknown.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 948

Author:(Bonta)

As Amended Ver:April 27, 2017

2/3 vote

SUMMARY: Authorizes the State Board of Equalization (BOE) to allow a person engaged in commercial marijuana activity under the Marijuana Regulation and Safety (MRS) to remit tax liability due in a method other than an electronic funds transfer (EFT) if the BOE deems it necessary to facilitate the collection of amounts due. Specifically, this bill:

1. Authorizes persons licensed to engage in commercial marijuana activity under MRS to remit sales and use tax due by means other than EFT if the BOE deems it necessary to facilitate the collection of amounts due.
2. Provides that the mandatory EFT does not apply to persons required to pay or collect the cultivation and marijuana excise tax if the BOE deems it necessary to facilitate the collection of amounts due.
3. Repeals the provisions of this bill on January 1, 2021.
4. Makes findings and declarations related to providing the BOE with the authority necessary to efficiently and effectively collect taxes imposed.

EXISTING LAW:

1. Provides that any person whose estimated tax liability averages $10,000 or more per month shall remit the amounts due by an EFT.
2. Provides the BOE with the authority to allow a dispensary, as defined, to remit amounts due by means other than an EFT until January 1, 2022, if the BOE deems it necessary to facilitate the collection of amounts due.
3. Requires the BOE to administer and collect the cultivation tax and marijuana excise tax pursuant to the Fee Collection Procedures Law^[1] (FCPL). The FCPL requires fee payers with monthly tax liabilities that average $20,000 or more to remit their tax payments via an EFT.
4. Provides penalty relief under both the Sales and Use Tax (SUT) Law and the FCPL when the person's failure to remit tax payments by EFT is due to reasonable cause and circumstances beyond their control. Taxpayers are required to file a request for relief after the mandatory penalty is billed, and the request must be signed under penalty of perjury setting forth the facts for the claimed relief.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Possible administrative savings to BOE as a result of reduced workload associated with processing penalty relief claims from affected taxpayers.
2. No expected loss in EFT-related penalty revenue. BOE generally grants taxpayers who are unable to hold a bank account penalty relief when claims are made.

COMMENTS:

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

Currently, the State Board of Equalization (BOE) is required to collect payments of over $10,000 from businesses via Electronic Funds Transfer (EFT) payments, and impose a 10% fee on all payments that are not made through this method.

Federal law classifies cannabis as a schedule 1 drug. Since cannabis is a schedule 1 drug, nearly all banks refuse to provide accounts to marijuana-related businesses for fear that they will be shut down by federal authorities. Without a bank account, marijuana businesses mandated to make payments by EFT are not able to do so. As a result, these businesses pay their sales and use tax liability in cash at Board of Equalization district offices. However, by doing so, they face a 10% tax penalty for making a payment by means other than appropriate EFT.

To fix this unfair disadvantage to medical marijuana and other cash-based businesses, the Legislature passed AB 821 (Gipson) last year with bipartisan support, which removed the 10% fee on all non-EFT payments over 10 thousand dollars made to BOE offices.

AB 821 only applied to sales and use taxes on medical cannabis. However, on November 8, 2016, voters passed Proposition 64, which created a cultivation and excise tax on medical and recreational cannabis. AB 821 doesn't apply to the new taxes imposed by Proposition 64.

AB 948 will create equity for the taxpayers in this industry by extending the provisions of AB 821 to cultivation and excise taxes passed by Proposition 64.

AB 948 will also prevent an unfair penalty on cash tax payments made by cannabis businesses to the State BOE.

AB 948 further incentivizes the cannabis industry to legally comply with California's tax code, which in turn would generate much more taxable revenue and further stimulate California's economy.

1. According to supporters of this bill, "AB 948 will create equity for the taxpayers in this industry by extending the provisions of AB 821 to cultivation and excise taxes passed by Proposition 64. AB 948 will prevent an unfair penalty on cash tax payments made by the cannabis businesses to the [BOE]."
2. Revenue and Taxation Committee Comments:
   1. Marijuana remains illegal under federal law: Federal law prohibits the manufacture, possession, sale, or distribution of marijuana. Congress enacted the Controlled Substances Act (CSA) in 1970, setting forth five "schedules" of controlled substances. Federal law lists marijuana as a Schedule I controlled substance, meaning that the substance '"has a high potential for abuse" and has "no currently accepted medical use in treatment in the United States."

