(1)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, commencing January 1, 2018, imposes an excise tax on the purchase of marijuana and marijuana products, as defined, and a separate cultivation tax on marijuana that enters the commercial market, and requires revenues from those taxes, interest, penalties, and other related amounts to be deposited into the California Marijuana Tax Fund, which is continuously appropriated for specified purposes pursuant to a specified schedule. AUMA provides for the administration of both taxes by the State Board of Equalization (board) and requires persons required to be licensed involved in the cultivation and retail sale of marijuana or marijuana products to obtain a separate permit from the board. Under AUMA, a violation of provisions relating to these taxes is a crime unless otherwise specified.

This bill would provide for the suspension or revocation of those permits, would authorize the board to deny an application for a permit if the applicant had previously been issued a permit that was suspended or revoked, among other reasons, and would set forth the process for appealing permit suspensions, revocations, and application denials. The bill would also impose specific criminal penalties, including fines and imprisonment, for certain violations of the provisions relating to the cultivation and excise taxes on marijuana. By modifying the scope of a crime and imposing new crimes, the bill would impose a state-mandated local program. As revenues from the fines imposed by the bill would be deposited into the California Marijuana Tax Fund, a continuously appropriated fund, this bill would make an appropriation.

(2)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 on 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. Existing law requires a collection of prepayment of retail sales tax at the time that motor vehicle fuel tax or diesel fuel tax is imposed, and on each subsequent sale other than the retail sale, as specified. AUMA

AUMA authorizes the board to prescribe a method and manner for payment of the marijuana cultivation tax that utilizes tax stamps or state-issued product bags, as specified.

This bill, commencing July 1, 2018, would require a wholesaler, which this bill would define as a person that makes a distribution of marijuana or marijuana products to a retailer, to collect prepayments of both marijuana excise tax and sales tax on the marijuana or marijuana products distributed, as specified. The bill would require the wholesaler to provide the retailer with evidence of the prepayment amounts collected and would grant a retailer that retains that evidence and other documents to credits in the amount of the marijuana excise tax and sales tax prepayments against its marijuana excise tax or sales and use tax obligations, respectively, for the same period. The bill would require a wholesaler not required to hold a sellers permit to register with the board, would require all wholesalers to obtain a permit from the board for the purposes of the marijuana taxes, and would authorize the board to require wholesalers to place a security with the board.

This bill would authorize the board to prescribe a method and manner for prepayment of the marijuana excise tax that utilizes tax stamps or other markings and would further authorize the board to prescribe a method and manner for collection and remittance of the marijuana cultivation tax by wholesalers, as specified.

As a violation of this bills requirements would be a crime, this bill would impose a state-mandated local program.

(3)AUMA exempts from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis, as defined, to qualified patients or primary caregivers that provide identification cards issued under the Medical Marijuana Program and other government-issued identification cards.

This bill would revise and recast that provision to exempt from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis to persons with identification cards, as defined, or primary caregivers that provide the above-described identification. The bill would subject a purchaser that furnishes a seller with a false or falsified identification card to specified fines.

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

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

(5)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 specified reasons.

(1)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, commencing January 1, 2018, imposes an excise tax on the purchase of marijuana and marijuana products, as defined, and a separate cultivation tax on marijuana that enters the commercial market, and requires revenues from those taxes, interest, penalties, and other related amounts to be deposited into the California Marijuana Tax Fund, which is continuously appropriated for specified purposes pursuant to a specified schedule. AUMA provides for the administration of both taxes by the State Board of Equalization (board) and requires persons required to be licensed involved in the cultivation and retail sale of marijuana or marijuana products to obtain a separate permit from the board. Under AUMA, a violation of provisions relating to these taxes is a crime unless otherwise specified.

This bill would provide for the suspension or revocation of those permits, would authorize the board to deny an application for a permit if the applicant had previously been issued a permit that was suspended or revoked, among other reasons, and would set forth the process for appealing permit suspensions, revocations, and application denials. The bill would also impose specific criminal penalties, including fines and imprisonment, for certain violations of the provisions relating to the cultivation and excise taxes on marijuana. By modifying the scope of a crime and imposing new crimes, the bill would impose a state-mandated local program. As revenues from the fines imposed by the bill would be deposited into the California Marijuana Tax Fund, a continuously appropriated fund, this bill would make an appropriation.

(2)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 on 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. Existing law requires a collection of prepayment of retail sales tax at the time that motor vehicle fuel tax or diesel fuel tax is imposed, and on each subsequent sale other than the retail sale, as specified. AUMA authorizes the State Board of Equalization board to prescribe a method and manner for payment of the marijuana cultivation tax that utilizes tax stamps or state-issued product bags, as specified.

This bill bill, commencing July 1, 2018, would require a wholesaler, which this bill would define as a person that makes a distribution of marijuana or marijuana products to a retailer, to collect prepayments of both marijuana excise tax and sales tax on the marijuana or marijuana products distributed, as specified. The bill would require the wholesaler to provide the retailer with evidence of the prepayment amounts collected and would grant a retailer that retains that evidence and other documents to credits in the amount of the marijuana excise tax and sales tax prepayments against its marijuana excise tax or sales and use tax obligations, respectively, for the same period. The bill would require a wholesaler not required to hold a sellers permit to register with the board, would require all wholesalers to obtain a permit from the board for the purposes of the marijuana taxes, and would authorize the board to require wholesalers to place a security with the board. The

This bill would authorize the board to prescribe a method and manner for prepayment of the marijuana excise tax that utilizes tax stamps or other markings, as specified, markings and would further authorize the board to prescribe a method and manner for collection and remittance of the marijuana cultivation tax by wholesalers. As wholesalers, as specified.

As a violation of these this bills requirements would be a crime, this bill would impose a state-mandated local program.

(3)AUMA exempts from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis, as defined, to qualified patients or primary caregivers that provide identification cards issued under the Medical Marijuana Program and other government-issued identification cards.

This bill would revise and recast that provision to exempt from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis to persons with identification cards, as defined, or primary caregivers that provide the above-described identification. The bill would subject a purchaser that furnishes a seller with a false or falsified identification card to specified fines.

(4)The Revenue Recovery and Collaborative Enforcement Team Act, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program for combating criminal tax evasion associated with the underground economy, as specified. The act requires the team to include the board, the Franchise Tax Board, the Department of Justice, and the Employment Development Department, and further requires the team to operate the pilot program using existing funding of those state agencies.

Under AUMA, reasonable costs incurred by the board for administering and collecting the taxes imposed by AUMA, as long as those costs do not exceed 4% of tax revenues received, are continuously appropriated to the board from the California Marijuana Tax Fund, as specified.

This bill would extend that pilot program until January 1, 2020, and would establish within the Department of Justices Tax Recovery and Criminal Enforcement Task Force the require the board to create a Cannabis Criminal Enforcement Team for the purpose of combating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories. The bill would require the Cannabis Criminal Enforcement Team to consist of the state entities described above and accessories with representatives from the board, the Franchise Tax Board, the Employment Development Department, and state licensing authorities under AUMA and the Medical Cannabis Regulation and Safety Act. The bill would require authorize those entities and state medical cannabis or nonmedical marijuana licensing authorities team members to exchange data information for those purposes. purposes, would provide for the continued confidentiality of exchanged confidential information, and would prohibit the disclosure of any confidential information received by, or reported to, the team, as specified. The bill would modify the above-described allocation to the board to include enforcement activity costs incurred by the board through participation in the Cannabis Criminal Enforcement Team as that participation relates to the taxes imposed by AUMA. By expanding the purposes for which the California Marijuana Tax Fund is continuously appropriated, this bill would make an appropriation.

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

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

(6)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 specified reasons.

(1)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, commencing January 1, 2018, imposes an excise tax on the purchase of marijuana and marijuana products, as defined, and a separate cultivation tax on the cultivation of marijuana that enters the commercial market, and requires revenues from those taxes taxes, interest, penalties, and other related amounts to be deposited into the California Marijuana Tax Fund and allocated Fund, which is continuously appropriated for specified purposes pursuant to a specified schedule. AUMA provides for the administration of both taxes by the State Board of Equalization and requires persons required to be licensed involved in the cultivation and retail sale of marijuana or marijuana products to obtain a separate permit from the board. Under AUMA, a violation of provisions relating to these taxes is a crime unless otherwise specified.

This bill would provide for the suspension or revocation of those permits, would authorize the board to deny an application for a permit if the applicant had previously been issued a permit that was suspended or revoked, among other reasons, and would set forth the process for appealing permit suspensions, revocations, and application denials. The bill would also impose specific criminal penalties, including fines and imprisonment, for certain violations of the provisions relating to the cultivation and excise taxes on marijuana and would require funds derived from those fines and collected or paid to the board to be deposited into the Marijuana Tax Fines and Penalties Account, which this bill would create in the California Marijuana Tax Fund. marijuana. By modifying the scope of a crime and imposing new crimes, the bill would impose a state-mandated local program. As revenues from the fines imposed by the bill would be deposited into the California Marijuana Tax Fund, a continuously appropriated fund, this bill would make an appropriation.

(2)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 on 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. Existing law requires a collection of prepayment of retail sales tax at the time that motor vehicle fuel tax or diesel fuel tax is imposed, and on each subsequent sale other than the retail sale, as specified. AUMA authorizes the State Board of Equalization to prescribe a method and manner for payment of the marijuana cultivation tax that utilizes tax stamps or state-issued product bags, as specified.

This bill would require a distributor, wholesaler, which this bill would define as a person that makes a distribution of marijuana or marijuana products to a retailer, to collect prepayments of both marijuana excise tax and sales tax on the marijuana or marijuana products distributed, as specified. The bill would require the distributor wholesaler to provide the retailer with evidence of the prepayment amounts collected and would grant a retailer that retains that evidence and other documents to credits in the amount of the marijuana excise tax and sales tax prepayments against its marijuana excise tax or sales and use tax obligations, respectively, for the same period. The bill would require a distributor wholesaler not required to hold a sellers permit to register with the board, would require all distributors wholesalers to obtain a permit from the board for the purposes of the marijuana taxes, and would authorize the board to require distributors wholesalers to place a security with the board. The bill would authorize the board to prescribe a method and manner for prepayment of the marijuana excise tax that utilizes tax stamps or other markings, as specified, and would further authorize the board to prescribe a method and manner for collection and remittance of the marijuana cultivation tax by distributors. wholesalers. As a violation of these requirements would be a crime, this bill would impose a state-mandated local program.

(3)AUMA exempts from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis, as defined, to qualified patients or primary caregivers that provide identification cards issued under the Medical Marijuana Program and other government-issued identification cards.

This bill would revise and recast that provision to exempt from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis to persons with identification cards, as defined, or primary caregivers that provide the above-described identification. The bill would subject a purchaser that furnishes a seller with a false or falsified identification card to specified fines. The bill would require the State Department of Health Care Services to, on or before July 1, 2018, develop a magnetic encoding or similar capability of storing data for identification cards issued under the Medical Marijuana Program, would require identification cards issued after that development to contain the encoding or similar capability of storing data, and on or before January 1, 2019, would require every seller to employ a sales tracking system through a card reader with the capability of reading that encoding or similar capability of storing data, as specified. By requiring county health departments to issue identification cards containing the encoding or similar capability of storing data, this bill would impose a state-mandated local program. On or after July 1, 2019, the bill would limit the sales and use tax exemption to sales made to purchasers with identification cards with the encoding or similar capability of storing data and tracked according to the sales tracking system.

(4)The Revenue Recovery and Collaborative Enforcement Team Act, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program for combating criminal tax evasion associated with the underground economy, as specified. The act requires the team to include the board, the Franchise Tax Board, the Department of Justice, and the Employment Development Department, and further requires the team to operate the pilot program using existing funding of those state agencies.

This bill would extend that pilot program until January 1, 2020, and would establish within the team the Department of Justices Tax Recovery and Criminal Enforcement Task Force the Cannabis Criminal Enforcement Team for the purpose of combating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories. The bill would require the Cannabis Criminal Enforcement Team to consist of the state entities described above and would require those entities and state medical cannabis or nonmedical marijuana licensing authorities to exchange data for those purposes. The bill would require moneys in the Marijuana Tax Fines and Penalties Account created by the bill to be available, upon appropriation, to the Cannabis Criminal Enforcement Team for those purposes and, if those moneys are insufficient to adequately fund the team, would require revenues derived from sales and use taxes on marijuana and marijuana products to also be used to fund the team. modify the above-described allocation to the board to include enforcement activity costs incurred by the board through participation in the Cannabis Criminal Enforcement Team as that participation relates to the taxes imposed by AUMA. By expanding the purposes for which the California Marijuana Tax Fund is continuously appropriated, this bill would make an appropriation.

(6)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 specified reasons.

(1)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, commencing January 1, 2018, imposes an excise tax on the purchase of marijuana and marijuana products, as defined, and a separate tax on the cultivation of marijuana that enters the commercial market, and requires revenues from those taxes to be deposited into the California Marijuana Tax Fund and allocated for specified purposes pursuant to a specified schedule. AUMA provides for the administration of both taxes by the State Board of Equalization and requires persons required to be licensed involved in the cultivation and retail sale of marijuana or marijuana products to obtain a separate permit from the board. Under AUMA, a violation of provisions relating to these taxes is a crime unless otherwise specified.

This bill would provide for the suspension or revocation of those permits, would authorize the board to deny an application for a permit if the applicant had previously been issued a permit that was suspended or revoked, among other reasons, and would set forth the process for appealing permit suspensions, revocations, and application denials. The bill would also impose specific criminal penalties, including fines and imprisonment, for certain violations of the provisions relating to the cultivation and excise taxes on marijuana and would require funds derived from those fines and collected or paid to the board to be deposited into the Marijuana Tax Fines and Penalties Account, which this bill would create in the California Marijuana Tax Fund. By modifying the scope of a crime and imposing new crimes, the bill would impose a state-mandated local program.

(2)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 on 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. Existing law requires a collection of prepayment of retail sales tax at the time that motor vehicle fuel tax or diesel fuel tax is imposed, and on each subsequent sale other than the retail sale, as specified. AUMA authorizes the State Board of Equalization to prescribe a method and manner for payment of the marijuana cultivation tax that utilizes tax stamps or state-issued product bags, as specified.

This bill would require a distributor, which this bill would define as a person that makes a distribution of marijuana or marijuana products to a retailer, to collect prepayments of both marijuana excise tax and sales tax on the marijuana or marijuana products distributed, as specified. The bill would require the distributor to provide the retailer with evidence of the prepayment amounts collected and would grant a retailer that retains that evidence and other documents to credits in the amount of the marijuana excise tax and sales tax prepayments against its marijuana excise tax or sales and use tax obligations, respectively, for the same period. The bill would require a distributor not required to hold a sellers permit to register with the board, would require all distributors to obtain a permit from the board for the purposes of the marijuana taxes, and would authorize the board to require distributors to place security with the board. The bill would authorize the board to prescribe a method and manner for prepayment of the marijuana excise tax that utilizes tax stamps or other markings, as specified, and would further authorize the board to prescribe a method and manner for collection and remittance of the cultivation tax by distributors. As a violation of these requirements would be a crime, this bill would impose a state-mandated local program.

(3)AUMA exempts from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis, as defined, to qualified patients or primary caregivers that provide identification cards issued under the Medical Marijuana Program and other government-issued identification cards.

This bill would revise and recast that provision to exempt from sales and use taxes retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis to persons with identification cards, as defined, or primary caregivers that provide the above-described identification. The bill would subject a purchaser that furnishes a seller with a false or falsified identification card to specified fines. The bill would require the State Department of Health Care Services to, on or before July 1, 2018, develop a magnetic encoding or similar capability of storing data for identification cards issued under the Medical Marijuana Program, would require identification cards issued after that development to contain the encoding or similar capability of storing data, and on or before January 1, 2019, would require every seller to employ a sales tracking system through a card reader with the capability of reading that encoding or similar capability of storing data, as specified. By requiring county health departments to issue identification cards containing the encoding or similar capability of storing data, this bill would impose a state-mandated local program. On or after July 1, 2019, the bill would limit the sales and use tax exemption to sales made to purchasers with identification cards with the encoding or similar capability of storing data and tracked according to the sales tracking system.

(4)The Revenue Recovery and Collaborative Enforcement Team Act, until January 1, 2019, establishes the Revenue Recovery and Collaborative Enforcement Team as a pilot program for combating criminal tax evasion associated with the underground economy, as specified. The act requires the team to include the board, the Franchise Tax Board, the Department of Justice, and the Employment Development Department, and further requires the team to operate the pilot program using existing funding of those state agencies.

This bill would extend that pilot program until January 1, 2020, and would establish within the team the Cannabis Criminal Enforcement Team for the purpose of combating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories. The bill would require the Cannabis Criminal Enforcement Team to consist of the state entities described above and would require those entities and state medical cannabis or nonmedical marijuana licensing authorities to exchange data for those purposes. The bill would require moneys in the Marijuana Tax Fines and Penalties Account created by the bill to be available, upon appropriation, to the Cannabis Criminal Enforcement Team for those purposes and, if those moneys are insufficient to adequately fund the team, would require revenues derived from sales and use taxes on marijuana and marijuana products to also be used to fund the team.

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

This bill would provide that with regard to certain mandates no reimbursement is required by this act for a specified reason.

With regard to any other mandates, this bill would provide that, if the Commission on State Mandates determines that the bill contains costs so mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

(6)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 specified reasons.

ASSEMBLY THIRD READING

ATR Bill Id:AB 963

Author:(Gipson)

As Amended Ver:May 30, 2017

2/3 vote

SUMMARY: Makes numerous changes to how the Sales and Use Tax (SUT), excise tax, and cultivation tax on marijuana are administered, collected, and enforced, including monthly prepayments of sales tax and excise tax collected by wholesalers and, if authorized by the State Board of Equalization (BOE), collection of the cultivation tax by wholesalers. Specifically, this bill:

1. Shifts the SUT exemption for medical marijuana created by the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA) from the Marijuana Tax (MT) Law to the SUT Law.
2. Recasts the SUT exemption to apply to a "person with an identification card" or "primary caregiver," as defined in Health and Safety Code (H&SC) Section 11362.7, instead of a qualified patient or primary caregiver for a qualified patient.
3. Provides that any purchaser of medical marijuana who furnishes the seller with a false or falsified identification card, as specified, is liable to pay SUT and a penalty of 10% of the SUT or $500, whichever is greater, for each purchase made under false identification.
4. Relieves a seller of liability for sales tax if the purchaser furnishes the seller with valid identification cards and the seller takes the identification cards in good faith.
5. Defines "wholesaler" to mean a person that makes a distribution of marijuana or marijuana products.
6. Defines "distribution" to mean, for purposes of the prepayment of sales tax and excise tax on marijuana and marijuana products, sale or delivery of marijuana or marijuana products from a wholesaler to a retailer.
7. Requires, beginning July 1, 2018, at any time a wholesaler makes a distribution of marijuana or marijuana products to a retailer, the wholesaler to collect a monthly prepayment of sales tax from the retailer to which the products are distributed, as follows:
   1. When the distribution is a sale, the prepayment is based on the gross receipts derived from the sale of marijuana or marijuana products;
   2. If a cultivator or manufacturer is also the retailer, the prepayment is based on the wholesale cost of marijuana or marijuana products, as determined by the BOE; or,
   3. If the wholesaler is not required to hold a seller's permit, the prepayment is based on the wholesale cost, as determined by the BOE.
8. Defines "sale" to mean, for purposes of the imposition of sales tax prepayment on marijuana and marijuana products, the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration, or a distribution without consideration.
9. Requires each wholesaler to report and pay the sales tax prepayment amounts to BOE, in a form as prescribed by the BOE, in the period in which the marijuana or marijuana products are distributed.
10. Provides that the sales tax prepayment amount is deemed to be public money that is property of the State of California (subject to any credit or refund due to the retailer), that the prepayment is held in trust for the state by the wholesaler, and that the prepayment constitutes a debt owed by the wholesaler to the state until reported and paid to the BOE.
11. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of collection of, sales tax prepayment amounts, which are to be separately stated on the invoice.
12. Requires each wholesaler to report to the BOE, for each period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from any sale (or the wholesale cost), the amount of sales tax prepayments collected by the wholesaler, and any other information deemed necessary by the BOE; and,
    2. If the amount of sales tax prepayments collected by the wholesaler is greater than the amount of prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public money that is the property of the State of California, as specified.
13. Provides that the amount of sales tax prepayment made by the retailer constitutes a credit against its SUT due and payable for the period in which the retail sale was made if the retailer retains specified evidence of the prepayment.
14. Specifies that the rate of sales tax prepayment required to be collected is the combined rate of tax imposed pursuant to the SUT Law, Bradley-Burns Uniform Local SUT Law, and the California Constitution for purposes of the Local Public Safety Fund.
15. Authorizes the BOE to require a wholesaler to provide a list of retailers to which the marijuana or marijuana products were distributed, or other specified reports, to the BOE. Any wholesaler that fails to provide reports required by the BOE is guilty of a misdemeanor punishable as provided in Revenue and Taxation Code (R&TC) Section 7153.
16. Requires the wholesaler to file its sales tax prepayment form together with a remittance of the prepayment amounts on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
17. Requires any wholesaler that fails to make a timely remittance of sales tax prepayment amounts to the BOE to pay a penalty of 10% of the amount of prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, as specified, and increases the penalty to 25% if the wholesaler knowingly or intentionally fails to make a timely remittance. The BOE may relieve a person of these penalties if the BOE finds that the failure was due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect.
18. Requires retailers to be refunded sales tax prepayment amounts (or provides for authorization of a credit in lieu of a refund) on the following:
    1. Marijuana or marijuana products exempt from the SUT pursuant to R&TC Section 6352 or 6381;
    2. Marijuana or marijuana products lost through fire, flood, theft, spoilage, or accident prior to any retail sale; and,
    3. Marijuana or marijuana products purchased by a person with an identification card or primary caregiver who furnishes the seller with both his or her card issued under H&SC Section 11362.71 and a valid government-issued identification card, when the prepayment amounts paid are in excess of the amount due and payable for the period in which the retail sale of those products was made.
19. Requires the BOE to credit excess sales tax prepayment, interest, or penalty amounts collected or paid, and refund the balance to the person from whom it was collected or paid, if the BOE determines that the amount has been paid more than once or has been erroneously or illegally collected or computed.
20. Authorizes the BOE to require any wholesaler to place with the BOE any security that the BOE determines is necessary to ensure compliance with sales tax prepayment. The amount of security is to be fixed by the BOE, but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, or $500,000, whichever is less. The BOE may sell the security at public auction, as specified, if it is necessary to do so in order to recover any tax, penalty, or other amount required to be collected or due.
21. Requires a wholesaler to register with the BOE, as specified, if the wholesaler is not required to hold a seller's permit.
22. Provides that any person required to make prepayments of sales tax on marijuana and marijuana products may not be required to make additional prepayments provided that more than 75% of gross receipts are from the retail sale of marijuana or marijuana products.
23. Requires, beginning July 1, 2018, at any time marijuana or marijuana products are distributed to a retailer, the wholesaler to collect a monthly prepayment of marijuana excise tax from the retailer to which the products are distributed, as follows:
    1. When the distribution is a sale, the prepayment is based on the gross receipts derived from the sale of marijuana or marijuana products to that retailer in an arm's length transaction; or,
    2. If a cultivator or manufacturer is also the retailer, the prepayment is based on the wholesale cost of marijuana and marijuana products, as determined by the BOE.
24. Defines "arm's length transaction" to mean, for purposes of the imposition of marijuana excise tax prepayment, a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. A sale between relatives, related companies, or partners is presumed not to be made at "arm's length."
25. Defines "sale" to mean, for purposes of the imposition of marijuana excise tax prepayment, the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration.
26. Requires each wholesaler to report and pay the marijuana excise tax prepayment amounts to BOE, in a form as prescribed by the BOE, in the period in which the marijuana or marijuana products are distributed.
27. Provides that the marijuana excise tax prepayment amount is deemed to be public money that is property of the State of California to be deposited in the California Marijuana Tax (CMT) Fund (subject to any credit or refund due to the retailer) and disbursed for the purposes set forth in R&TC Section 34019, that the prepayment is held in trust for these purposes, and that the prepayment constitutes a debt owed by the wholesaler to the state until reported and paid to the BOE.
28. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of collection of, marijuana excise tax prepayment amounts, which are to be separately stated on the invoice.
29. Requires each wholesaler to use electronic media to report to the BOE, for each period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from the sale (or wholesale cost), the amount of marijuana excise tax prepayments collected by the wholesaler, and any other information deemed necessary by the BOE; and,
    2. If the amount of marijuana excise tax prepayments collected by the wholesaler is greater than the amount of prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public money that is the property of the State of California, as specified.
30. Provides that the amount of marijuana excise tax prepayment made by the retailer constitutes a credit against its marijuana excise tax due and payable for the period in which the sale was made if the retailer retains specified evidence of the prepayment.
31. Specifies that the rate of marijuana excise tax prepayment required to be collected is ___ on the gross receipts or wholesale cost of the marijuana or marijuana products distributed to a retailer by a wholesaler.
32. Requires wholesalers to maintain information that indicates the wholesale cost or price and quantity of marijuana or marijuana products to be sold, as specified, as deemed necessary by the BOE.
33. Requires returns or reports to be authenticated in a form or pursuant to methods as may be prescribed by the BOE.
34. Authorizes the BOE to require a wholesaler to provide a list of retailers to which the marijuana or marijuana products were distributed, or other specified reports, to the BOE. Any wholesaler that fails to provide reports required by the BOE is guilty of a misdemeanor punishable as provided in R&TC Section 34016.
35. Requires the wholesaler to file its marijuana excise tax prepayment form together with a remittance of the prepayment amounts on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
36. Requires any wholesaler that fails to make a timely remittance of marijuana excise tax prepayment amounts to the BOE to pay a penalty of 10% of the amount of prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, as specified, and increases the penalty to 25% if the wholesaler knowingly or intentionally fails to make a timely remittance. The BOE may relieve a person of these penalties in accordance with R&TC Section 55044.
37. Requires retailers to be refunded marijuana excise tax prepayment amounts (or provides for authorization of a credit in lieu of a refund) on marijuana or marijuana products lost through fire, flood, theft, spoilage, or accident prior to any retail sale.
38. Authorizes the BOE to require any wholesaler to place with the BOE any security that the BOE determines is necessary to ensure compliance with marijuana excise tax prepayment. The amount of security is to be fixed by the BOE, but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, or $500,000, whichever is less. The BOE may sell the security at public auction, as specified, if it is necessary to do so in order to recover any tax, penalty, or other amount required to be collected or due.
39. Authorizes the BOE to prescribe by regulation a method and manner for prepayment of the marijuana excise tax, including when and how the tax should be paid, that utilizes tax stamps or other markings that indicate that all required tax has been paid.
40. Authorizes the BOE to prescribe by regulation a method and manner for collection and remittance of the marijuana cultivation tax by wholesalers that includes the following provisions:
    1. All sums of money paid by a person as the cultivation tax, including that collected from a cultivator that has not been remitted to the BOE, is public money that is property of the State of California to be deposited in the CMT Fund (subject to any credit or refund due to the retailer) and disbursed for the purposes set forth in R&TC Section 34019. The collected cultivation tax constitutes a debt owed to the state by the wholesaler until reported and paid to the BOE.
    2. A wholesaler that has collected any amount of cultivation tax in excess of the amount of tax actually due may refund that overpayment to the cultivator, even though the overpayment has already been paid to the BOE and a corresponding credit or refund has not yet been secured. The wholesaler may claim a credit for that overpayment against the amount of cultivation tax due upon any other quarterly return, if the credit is claimed in a return dated no later than three years from the date of the overpayment.
    3. Every cultivator is liable for the cultivation tax until it has been paid, except that payment to a wholesaler with a permit issued by the BOE is sufficient to relieve the cultivator from further liability for the tax.
    4. Wholesalers are not obligated to take any legal action to enforce the collection of the cultivation tax, but are required to provide the BOE with amounts uncollected which total $___ or more on a cumulative basis with respect to a single cultivator, along with the names, addresses, and reasons of the cultivators refusing to pay the tax.
    5. The cultivation tax must be stated separately from the price or value of the harvested marijuana on the invoice, or other price or valued displayed on any proof of sales or documentation of a transaction.
41. Requires all persons required to be licensed to distribute marijuana or marijuana products to obtain a separate permit from the BOE, and specifies that engaging in business without the permit or after the permit has been canceled, suspended, or revoked is a misdemeanor offense.
42. Requires the BOE to issue a permit to a cultivator, retailer, or wholesaler upon receipt of a completed application and any required security, unless any of the following apply:
    1. The applicant, or person controlling the applicant, has previously had its permit suspended or revoked for violating the MT Law;
    2. The applicant's permit was revoked or is subject to revocation proceedings for violating the MT Law, unless it has been more than five years since the permit was revoked;
    3. The applicant is applying for a permit for a premises or business that is the same as that of an applicant whose license was revoked or is subject to revocation proceedings for violating the MT Law, unless the applicant has acquired or is acquiring the premises or business in an arm's length transaction;
    4. The applicant, or person controlling the applicant, has been convicted of a felony under the MT Law; or,
    5. The applicant does not possess all required permits or licenses required under the R&TC.
43. Allows any cultivator, retailer, or wholesaler denied a permit to petition for a redetermination of the BOE's action within 30 days of serving the applicant with notice of the denial. Every petition must be in writing and state the specific grounds upon which the petition is founded. The BOE must grant the petitioner an oral hearing, with at least 10 days' notice of the time and place of hearing, during which the petition will be considered if timely filed.
44. Authorizes the BOE to suspend or revoke the permit of any person, upon hearing, who fails to comply with the MT Law, and prohibits the BOE from issuing a new permit after revocation unless it is satisfied that the former holder of the permit will comply with the MT Law. The BOE must give the person at least 10 days' written notice specifying the time and place of the hearing and require the person to show cause why the permit should not be suspended or revoked. The BOE must provide written notice to the person of the suspension or revocation of his or her permit.
45. Provides that any person required to make, render, sign, or verify any return or report who makes any false or fraudulent report with intent to evade tax under the MT Law is guilty of a misdemeanor. Each offense is punishable by a fine of $300 to $5,000 or by imprisonment in county jail no longer than one year, or both.
46. Provides that any person who fails or refuses to file or furnish any report or other data required by the BOE is guilty of a misdemeanor, subject to a fine not to exceed $1,000 for each offense.
47. Provides that any person who falsely or fraudulently makes, forges, alters, reuses, or counterfeits any evidence of the cultivation tax or marijuana excise tax, tampers with related metering machines, or otherwise advances false evidence, for the purpose of tax evasion, is guilty of a felony punishable by a fine of $1,000 to $25,000 or by imprisonment of two, three, or four years, or both.
48. Provides that any person who possesses, sells, or buys any false or fraudulent evidence of the cultivation tax or marijuana excise tax is guilty of a misdemeanor punishable by a fine not to exceed $5,000 or $50,000, depending on the value (left unspecified) of false evidence, or imprisonment in county jail no longer than one year, or both.
49. Requires the BOE to destroy any evidence of the cultivation tax or marijuana excise tax seized in relation to evidence-related felonies and misdemeanors.
50. Provides that any person, except permitted cultivators, as specified, who knowingly possesses or keeps, stores, or retains for the purpose of sale any marijuana or marijuana products on which tax has not been paid or to which there is no evidence of tax authorized to be made upon secure packaging, is guilty of a misdemeanor. Each offense is punishable by a fine of $25,000 or by imprisonment in county jail no longer than one year, or both.
51. Requires the BOE to revoke all permits issued under the SUT Law from any cultivator, retailer, or wholesaler convicted under any provision of the MT Law.
52. Provides that any person who violates the MT Law with intent to evade tax is guilty of a felony when the amount of tax liability (the determination of which must be approved by the executive director) aggregates $25,000 or more in any 12-consecutive-month period. Each offense is punishable by a fine of $5,000 to $20,000 or by imprisonment for 16 months, two years, or three years, or both.
53. Provides that any person convicted of a crime under the MT Law may be charged the costs of investigation and prosecution at the discretion of the court.
54. Allows the BOE to collect court-ordered restitution orders or any other amounts due and payable to the BOE in any manner provided by law for collection of a delinquent cultivation tax or marijuana excise tax liability, including issuance of an order and levy for earnings withholding orders, as specified, and by recording notice of state tax lien. Restitution orders are to be treated as final and due and payable to the State of California on the date the amount is established on the records of the BOE. Any amounts paid are not subject to refund or credit, and any amounts authorized to be collected may accrue interest and are not subject to any statute of limitations, as specified.
55. Provides no reimbursement to local agencies and school districts for costs mandated by the state, as specified.
56. Finds and declares that this bill's provisions further the purpose of the AUMA by providing the BOE with the authority and resources necessary to collect the taxes imposed by the AUMA.