On August 29, 2013, the United States (U.S.) Department of Justice (US DOJ) issued guidance to federal prosecutors regarding cannabis enforcement under the CSA (referred to as the "Cole Memo"). The Cole Memo reiterated US DOJ's commitment to enforcing the CSA consistent with Congress's 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 US DOJ attorneys and law enforcement officials to focus on enforcement priorities that protect minors, public safety, public health, and the environment from the impact of marijuana. On February 14, 2014, the U.S. Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) issued guidance that clarified requirements for financial institutions seeking to provide services to marijuana businesses. Specifically, the guidance allows financial institutions to provide services to marijuana-related businesses so long as it is done in a manner consistent with their obligations to know their customers and to report possible criminal activity. The goal of providing clarity was to increase the availability of financial services for marijuana businesses.

Despite the efforts of US DOJ and FinCEN, many in the marijuana industry have found it difficult to consistently use financial services. The White House spokesman has also made the use of financial services more uncertain by stating that recreational marijuana will be subject to greater enforcement under the new administration. While it appears that new guidance may be coming, potentially superseding the Cole Memo and the guidance issued by FinCEN, nothing new has been issued^[2].

• 1. Medical Cannabis Regulation and Safety Act (MCRSA): In 2015, the Legislature enacted MCRSA through a package of bills establishing a comprehensive licensing and regulatory framework for medical marijuana^[3]. In addition to establishing the Bureau of Medical Cannabis Regulation within the Department of Consumer Affairs to oversee and enforce state regulations, the BOE, in consultation with the California Department of Food and Agriculture, is required to adopt a system to report commercial cannabis and cannabis product movement throughout the distribution chain (i.e., "track and trace").
  2. Remittance of SUT: In 2007, the BOE mailed a special notice to California sellers of medical marijuana clarifying the application of tax to medical marijuana sales and the requirement that they must hold a seller's permit. Many sellers began remitting taxes due to the BOE, but because many banks and credit unions refuse to accept dispensaries as customers for fear of federal sanctions, the funds were remitted in cash. At the time, persons were required to remit tax liability due by an EFT if the estimated tax liability averaged $10,000 or more per month. A 10% penalty of the tax amount due was added if other means, like cash, were utilized. A waiver of the penalty was generally provided to dispensaries remitting funds in cash, but a request for waiver of the penalty had to be made every single time funds were remitted in a method other than EFT. In order to help reduce the administrative burden on both the BOE and dispensaries, the BOE sponsored AB 821 (Gipson), Chapter 811, Statutes of 2016, to allow the remittance of tax liability in a method other than an EFT if the BOE deemed it necessary to facilitate the collection of amounts due.
  3. Proposition 64 Adult Use of Marijuana Act (AUMA): On November 8, 2016, California voters approved Proposition 64 to legalize the recreational use of marijuana for adults age 21 and older. Proposition 64 exempts medical marijuana from the SUT if purchased by a customer who has a Medical Marijuana Identification Card (MMIC), imposes a 15% excise tax on the gross receipts of any retail sale by a dispensary to be paid by purchasers 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. Cannabis cultivated for personal use is not subject to the cultivation tax. Additionally, Proposition 64 explicitly authorizes counties to impose taxes, subject to voter approval, on the privilege of cultivating, manufacturing, selling, or conducting other business activities related to marijuana. This bill would extend BOE's authority to refrain from imposing the penalty on retailers and cultivators who pay taxes, as required by Proposition 64, in a manner other than EFT.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0000366

1. Part 30 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code (R&TC). ↑

2. Alicia Wallace, Trump administration puts recreational marijuana in crosshairs, The Cannabist, Feb. 23, 2017. ↑

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

Date of Hearing: May 10, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 948

Author:(Bonta) – As Amended Ver:April 27, 2017

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

SUMMARY:

This bill authorizes the Board of Equalization (BOE), until January 1, 2021, to allow a person engaged in commercial marijuana activity to remit tax liability due in a method other than an electronic funds transfer (EFT), if the BOE deems it necessary to facilitate the collection of amounts due.

FISCAL EFFECT:

1. Possible administrative savings to BOE as a result of reduced workload associated with processing penalty relief claims from affected taxpayers.
2. No expected loss in EFT-related penalty revenue. BOE generally grants taxpayers who are unable to hold a bank account penalty relief when claims are made.