EXISTING LAW:

1. Legalizes the cultivation, sale, and use of marijuana for medical and recreational purposes in California, under the Medical Cannabis Regulation and Safety Act (MCRSA) and AUMA.
2. Imposes SUT on retailers for the privilege of selling tangible personal property (TPP) in California and on purchasers for the consumption of TPP brought into California, absent a specific exemption. Every person engaged in the business of selling TPP subject to SUT must apply to the BOE for a seller's permit, and a person engaged in business as a seller without a seller's permit is guilty of a misdemeanor.
3. Exempts medical marijuana and medical marijuana products from the SUT when purchased by a qualified patient or his or her primary caregiver who provides his or her government-issued Medical Marijuana Identification Card (MMIC), as specified.
4. Requires prepayment of sales tax on motor vehicle fuel and diesel fuel, as specified.
5. Imposes, effective January 1, 2018, a marijuana excise tax upon purchasers of marijuana or marijuana products at the rate of 15% of the gross receipts of any retail sale by a dispensary, retailer, microbusiness, nonprofit, or other person required to be licensed under the MCRSA or AUMA. No marijuana or marijuana products may be sold to a purchaser unless the excise tax has been paid by the purchaser at the time of sale, with the licensee responsible for collecting the excise tax and remitting it to the BOE, as specified.
6. Specifies that gross receipts from the sale of marijuana or marijuana products for purposes of assessing the SUT includes the marijuana excise tax levied.
7. Imposes, effective January 1, 2018, a cultivation tax on all harvested marijuana that enters the commercial market and upon all persons required to be licensed to cultivate marijuana. The tax for marijuana flowers is $9.25 per dry-weight ounce and the tax for marijuana leaves is $2.75 per dry-weight ounce, subject to adjustment by the BOE. All marijuana removed from a cultivator's premises, except for plant waste, is presumed sold and therefore subject to the cultivation tax.
8. Requires the BOE to administer and collect the marijuana excise and cultivation tax quarterly pursuant to the Fee Collection Procedures Law and provides that any person who fails to pay the taxes imposed under the MT Law is subject to a penalty of at least one-half the amount of taxes not paid and license revocation.
9. Requires all persons required to be licensed to cultivate or sell marijuana to obtain a separate permit from the BOE and specifies that engaging in business without the permit or after the permit has been canceled, suspended, or revoked is a misdemeanor offense. The BOE may also require security from licensees to cover liability for taxes imposed.
10. Allows the BOE to require every licensee engaged in the cultivation, distribution, or retail sale of marijuana to file a monthly electronic report regarding the licensee's inventory, purchases, and sales during the preceding month.
11. Authorizes peace officers or BOE employees granted limited peace officer status to inspect sites where marijuana or marijuana products are sold to purchases, cultivated, or stored, or any site where evidence of activities involving evasion may be discovered, and authorizes the BOE or law enforcement agency to seize marijuana or marijuana products without evidence of tax payment or not contained in secure packaging.
12. Provides for increased enforcement mechanisms, fines, and penalties for tax evasion related to the retail sale of cigarettes and tobacco products under the Cigarette and Tobacco Products Tax (CTPT) Law and Cigarette and Tobacco Products Licensing (CTPL) Act, including use of a "smart" cigarette tax stamp.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. Significant one-time administrative costs in excess of $300,000 for the BOE to develop systems and processes needed for administering the sales tax and marijuana excise tax prepayment process, and ongoing administrative costs in excess of $250,000 to manage that prepayment process.
2. Additional ongoing costs in excess of $250,000 for the BOE to develop regulations and administer a process for a wholesaler to collect the cultivation tax on behalf of cultivators, if the BOE chooses to develop such regulations.
3. Ongoing administrative costs for the California Department of Consumer Affairs in the range of $90,000 to investigate licensees that have their BOE seller's permit suspended or revoked.

COMMENTS:

1. Author's Statement: The author has provided the following statement in support of this bill:

AB 963 seeks to create an ease of tax collection and enforce accountability for cannabis by centralizing tax collection and creating a Cannabis Criminal Enforcement Team to audit the collection. This will be done by requiring the cultivation tax and a prepayment of the retail tax to be collected by the distributor. By centralizing the tax collection it creates a more efficient way of reporting and paying tax on cannabis.

1. Marijuana Remains Illegal Under Federal Law: Federal law prohibits the manufacture, possession, sale, or distribution of marijuana and 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 Department of Justice (US DOJ) issued guidance to federal prosecutors regarding cannabis enforcement (referred to as the "Cole Memo"). The Cole Memo reiterated the US DOJ's commitment to enforcing federal law 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.

Since December 16, 2014, an appropriations rider (Rohrabacher-Farr Amendment) has prohibited the US DOJ from using funds to prevent specified states, including California, from implementing laws that authorize the use, distribution, possession, or cultivation of medical marijuana. Although this prohibition has been extended into subsequent fiscal years, it is currently set to expire on September 30, 2017. Lastly, given the appointment of a new US Attorney General who has stated his opposition to marijuana legalization, the federal government's long-term enforcement landscape remains uncertain, with both medical and recreational marijuana businesses susceptible to federal prosecution.

1. Legalization of Medical and Recreational Marijuana in California: In 1996, California voters approved Proposition 215 specifying that qualified patients and their primary caregivers cannot be prosecuted for possessing or cultivating medical marijuana upon the recommendation of an attending physician, thus legalizing possession and use of medical marijuana. SB 420 (Vasconcellos), Chapter 875, Statutes of 2003, established statewide guidelines implementing Proposition 215, including a voluntary program for the issuance of MMICs to patients and their primary caregivers.

In 2015, the Legislature enacted the MCRSA through a package of bills establishing a comprehensive licensing and regulatory framework for medical marijuana. The MCRSA created the Bureau of Medical Cannabis Regulation (BMCR) within the Department of Consumer Affairs to oversee and enforce California's medical marijuana regulations in collaboration with the California Department of Public Health, California Department of Food and Agriculture (CDFA), and BOE. The MCRSA also established categories of licenses for various medical marijuana activities such as cultivation, manufacturing, distribution, transportation, and sale overseen by specified state agencies. CDFA, in consultation with the BMCR and BOE, is tasked with establishing a track and trace program for reporting movement of marijuana through the distribution chain.

On November 8, 2016, California voters approved Proposition 64, the AUMA, to legalize the recreational use of marijuana for adults age 21 and older. Proposition 64 also exempted medical marijuana from SUT if purchased by a MMIC cardholder, and beginning January 1, 2018, imposes a 15% excise tax on the gross receipts of any retail sale by a dispensary or other licensee 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 to be paid by cultivators. Both the excise and cultivation tax are to be administered by the BOE.

The regulatory system for recreational marijuana established by the AUMA was similar, but not identical, to that established for medical marijuana, with some notable key differences. As such, both the Legislature and Governor's Administration have recognized the need to reconcile these two regulatory systems. California must be ready to issue both sets of licenses by January 1, 2018.

1. Purpose of this Bill: According to the author, this bill is sponsored by BOE Member Jerome Horton, whose office states that the BOE estimates 40% of the taxes on medical marijuana are currently not reported. As such, California has been losing $73.3 million annually, since 2000, in SUT, income, and payroll taxes from the sale of medical marijuana. Furthermore, a study of noncompliance in Los Angeles County showed that 51% of cannabis entities were not registered with any California taxing agencies.

The sponsor's office states that noncompliance will continue in the recreational marijuana market, citing estimates that 40% to 60% of taxes on sales in the legal marijuana market will go unreported, and that only 15% to 20% of the illegal businesses will convert to legitimate businesses. This bill proposes numerous enhanced tax collection efforts intended to deter untaxed or underreported sales, combat the underground economy, and ensure that California benefits from the tax revenue due to the state.

1. Recasting the SUT Exemption: The AUMA exempted medical marijuana from the SUT if purchased by a MMIC cardholder. This bill makes technical changes to how the SUT exemption was drafted under the initiative and imposes penalties for falsely claiming the exemption. As stated in the BOE's analysis of this bill, "[i]ncorporating [SUT] provisions outside of the [SUT Law] adds unnecessary confusion for taxpayers and persons researching the exemption. These provisions correctly place the medical cannabis sales tax exemption within the [SUT Law]" instead of the MT Law.

Additionally, the BOE analysis further explains that "[H&SC] Section 11362.7 defines a "qualified patient" to mean a person who is entitled to certain specified protections, but who does not have an identification card. Since the person must provide the seller with his or her [MMIC] to qualify for the sales tax exemption," this bill corrects the reference to provide that a "person with an identification card" is exempt from the SUT. Under this bill, both patients and their primary caregivers who furnish their MMIC card and another valid government-issued identification card at the time of sale would remain eligible for the SUT exemption.

1. Prepayment of the Sales Tax and Marijuana Excise Tax: This bill requires both the sales tax and marijuana excise tax imposed on purchasers of marijuana or marijuana products to be prepaid by a wholesaler. The rate of sales tax prepayment required to be collected is the combined state and local SUT rate, but the rate of excise tax prepayment required to be collected on the gross receipts or wholesale cost of the marijuana or marijuana products is left unspecified. Prepayment amounts would be deemed public money that is property of California, held in trust by the wholesaler, and a debt owed by the wholesaler to California until paid to the BOE.

Currently, sales tax on motor vehicle and diesel fuel is required to be prepaid to prevent tax evasion by service stations. According to the BOE, due to the number of service stations and the nature of operations, many service stations previously failed to obtain the mandated seller's permit or report the entire tax liability from their retail sales. Requiring prepayment of sales tax on fuel provides that 80% of the sales tax is collected in advance, giving retailers an incentive to report the correct sales amount and recoup the tax already paid to suppliers. The prepayment system requires documentation of how many gallons of fuel are sold to each vendor, information used by the BOE to trace fuel through the distribution chain and ultimately reconcile those numbers with the final retail sale of fuel.

Although the prepayment system has helped deter tax evasion on fuel sales, in part by providing an effective audit trail, the MCRSA and AUMA already establish a robust electronic track and trace program that will track marijuana through the distribution chain to prevent illegal diversion. The electronic system must include at a minimum the following information: 1) the quantity, or weight, and variety of products shipped; 2) the estimated times of departure and arrival; 3) the quantity, or weight, and variety of products received; 4) the actual time of departure and arrival; 5) a categorization of the product; and 6) the license number and unique identifier for all licensees involved in the shipping process, such as cultivators, manufacturers, transporters, distributors, and dispensaries. The database will also be specifically designed to flag irregularities for all licensing authorities to investigate, such as reconciliation errors that may indicate diversion to the black market, with the BOE granted read access for taxation purposes.

According to the BOE's analysis of this bill, dispensary and retailer purchase information provided by the track and trace system "will allow the BOE to estimate retail sales in order to reconcile amounts reported for sales tax and marijuana excise tax purposes, and if necessary, will provide a basis for a mark-up of purchases as an indirect audit approach." It is possible and likely inevitable that some harvested marijuana will not be entered into the track and trace system by unscrupulous individuals. However, if these bad actors are already operating outside the legitimate distribution structure, "it is unclear to BOE staff how the tax prepayments proposed by this measure will address tax evasion by underground cultivators and retailers."

Lastly, this bill specifies that the prepayment system for sales tax and marijuana excise tax would become operative on July 1, 2018. Delayed implementation would help alleviate the BOE's workload, which has recently increased amidst replacing its legacy computer system and implementing other legislative and voter mandates such as the lead acid battery fee and expansion of the cigarette tax. However, businesses newly licensed to sell marijuana on January 1, 2018 would be required to carry out their duties as tax collectors and remitters under one set of rules, only to change the rules after six months of operation.

1. Collection of the Cultivation Tax by Wholesalers: This bill authorizes the BOE to prescribe via regulation a method and manner for collection and remittance of the cultivation tax by wholesalers. Until that time, the cultivation tax would continue to be collected and remitted by cultivators, on whom the tax is imposed. Although some requirements for shifting the cultivation tax collection system are specified, other provisions are confusing and less clear. Most notably, the term "wholesaler" is not used by either the MCRSA or AUMA, which "could cause confusion and result in unregistered taxpayers and unreported tax." BOE staff instead suggests using the terms "distributor" or "microbusiness" (established licensed categories) to refer to entities responsible for collecting and remitting the cultivation tax and prepayment of sales tax and marijuana excise tax.

BOE staff states in its analysis of this bill that it typically "recommends that excise taxes and fees be imposed as high in the distribution chain as possible, since there are fewer taxpayers and therefore less potential for tax evasion." Although the highest point in the marijuana distribution chain is the cultivator, it is estimated that 25,000 to 35,000 cultivators will be licensed under the MCRSA and AUMA, making the marijuana cultivation tax program one of the largest BOE administers. In contrast, "estimates also indicate considerably fewer distributors (wholesalers), manufacturers, and retailers" so "cultivation tax collection at the distributor/wholesaler level may be more appropriate."

1. Additional Enforcement Mechanisms: This bill provides for additional enforcement mechanisms to help deter tax evasion. Permits issued to cultivators, retailers, and wholesalers in violation of the MT Law would be revoked, and the BOE would be prohibited from issuing a new permit after revocation unless it is satisfied that the former permit holder will comply with the MT Law. However, it is unclear how such intent would be demonstrated to the BOE. This bill also specifies that a permit shall be issued to a former permit holder who reapplies after revocation if five years have passed, but does not further clarify the conditions under which the BOE will issue permits. Lastly, this bill enhances various violations, fines, and penalties for tax evasion similar to those under the CTPT Law and CTPL Act, and allows the BOE to recover costs from criminal investigations and orders of restitution.
2. Effectiveness of Existing Methods to Combat the Underground Economy: This bill proposes numerous changes to how the SUT, excise tax, and cultivation tax on marijuana are collected, remitted, and enforced, modeled after existing tax programs administered by the BOE. However, it is unclear whether existing tools may be similarly successful given the unique nature of the marijuana industry. Although some industries such as that for cigarette and tobacco products are more susceptible to illegal diversion and criminal enterprise, to which the marijuana industry will also be highly susceptible, regulating marijuana businesses will likely be even more complex given the continued classification of marijuana as an illegal drug at the federal level and the resultant impact on businesses' ability to bank.

The AUMA requires the LAO to submit a report to the Legislature by January 1, 2020 with recommendations for adjustments to the tax rate to achieve the goals of undercutting illicit market prices and discouraging marijuana use by underage individuals, while still ensuring sufficient revenues are generated. Since regulation of marijuana under the MCRSA and AUMA has yet to even begin, implementation of some provisions in this bill may be premature, and further study of best practices may enhance solutions to the problems posed by this specific underground economy moving forward.

1. Amending the AUMA: Proposition 64 put limitations on the Legislature's ability to amend the AUMA. Although some provisions of the AUMA may be amended with a majority vote of the Legislature, the AUMA otherwise provides that its provisions may only be amended to further its purposes with a two-thirds vote of the Legislature.

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098 FN: 0000891

Date of Hearing: May 10, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 963

Author:(Gipson) – As Amended Ver:April 5, 2017

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

SUMMARY:

This bill establishes the Cannabis Criminal Enforcement Team (CCET) and makes numerous changes to how the Sales and Use Tax (SUT), excise tax, and cultivation tax on marijuana are administered, collected, and enforced. In summary, this bill:

1. Requires wholesalers to report and pay sales tax and excise tax prepayment amounts to the Board of Equalization (BOE), and defines the parameters and administration of this prepayment process.
2. Authorizes the BOE to prescribe, by regulation, a process to collect the marijuana cultivation tax from wholesalers, and defines parameters of this regulation.
3. Establishes a range of penalties for retailers, wholesalers, and cultivators that do not comply with the provisions of this bill.
4. Requires the BOE to create the CCET for the purpose of combatting criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories, that may include, but not be limited to, representatives from the BOE, Franchise Tax Board (FTB), Employment Development Department (EDD), and state licensing authorities.
5. Makes clarifying changes to sales tax exemption on medical cannabis.

FISCAL EFFECT:

1. Significant one-time administrative costs in excess of $300,000 for BOE to develop systems and processes needed for administering the sales tax and marijuana excise tax prepayment process, and ongoing administrative costs in excess of $250,000 to manage that prepayment process.
2. Additional ongoing costs in excess of $250,000 for BOE to develop regulations and administer a process for a wholesaler to collect the cultivation tax on behalf of cultivators, if BOE chooses to develop such regulations.
3. Unknown ongoing administrative costs for BOE to participate in the proposed CCET, which would result in enhanced enforcement activities and investigations.

COMMENTS:

1. Purpose. According to the bill’s sponsor, BOE Member Jerome Horton, AB 963 will introduce numerous enhanced tax collection efforts to ensure that the taxes on cannabis products are properly collected. The sponsor’s office states that noncompliance has been an ongoing issue in the medical cannabis industry, with 40% of the taxes on medical cannabis not being reported. This issue is expected to continue with recreational cannabis taxes as well.
2. Proposition 64. 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. AUMU specifies that this cultivation tax is imposed on all harvested marijuana that enters the commercial market and all marijuana removed from a cultivator's premises even if that marijuana does not pass quality assurance testing after it is collected.

1. Prepayment of taxes. Currently, sales tax on motor vehicle and diesel fuel is required to be prepaid to prevent tax evasion by service stations. Suppliers collect prepayment of sales tax from whoever purchases the fuel for retail sale, and the annual prepayment rate is established by BOE. This process was established because the large number of service stations and the nature of their operations have led to many stations failing to report their entire tax liability. Requiring prepayment of sales tax on fuel provides that 80% of the sales tax is collected in advance, giving retailers an incentive to report the correct sales amount and recoup the tax already paid to suppliers. The prepayment system requires documentation of how many gallons of fuel are sold to each vendor, information used by the BOE to trace fuel through the distribution chain and ultimately reconcile those numbers with the final retail sale of fuel

AB 963 establishes a similar prepayment process related to cannabis products. The bill requires both the sales tax and marijuana excise tax to be prepaid by a wholesaler. The rate of sales tax prepayment required to be collected is the combined state and local SUT rate, but the rate of excise tax prepayment required to be collected on the gross receipts or wholesale cost of the marijuana or marijuana products is left unspecified. Prepayment amounts would be deemed public money that is property of California, held in trust by the wholesaler, and a debt owed by the wholesaler to California until paid to the BOE.

1. Wholesaler. This bill uses the term “wholesaler,” but AUMU does not use this term to reference any entity in the cannabis supply chain. According to BOE staff analysis, the term “wholesaler” should be changed to “distributor” or “microbusiness,” which are established licensed categories.
2. Related legislation. AB 963 is one of three cannabis tax-related bills pending in this Committee: AB 948 (Bonta) authorizes the BOE to allow a person engaged in commercial marijuana activity to remit tax liability due in a method other than an electronic funds transfer, and AB 1410 (Wood) allows distributors to collect the marijuana cultivation tax from cultivator. Both AB 948 and AB 1410 will be heard today.