COMMENTS:

1. Background. Under existing law, taxpayers with monthly sales and use tax liabilities that average $10,000 or more must pay taxes via EFT or else face a penalty equal to 10% the tax amount due. This penalty presented a problem for sellers of medical cannabis because many banks and credit unions refuse to accept dispensaries as customers for fear of federal legal action. AB 821 (Gipson), Chapter 811, Statutes of 2016, created a specific exception for these dispensaries by allowing them to remit tax liability in a method other than an EFT if the BOE deemed it necessary to facilitate the collection of amounts due.
2. Proposition 64 Taxes. The Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA), enacted when voters approved Proposition 64 in 2016, 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. Unlike the sales tax on recreational or medical cannabis, these two taxes are subject to the Fee Collection Procedures Law (FCPL). FCPL also requires that taxpayer that meet certain tax liability thresholds remit their taxpayers via EFT or else face a 10% penalty. However, that threshold is $20,000 instead of $10,000.
3. Purpose. According to the author, AB 948 will help California’s cannabis industry legally comply with California tax requirements. This bill provides the same protection from EFT-related penalties that is provided to medical dispensaries to those who are licensed to engage in commercial activity. This includes taxpayers remitting sales tax on recreational marijuana, the marijuana excise tax, or the cultivation tax.
4. Related legislation. AB 948 is one of three cannabis tax-related bills pending in this Committee: AB 1410 (Wood) allows licensed distributors to collect the marijuana cultivation tax on behalf of cultivators, and AB 963 (Gipson) establishes the Cannabis Criminal Enforcement Team and makes numerous changes to how the sales and use tax, excise tax, and cultivation tax on marijuana are administered and collected. AB 963 and AB 1410 will be heard today along with AB 948.

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

Date of Hearing: April 17, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 948 (

Author:Bonta) – As Amended Ver:March 29, 2017

2/3 vote. Fiscal committee.

SUBJECT: Marijuana: taxation: electronic fund transfer

SUMMARY: Authorizes the State Board of Equalization (BOE) to allow a person engaged in commercial marijuana activity to remit tax liability due in a method other than an electronic funds transfer (EFT) if the BOE deems it necessary to facilitate the collection of amounts due. Specifically, this bill:

1. Authorizes persons licensed to engage in commercial marijuana activity under the Medical Cannabis Regulation and Safety Act (MCRSA) and Marijuana Regulation and Safety (MRS) to remit sales and use tax due by means other than EFT if the BOE deems it necessary to facilitate the collection of amounts due.
2. Provides that the mandatory EFT does not apply to persons required to pay or collect the cultivation and marijuana excise tax if the BOE deems it necessary to facilitate the collection of amounts due.
3. Deletes the January 1, 2022 repeal date for the existing sales and use tax EFT exception.
4. Makes findings and declarations related to providing the BOE with the authority necessary to efficiently and effectively collect taxes imposed.

EXISTING LAW:

1. Provides that any person whose estimated tax liability averages $10,000 or more per month shall remit the amounts due by an EFT.
2. Provides the BOE with the authority to allow a dispensary, as defined, to remit amounts due by means other than an EFT until January 1, 2022, if the BOE deems it necessary to facilitate the collection of amounts due.
3. Requires the BOE to administer and collect the cultivation tax and marijuana excise tax pursuant to the Fee Collection Procedures Law^[1] (FCPL). The FCPL requires fee payers with monthly tax liabilities that average $20,000 or more to remit their tax payments via an EFT.
4. Provides penalty relief under both the Sales and Use Tax (SUT) Law and the FCPL when the person’s failure to remit tax payments by EFT is due to reasonable cause and circumstances beyond their control. Taxpayers are required to file a request for relief after the mandatory penalty is billed, and the request must be signed under penalty of perjury setting forth the facts for the claimed relief.

FISCAL EFFECT: The BOE states that “[o]ther than the potential for avoiding some interest loss, this bill would not significantly affect state or local revenues, since the BOE has provided penalty relief to taxpayers that are unable to hold a bank account.”

COMMENTS:

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

Currently, the State Board of Equalization (BOE) is required to collect payments of over $10,000 from businesses via Electronic Funds Transfer (EFT) payments, and impose a 10% fee on all payments that are not made through this method.

Federal law classifies cannabis as a schedule 1 drug. Since cannabis is a schedule 1 drug, nearly all banks refuse to provide accounts to marijuana-related businesses for fear that they will be shut down by federal authorities. Without a bank account, marijuana businesses mandated to make payments by EFT are not able to do so. As a result, these businesses pay their sales and use tax liability in cash at Board of Equalization district offices. However, by doing so, they face a 10 percent tax penalty for making a payment by means other than appropriate EFT.

To fix this unfair disadvantage to medical marijuana and other cash-based businesses, the Legislature passed AB 821 (Gipson) last year with bipartisan support, which removed the 10 percent fee on all non-EFT payments over 10 thousand dollars made to BOE offices.

AB 821 only applied to sales and use taxes on medical cannabis. However, on November 8, 2016, voters passed Proposition 64, which created a cultivation and excise tax on medical and recreational cannabis. AB 821 doesn’t apply to the new taxes imposed by Proposition 64.

AB 948 will create equity for the taxpayers in this industry by extending the provisions of AB 821 to cultivation and excise taxes passed by Proposition 64.

AB 948 will also prevent an unfair penalty on cash tax payments made by cannabis businesses to the State BOE.