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

Date of Hearing: April 24, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 963 (

Author:Gipson) – As Amended Ver:April 5, 2017

2/3 vote. Fiscal committee.

SUBJECT: Taxation: marijuana

SUMMARY: Establishes the Cannabis Criminal Enforcement Team (CCET) and makes numerous changes to how the Sales and Use Tax (SUT), excise tax, and cultivation tax on marijuana are administered, collected, and enforced, including monthly prepayments of sales tax and excise tax collected by wholesalers and, if authorized by the State Board of Equalization (BOE), collection of the cultivation tax by wholesalers. Specifically, this bill:

1. Shifts the SUT exemption for medical marijuana created by the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA) from the Marijuana Tax (MT) Law to the SUT Law.
2. Recasts the SUT exemption to apply to a "person with an identification card" or "primary caregiver," as defined in Health and Safety Code (H&SC) Section 11362.7, instead of a qualified patient or primary caregiver for a qualified patient.
3. Provides that any purchaser of medical marijuana who furnishes the seller with a false or falsified identification card, as specified, is liable to pay SUT and a penalty of 10% of the SUT or $500, whichever is greater, for each purchase made under false identification.
4. Relieves a seller of liability for sales tax if the purchaser furnishes the seller with valid identification cards and the seller takes the identification cards in good faith.
5. Defines "wholesaler" to mean a person that makes a distribution of marijuana or marijuana products.
6. Defines "distribution" to mean, for purposes of the prepayment of sales tax and excise tax on marijuana and marijuana products, sale or delivery of marijuana or marijuana products from a wholesaler to a retailer.
7. Requires, beginning July 1, 2018, at any time a wholesaler makes a distribution of marijuana or marijuana products to a retailer, the wholesaler to collect a monthly prepayment of sales tax from the retailer to which the products are distributed, as follows:
   1. When the distribution is a sale, the prepayment is based on the gross receipts derived from the sale of marijuana or marijuana products;
   2. If a cultivator or manufacturer is also the retailer, the prepayment is based on the wholesale cost of marijuana or marijuana products, as determined by the BOE; or,
   3. If the wholesaler is not required to hold a seller's permit, the prepayment is based on the wholesale cost, as determined by the BOE.
8. Defines "sale" to mean, for purposes of the imposition of sales tax prepayment on marijuana and marijuana products, the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration, or a distribution without consideration.
9. Requires each wholesaler to report and pay the sales tax prepayment amounts to BOE, in a form as prescribed by the BOE, in the period in which the marijuana or marijuana products are distributed.
10. Provides that the sales tax prepayment amount is deemed to be public money that is property of the State of California (subject to any credit or refund due to the retailer), that the prepayment is held in trust for the state by the wholesaler, and that the prepayment constitutes a debt owed by the wholesaler to the state until reported and paid to the BOE.
11. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of collection of, sales tax prepayment amounts, which are to be separately stated on the invoice.
12. Requires each wholesaler to report to the BOE, for each period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from any sale (or the wholesale cost), the amount of sales tax prepayments collected by the wholesaler, and any other information deemed necessary by the BOE; and,
    2. If the amount of sales tax prepayments collected by the wholesaler is greater than the amount of prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public money that is the property of the State of California, as specified.
13. Provides that the amount of sales tax prepayment made by the retailer constitutes a credit against its SUT due and payable for the period in which the retail sale was made if the retailer retains specified evidence of the prepayment.
14. Specifies that the rate of sales tax prepayment required to be collected is the combined rate of tax imposed pursuant to the SUT Law, Bradley-Burns Uniform Local SUT Law, and the California Constitution for purposes of the Local Public Safety Fund.
15. Authorizes the BOE to require a wholesaler to provide a list of retailers to which the marijuana or marijuana products were distributed, or other specified reports, to the BOE. Any wholesaler that fails to provide reports required by the BOE is guilty of a misdemeanor punishable as provided in Revenue and Taxation Code (R&TC) Section 7153.
16. Requires the wholesaler to file its sales tax prepayment form together with a remittance of the prepayment amounts on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
17. Requires any wholesaler that fails to make a timely remittance of sales tax prepayment amounts to the BOE to pay a penalty of 10% of the amount of prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, as specified, and increases the penalty to 25% if the wholesaler knowingly or intentionally fails to make a timely remittance. The BOE may relieve a person of these penalties if the BOE finds that the failure was due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect.
18. Requires retailers to be refunded sales tax prepayment amounts (or provides for authorization of a credit in lieu of a refund) on the following:
    1. Marijuana or marijuana products exempt from the SUT pursuant to R&TC Section 6352 or 6381;
    2. Marijuana or marijuana products lost through fire, flood, theft, spoilage, or accident prior to any retail sale; and,
    3. Marijuana or marijuana products purchased by a person with an identification card or primary caregiver who furnishes the seller with both his or her card issued under H&SC Section 11362.71 and a valid government-issued identification card, when the prepayment amounts paid are in excess of the amount due and payable for the period in which the retail sale of those products was made.
19. Requires the BOE to credit excess sales tax prepayment, interest, or penalty amounts collected or paid, and refund the balance to the person from whom it was collected or paid, if the BOE determines that the amount has been paid more than once or has been erroneously or illegally collected or computed.
20. Authorizes the BOE to require any wholesaler to place with the BOE any security that the BOE determines is necessary to ensure compliance with sales tax prepayment. The amount of security is to be fixed by the BOE, but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, or $500,000, whichever is less. The BOE may sell the security at public auction, as specified, if it is necessary to do so in order to recover any tax, penalty, or other amount required to be collected or due.
21. Requires a wholesaler to register with the BOE, as specified, if the wholesaler is not required to hold a seller's permit.
22. Provides that any person required to make prepayments of sales tax on marijuana and marijuana products may not be required to make additional prepayments provided that more than 75% of gross receipts are from the retail sale of marijuana or marijuana products.
23. Requires, beginning July 1, 2018, at any time marijuana or marijuana products are distributed to a retailer, the wholesaler to collect a monthly prepayment of marijuana excise tax from the retailer to which the products are distributed, as follows:
    1. When the distribution is a sale, the prepayment is based on the gross receipts derived from the sale of marijuana or marijuana products to that retailer in an arm's length transaction; or,
    2. If a cultivator or manufacturer is also the retailer, the prepayment is based on the wholesale cost of marijuana and marijuana products, as determined by the BOE.
24. Defines "arm's length transaction" to mean, for purposes of the imposition of marijuana excise tax prepayment, a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. A sale between relatives, related companies, or partners is presumed not to be made at "arm's length."
25. Defines "sale" to mean, for purposes of the imposition of marijuana excise tax prepayment, the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration.
26. Requires each wholesaler to report and pay the marijuana excise tax prepayment amounts to BOE, in a form as prescribed by the BOE, in the period in which the marijuana or marijuana products are distributed.
27. Provides that the marijuana excise tax prepayment amount is deemed to be public money that is property of the State of California to be deposited in the California Marijuana Tax (CMT) Fund (subject to any credit or refund due to the retailer) and disbursed for the purposes set forth in R&TC Section 34019, that the prepayment is held in trust for these purposes, and that the prepayment constitutes a debt owed by the wholesaler to the state until reported and paid to the BOE.
28. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of collection of, marijuana excise tax prepayment amounts, which are to be separately stated on the invoice.
29. Requires each wholesaler to use electronic media to report to the BOE, for each period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from the sale (or wholesale cost), the amount of marijuana excise tax prepayments collected by the wholesaler, and any other information deemed necessary by the BOE; and,
    2. If the amount of marijuana excise tax prepayments collected by the wholesaler is greater than the amount of prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public money that is the property of the State of California, as specified.
30. Provides that the amount of marijuana excise tax prepayment made by the retailer constitutes a credit against its marijuana excise tax due and payable for the period in which the sale was made if the retailer retains specified evidence of the prepayment.
31. Specifies that the rate of marijuana excise tax prepayment required to be collected is ___ on the gross receipts or wholesale cost of the marijuana or marijuana products distributed to a retailer by a wholesaler.
32. Requires wholesalers to maintain information that indicates the wholesale cost or price and quantity of marijuana or marijuana products to be sold, as specified, as deemed necessary by the BOE.
33. Requires returns or reports to be authenticated in a form or pursuant to methods as may be prescribed by the BOE.
34. Authorizes the BOE to require a wholesaler to provide a list of retailers to which the marijuana or marijuana products were distributed, or other specified reports, to the BOE. Any wholesaler that fails to provide reports required by the BOE is guilty of a misdemeanor punishable as provided in R&TC Section 34016.
35. Requires the wholesaler to file its marijuana excise tax prepayment form together with a remittance of the prepayment amounts on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
36. Requires any wholesaler that fails to make a timely remittance of marijuana excise tax prepayment amounts to the BOE to pay a penalty of 10% of the amount of prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, as specified, and increases the penalty to 25% if the wholesaler knowingly or intentionally fails to make a timely remittance. The BOE may relieve a person of these penalties in accordance with R&TC Section 55044.
37. Requires retailers to be refunded marijuana excise tax prepayment amounts (or provides for authorization of a credit in lieu of a refund) on marijuana or marijuana products lost through fire, flood, theft, spoilage, or accident prior to any retail sale.
38. Authorizes the BOE to require any wholesaler to place with the BOE any security that the BOE determines is necessary to ensure compliance with marijuana excise tax prepayment. The amount of security is to be fixed by the BOE, but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, or $500,000, whichever is less. The BOE may sell the security at public auction, as specified, if it is necessary to do so in order to recover any tax, penalty, or other amount required to be collected or due.
39. Authorizes the BOE to prescribe by regulation a method and manner for prepayment of the marijuana excise tax, including when and how the tax should be paid, that utilizes tax stamps or other markings that indicate that all required tax has been paid.
40. Authorizes the BOE to prescribe by regulation a method and manner for collection and remittance of the marijuana cultivation tax by wholesalers that includes the following provisions:
    1. All sums of money paid by a person as the cultivation tax, including that collected from a cultivator that has not been remitted to the BOE, is public money that is property of the State of California to be deposited in the CMT Fund (subject to any credit or refund due to the retailer) and disbursed for the purposes set forth in R&TC Section 34019. The collected cultivation tax constitutes a debt owed to the state by the wholesaler until reported and paid to the BOE.
    2. A wholesaler that has collected any amount of cultivation tax in excess of the amount of tax actually due may refund that overpayment to the cultivator, even though the overpayment has already been paid to the BOE and a corresponding credit or refund has not yet been secured. The wholesaler may claim a credit for that overpayment against the amount of cultivation tax due upon any other quarterly return, if the credit is claimed in a return dated no later than three years from the date of the overpayment.
    3. Every cultivator is liable for the cultivation tax until it has been paid, except that payment to a wholesaler with a permit issued by the BOE is sufficient to relieve the cultivator from further liability for the tax.
    4. Wholesalers are not obligated to take any legal action to enforce the collection of the cultivation tax, but are required to provide the BOE with amounts uncollected which total $___ or more on a cumulative basis with respect to a single cultivator, along with the names, addresses, and reasons of the cultivators refusing to pay the tax.
    5. The cultivation tax must be stated separately from the price or value of the harvested marijuana on the invoice, or other price or valued displayed on any proof of sales or documentation of a transaction.
41. Requires the BOE to create the CCET for the purpose of combatting criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories, that may include, but not be limited to, representatives from the BOE, Franchise Tax Board (FTB), Employment Development Department (EDD), and state licensing authorities under the Medical Cannabis Regulation and Safety Act (MCRSA) and AUMA.
42. Authorizes CCET members to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating marijuana-related criminal tax evasion, and provides that any information exchanged remains subject to any applicable confidentiality provisions.
43. Provides that enforcement activity costs incurred by the BOE through participation in the CCET are included as reasonable costs incurred by the BOE for administering and collecting taxes imposed by the MT Law, to be funded by CMT Fund revenues.
44. Requires all persons required to be licensed to distribute marijuana or marijuana products to obtain a separate permit from the BOE, and specifies that engaging in business without the permit or after the permit has been canceled, suspended, or revoked is a misdemeanor offense.
45. Requires the BOE to issue a permit to a cultivator, retailer, or wholesaler upon receipt of a completed application and any required security, unless any of the following apply:
    1. The applicant, or person controlling the applicant, has previously had its permit suspended or revoked for violating the MT Law;
    2. The applicant's permit was revoked or is subject to revocation proceedings for violating the MT Law, unless it has been more than five years since the permit was revoked;
    3. The applicant is applying for a permit for a premises or business that is the same as that of an applicant whose license was revoked or is subject to revocation proceedings for violating the MT Law, unless the applicant has acquired or is acquiring the premises or business in an arm's length transaction;
    4. The applicant, or person controlling the applicant, has been convicted of a felony under the MT Law; or,
    5. The applicant does not possess all required permits or licenses required under the R&TC.
46. Allows any cultivator, retailer, or wholesaler denied a permit to petition for a redetermination of the BOE's action within 30 days of serving the applicant with notice of the denial. Every petition must be in writing and state the specific grounds upon which the petition is founded. The BOE must grant the petitioner an oral hearing, with at least 10 days' notice of the time and place of hearing, during which the petition will be considered if timely filed.
47. Authorizes the BOE to suspend or revoke the permit of any person, upon hearing, who fails to comply with the MT Law, and prohibits the BOE from issuing a new permit after revocation unless it is satisfied that the former holder of the permit will comply with the MT Law. The BOE must give the person at least 10 days' written notice specifying the time and place of the hearing and require the person to show cause why the permit should not be suspended or revoked. The BOE must provide written notice to the person of the suspension or revocation of his or her permit.
48. Provides that any person required to make, render, sign, or verify any return or report who makes any false or fraudulent report with intent to evade tax under the MT Law is guilty of a misdemeanor. Each offense is punishable by a fine of $300 to $5,000 or by imprisonment in county jail no longer than one year, or both.
49. Provides that any person who fails or refuses to file or furnish any report or other data required by the BOE is guilty of a misdemeanor, subject to a fine not to exceed $1,000 for each offense.
50. Provides that any person who falsely or fraudulently makes, forges, alters, reuses, or counterfeits any evidence of the cultivation tax or marijuana excise tax, tampers with related metering machines, or otherwise advances false evidence, for the purpose of tax evasion, is guilty of a felony punishable by a fine of $1,000 to $25,000 or by imprisonment of two, three, or four years, or both.
51. Provides that any person who possesses, sells, or buys any false or fraudulent evidence of the cultivation tax or marijuana excise tax is guilty of a misdemeanor punishable by a fine not to exceed $5,000 or $50,000, depending on the value (left unspecified) of false evidence, or imprisonment in county jail no longer than one year, or both.
52. Requires the BOE to destroy any evidence of the cultivation tax or marijuana excise tax seized in relation to evidence-related felonies and misdemeanors.
53. Provides that any person, except permitted cultivators, as specified, who knowingly possesses or keeps, stores, or retains for the purpose of sale any marijuana or marijuana products on which tax has not been paid or to which there is no evidence of tax authorized to be made upon secure packaging, is guilty of a misdemeanor. Each offense is punishable by a fine of $25,000 or by imprisonment in county jail no longer than one year, or both.
54. Requires the BOE to revoke all permits issued under the SUT Law from any cultivator, retailer, or wholesaler convicted under any provision of the MT Law.
55. Provides that any person who violates the MT Law with intent to evade tax is guilty of a felony when the amount of tax liability (the determination of which must be approved by the executive director) aggregates $25,000 or more in any 12-consecutive-month period. Each offense is punishable by a fine of $5,000 to $20,000 or by imprisonment for 16 months, two years, or three years, or both.
56. Recasts an existing provision that all taxes, interest, penalties, and other amounts collected and paid, or otherwise remitted, to the BOE pursuant to the MT Law, less payment of refunds, be credited to the CMT Fund.
57. Provides that any person convicted of a crime under the MT Law may be charged the costs of investigation and prosecution at the discretion of the court.
58. Allows the BOE to collect court-ordered restitution orders or any other amounts due and payable to the BOE in any manner provided by law for collection of a delinquent cultivation tax or marijuana excise tax liability, including issuance of an order and levy for earnings withholding orders, as specified, and by recording notice of state tax lien. Restitution orders are to be treated as final and due and payable to the State of California on the date the amount is established on the records of the BOE. Any amounts paid are not subject to refund or credit, and any amounts authorized to be collected may accrue interest and are not subject to any statute of limitations, as specified.
59. Provides no reimbursement to local agencies and school districts for costs mandated by the state, as specified.
60. Finds and declares that this bill's provisions further the purpose of the AUMA by providing the BOE with the authority and resources necessary to collect the taxes imposed by the AUMA.

EXISTING LAW:

1. Legalizes the cultivation, sale, and use of marijuana for medical and recreational purposes in California, under the MCRSA and AUMA, as specified.
2. Imposes SUT on retailers for the privilege of selling tangible personal property (TPP) in California and on purchasers for the consumption of TPP brought into California, absent a specific exemption. Every person engaged in the business of selling TPP subject to SUT must apply to the BOE for a seller's permit, and a person engaged in business as a seller without a seller's permit is guilty of a misdemeanor.
3. Exempts medical marijuana and medical marijuana products from the SUT when purchased by a qualified patient or his or her primary caregiver who provides his or her government-issued Medical Marijuana Identification Card (MMIC), as specified.
4. Requires prepayment of sales tax on motor vehicle fuel and diesel fuel, as specified.
5. Imposes, effective January 1, 2018, a marijuana excise tax upon purchasers of marijuana or marijuana products at the rate of 15% of the gross receipts of any retail sale by a dispensary, retailer, microbusiness, nonprofit, or other person required to be licensed under the MCRSA or AUMA. No marijuana or marijuana products may be sold to a purchaser unless the excise tax has been paid by the purchaser at the time of sale, with the licensee responsible for collecting the excise tax and remitting it to the BOE, as specified.
6. Provides, except as otherwise provided by regulation, that the marijuana excise tax applies to the full price, if non-itemized, of any transaction involving both marijuana or marijuana products and any other goods or service, and to the price of any goods or services, if a reduction in the price of marijuana or marijuana products is contingent on the purchase of those goods or services.
7. Specifies that gross receipts from the sale of marijuana or marijuana products for purposes of assessing the SUT includes the marijuana excise tax levied.
8. Imposes, effective January 1, 2018, a cultivation tax on all harvested marijuana that enters the commercial market and upon all persons required to be licensed to cultivate marijuana. The tax for marijuana flowers is $9.25 per dry-weight ounce and the tax for marijuana leaves is $2.75 per dry-weight ounce. All marijuana removed from a cultivator's premises, except for plant waste, is presumed sold and therefore subject to the cultivation tax.
9. Requires the BOE to adjust cultivation tax rates annually for inflation beginning January 1, 2020. The BOE is allowed to adjust the tax rate for marijuana leaves to reflect fluctuations in the relative price of flowers to leaves, and establish other categories of marijuana subject to tax at their relative value compared with flowers.
10. Requires the BOE to administer and collect the marijuana excise and cultivation tax quarterly pursuant to the Fee Collection Procedures Law and provides that any person who fails to pay the taxes imposed under the MT Law is subject to a penalty of at least one-half the amount of taxes not paid and license revocation.
11. Requires all persons required to be licensed to cultivate or sell marijuana to obtain a separate permit from the BOE and specifies that engaging in business without the permit or after the permit has been canceled, suspended, or revoked is a misdemeanor offense. The BOE may also require security from licensees to cover liability for taxes imposed.
12. Allows the BOE to require every licensee engaged in the cultivation, distribution, or retail sale of marijuana to file a monthly electronic report regarding the licensee's inventory, purchases, and sales during the preceding month.
13. Authorizes peace officers or BOE employees granted limited peace officer status to inspect sites where marijuana or marijuana products are sold to purchases, cultivated, or stored, or any site where evidence of activities involving evasion may be discovered, and authorizes the BOE or law enforcement agency to seize marijuana or marijuana products without evidence of tax payment or not contained in secure packaging.
14. Establishes the CMT Fund where all marijuana cultivation and excise taxes, interest, penalties, and other amounts collected and paid to the BOE, less payment of refunds, are deposited. All revenues in the CMT Fund are continuously appropriated for reasonable costs incurred by state agencies for administration of the MCRSA and the AUMA (with the BOE's costs limited to 4% of revenues received), law enforcement activities, youth education and substance abuse prevention programs, and environmental protection efforts, as specified.
15. Requires the Legislative Analyst's Office to submit a report to the Legislature by January 1, 2020 with recommendations for adjustments to the tax rate to achieve the goals of undercutting illicit market prices and discouraging use by individuals under age 21, while ensuring sufficient revenues are generated.
16. Establishes, until January 1, 2019, the Revenue Recovery and Collaborative Enforcement (RRACE) Team as a pilot program that includes the BOE, FTB, EDD, and the Department of Justice (DOJ) to work cooperatively to pursue criminal tax evasion resulting from underground economic activities. Team members are authorized to exchange information for purposes of investigating underground operations resulting in state tax evasion.
17. Specifies that the RRACE Team pilot program must operate using existing funding and prohibits any request for additional funding until a report is provided to the Legislature, due December 1, 2017, on the number of complaints processed and cases investigated or prosecuted.
18. Provides for increased enforcement mechanisms, fines, and penalties for tax evasion related to the retail sale of cigarettes and tobacco products under the Cigarette and Tobacco Products Tax (CTPT) Law and Cigarette and Tobacco Products Licensing (CTPL) Act, including use of a "smart" cigarette tax stamp.