AB 948 further incentivizes the cannabis industry to legally comply with California’s tax code, which in turn would generate much more taxable revenue and further stimulate California’s economy.

1. According to supporters of this bill, “AB 948 will create equity for the taxpayers in this industry by extending the provisions of AB 821 to cultivation and excise taxes passed by Proposition 64. AB 948 will prevent an unfair penalty on cash tax payments made by the cannabis businesses to the [BOE].”
2. Committee Staff Comments:
   1. Marijuana remains illegal under federal law:  Federal law prohibits the manufacture, possession, sale, or distribution of marijuana.  Congress enacted the Controlled Substances Act (CSA) in 1970, setting forth five "schedules" of controlled substances.  Federal law lists marijuana as a Schedule I controlled substance, meaning that the substance '"has a high potential for abuse" and has "no currently accepted medical use in treatment in the United States.”

On August 29, 2013, the U.S. Department of Justice (US DOJ) issued guidance to federal prosecutors regarding cannabis enforcement under the CSA (referred to as the "Cole Memo").  The Cole Memo reiterated US DOJ's commitment to enforcing the CSA consistent with Congress's 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 US DOJ attorneys and law enforcement officials to focus on enforcement priorities that protect minors, public safety, public health, and the environment from the impact of marijuana. On February 14, 2014, the U.S. Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) issued guidance that clarified requirements for financial institutions seeking to provide services to marijuana businesses. Specifically, the guidance allows financial institutions to provide services to marijuana-related businesses so long as it is done in a manner consistent with their obligations to know their customers and to report possible criminal activity. The goal of providing clarity was to increase the availability of financial services for marijuana businesses.

Despite the efforts of US DOJ and FinCEN, many in the marijuana industry have found it difficult to consistently use financial services. The White House spokesman has also made the use of financial services more uncertain by stating that recreational marijuana will be subject to greater enforcement under the new administration. While it appears that new guidance may be coming, potentially superseding the Cole Memo and the guidance issued by FinCEN, nothing new has been issued^[2].

• 1. Medical Cannabis Regulation and Safety Act (MCRSA): In 2015, the Legislature enacted MCRSA through a package of bills establishing a comprehensive licensing and regulatory framework for medical marijuana^[3].  In addition to establishing the Bureau of Medical Cannabis Regulation within the Department of Consumer Affairs to oversee and enforce state regulations, the BOE, in consultation with the California Department of Food and Agriculture, is required to adopt a system to report commercial cannabis and cannabis product movement throughout the distribution chain (i.e., "track and trace").
  2. Remittance of SUT: In 2007, the BOE mailed a special notice to California sellers of medical marijuana clarifying the application of tax to medical marijuana sales and the requirement that they must hold a seller's permit. Many sellers began remitting taxes due to the BOE, but because many banks and credit unions refuse to accept dispensaries as customers for fear of federal sanctions, the funds were remitted in cash. At the time, persons were required to remit tax liability due by an EFT if the estimated tax liability averaged $10,000 or more per month. A 10% penalty of the tax amount due was added if other means, like cash, were utilized. A waiver of the penalty was generally provided to dispensaries remitting funds in cash, but a request for waiver of the penalty had to be made every single time funds were remitted in a method other than EFT. In order to help reduce the administrative burden on both the BOE and dispensaries, the BOE sponsored AB 821 (Gipson), Chapter 811, Statutes of 2016, to allow the remittance of tax liability in a method other than an EFT if the BOE deemed it necessary to facilitate the collection of amounts due.
  3. Proposition 64 Adult Use of Marijuana Act (AUMA):  On November 8, 2016, California voters approved Proposition 64 to legalize the recreational use of marijuana for adults age 21 and older.  Proposition 64 exempts medical marijuana from the SUT if purchased by a customer who has a Medical Marijuana Identification Card (MMIC), imposes a 15% excise tax on the gross receipts of any retail sale by a dispensary to be paid by purchasers 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.  Cannabis cultivated for personal use is not subject to the cultivation tax.  Additionally, Proposition 64 explicitly authorizes counties to impose taxes, subject to voter approval, on the privilege of cultivating, manufacturing, selling, or conducting other business activities related to marijuana. This bill would extend BOE’s authority to refrain from imposing the penalty on retailers and cultivators who pay taxes, as required by Proposition 64, in a manner other than EFT.

REGISTERED SUPPORT / OPPOSITION:

Support

State Board of Equalization Member, Second District (Sponsor)

Opposition

None on file

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

1. Part 30 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code (R&TC). ↑

2. Alicia Wallace, Trump administration puts recreational marijuana in crosshairs, The Cannabist, Feb. 23, 2017. ↑

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