FISCAL EFFECT: The BOE estimates an "[u]ndetermined but positive impact on taxes associated with marijuana and marijuana products."

COMMENTS:

1. Author's Statement: The author has provided the following statement in support of this bill:

AB 963 seeks to create an ease of tax collection and enforce accountability for cannabis by centralizing tax collection and creating a Cannabis Criminal Enforcement Team to audit the collection. This will be done by requiring the cultivation tax and a prepayment of the retail tax to be collected by the distributor. By centralizing the tax collection it creates a more efficient way of reporting and paying tax on cannabis.

1. Arguments in Support: Diane L. Harkey, Chairwoman of the BOE, states the following in support of this bill:

By making the middleman, the marijuana wholesalers, the primary party responsible for collecting and remitting cultivation and excise taxes, this bill will streamline the process for all involved. Similar to how fuel taxes are collected "at the rack," marijuana taxes will be collected "at the field." This will insure that all taxes are properly collected at the beginning of the marijuana sales cycle, rather than at several points during the process.

1. Committee Staff Comments:
2. Marijuana Remains Illegal Under Federal Law: Federal law prohibits the manufacture, possession, sale, or distribution of marijuana and 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 Department of Justice (US DOJ) issued guidance to federal prosecutors regarding cannabis enforcement (referred to as the "Cole Memo"). The Cole Memo reiterated the US DOJ's commitment to enforcing federal law 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.

Since December 16, 2014, an appropriations rider (Rohrabacher-Farr Amendment) has prohibited the US DOJ from using funds to prevent specified states, including California, from implementing laws that authorize the use, distribution, possession, or cultivation of medical marijuana. Although this prohibition has been extended into subsequent fiscal years, it is currently set to expire on April 28, 2017. Lastly, given the appointment of a new US Attorney General who has stated his opposition to marijuana legalization, the federal government's long-term enforcement landscape remains uncertain, with both medical and recreational marijuana businesses susceptible to federal prosecution.

1. Legalization of Medical and Recreational Marijuana in California: Prior to 1996, both federal and state law prohibited the possession, cultivation, and sale of marijuana.
2. Proposition 215 (Compassionate Use Act): In 1996, California voters approved Proposition 215 specifying that qualified patients and their primary caregivers cannot be prosecuted for possessing or cultivating medical marijuana upon the recommendation of an attending physician, thus legalizing possession and use of medical marijuana. SB 420 (Vasconcellos), Chapter 875, Statutes of 2003, established statewide guidelines implementing Proposition 215, including a voluntary program for the issuance of MMICs to patients and their primary caregivers.

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. Sellers concerned about confidentiality and self-incrimination who declined to provide information regarding products sold and purchased, or names and addresses of suppliers, were still issued a permit so sales tax could be reported and paid.

1. MCRSA: In 2015, the Legislature enacted the MCRSA through a package of bills establishing a comprehensive licensing and regulatory framework for medical marijuana. The MCRSA created the Bureau of Medical Cannabis Regulation (BMCR) within the Department of Consumer Affairs to oversee and enforce California's medical marijuana regulations in collaboration with the California Department of Public Health, California Department of Food and Agriculture (CDFA), and BOE. The MCRSA also established categories of licenses for various medical marijuana activities such as cultivation, manufacturing, distribution, transportation, and sale overseen by specified state agencies. CDFA, in consultation with the BMCR and BOE, is tasked with establishing a track and trace program for reporting movement of marijuana through the distribution chain.
2. Proposition 64 (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 also exempted medical marijuana from SUT if purchased by a MMIC cardholder, and beginning January 1, 2018, imposes a 15% excise tax on the gross receipts of any retail sale by a dispensary or other licensee 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 to be paid by cultivators. Both the excise and cultivation tax are to be administered by the BOE.
3. Merging the Medical and Recreational Marijuana Regulatory Systems: The regulatory system for recreational marijuana established by the AUMA was similar, but not identical, to that established for medical marijuana, with some notable key differences. As such, both the Legislature and Governor's Administration have recognized the need to reconcile these two regulatory systems. California must be ready to issue both sets of licenses by January 1, 2018.
4. Purpose of this Bill: According to the author, this bill is sponsored by BOE Member Jerome Horton, whose office states that the BOE estimates 40% of the taxes on medical marijuana are currently not reported. As such, California has been losing $73.3 million annually, since 2000, in SUT, income, and payroll taxes from the sale of medical marijuana. Furthermore, a study of noncompliance in Los Angeles County showed that 51% of cannabis entities were not registered with any California taxing agencies.

The sponsor's office states that noncompliance will continue in the recreational marijuana market, citing estimates that 40% to 60% of taxes on sales in the legal marijuana market will go unreported, and that only 15% to 20% of the illegal businesses will convert to legitimate businesses. This bill proposes numerous enhanced tax collection efforts intended to deter untaxed or underreported sales, combat the underground economy, and ensure that California benefits from the tax revenue due to the state.

1. Recasting the SUT Exemption: The AUMA exempted medical marijuana from the SUT if purchased by a MMIC cardholder. This bill makes technical changes to how the SUT exemption was drafted under the initiative and imposes penalties for falsely claiming the exemption. As stated in the BOE's analysis of this bill, "[i]ncorporating [SUT] provisions outside of the [SUT Law] adds unnecessary confusion for taxpayers and persons researching the exemption. These provisions correctly place the medical cannabis sales tax exemption within the [SUT Law]" instead of the MT Law.

Additionally, the BOE analysis further explains that "[H&SC] Section 11362.7 defines a "qualified patient" to mean a person who is entitled to certain specified protections, but who does not have an identification card. Since the person must provide the seller with his or her [MMIC] to qualify for the sales tax exemption," this bill corrects the reference to provide that a "person with an identification card" is exempt from the SUT. Under this bill, both patients and their primary caregivers who furnish their MMIC card and another valid government-issued identification card at the time of sale would remain eligible for the SUT exemption.

1. Prepayment of the Sales Tax and Marijuana Excise Tax: This bill requires both the sales tax and marijuana excise tax imposed on purchasers of marijuana or marijuana products to be prepaid by a wholesaler. The rate of sales tax prepayment required to be collected is the combined state and local SUT rate, but the rate of excise tax prepayment required to be collected on the gross receipts or wholesale cost of the marijuana or marijuana products is left unspecified. Prepayment amounts would be deemed public money that is property of California, held in trust by the wholesaler, and a debt owed by the wholesaler to California until paid to the BOE.

Currently, sales tax on motor vehicle and diesel fuel is required to be prepaid to prevent tax evasion by service stations. According to the BOE, due to the number of service stations and the nature of operations, many service stations previously failed to obtain the mandated seller's permit or report the entire tax liability from their retail sales. Requiring prepayment of sales tax on fuel provides that 80% of the sales tax is collected in advance, giving retailers an incentive to report the correct sales amount and recoup the tax already paid to suppliers. The prepayment system requires documentation of how many gallons of fuel are sold to each vendor, information used by the BOE to trace fuel through the distribution chain and ultimately reconcile those numbers with the final retail sale of fuel.

Although the prepayment system has helped deter tax evasion on fuel sales, in part by providing an effective audit trail, the MCRSA and AUMA already establish a robust electronic track and trace program that will track marijuana through the distribution chain to prevent illegal diversion. The electronic system must include at a minimum the following information: (1) the quantity, or weight, and variety of products shipped; (2) the estimated times of departure and arrival; (3) the quantity, or weight, and variety of products received; (4) the actual time of departure and arrival; (5) a categorization of the product; and (6) the license number and unique identifier for all licensees involved in the shipping process, such as cultivators, manufacturers, transporters, distributors, and dispensaries. The database will also be specifically designed to flag irregularities for all licensing authorities to investigate, such as reconciliation errors that may indicate diversion to the black market, with the BOE granted read access for taxation purposes.

According to the BOE's analysis of this bill, dispensary and retailer purchase information provided by the track and trace system "will allow the BOE to estimate retail sales in order to reconcile amounts reported for sales tax and marijuana excise tax purposes, and if necessary, will provide a basis for a mark-up of purchases as an indirect audit approach." It is possible and likely inevitable that some harvested marijuana will not be entered into the track and trace system by unscrupulous individuals. However, if these bad actors are already operating outside the legitimate distribution structure, "it is unclear to BOE staff how the tax prepayments proposed by this measure will address tax evasion by underground cultivators and retailers."

Lastly, this bill specifies that the prepayment system for sales tax and marijuana excise tax would become operative on July 1, 2018. Delayed implementation would help alleviate the BOE's workload, which has recently increased amidst replacing its legacy computer system and implementing other legislative and voter mandates such as the lead acid battery fee and expansion of the cigarette tax. However, the Committee may wish to consider whether it is efficient to require businesses newly licensed to sell marijuana on January 1, 2018 to carry out their duties as tax collectors and remitters under one set of rules, only to change the rules after six months of operation.

1. Collection of the Cultivation Tax by Wholesalers: This bill authorizes the BOE to prescribe via regulation a method and manner for collection and remittance of the cultivation tax by wholesalers. Until that time, the cultivation tax would continue to be collected and remitted by cultivators, on whom the tax is imposed. Although some requirements for shifting the cultivation tax collection system are specified, other provisions are confusing and less clear.

BOE staff states in its analysis of this bill that it typically "recommends that excise taxes and fees be imposed as high in the distribution chain as possible, since there are fewer taxpayers and therefore less potential for tax evasion." Although the highest point in the marijuana distribution chain is the cultivator, it is estimated that 25,000 to 35,000 cultivators will be licensed under the MCRSA and AUMA, making the marijuana cultivation tax program one of the largest BOE administers. In contrast, "estimates also indicate considerably fewer distributors (wholesalers), manufacturers, and retailers" so "cultivation tax collection at the distributor/wholesaler level may be more appropriate."

1. What Is A Wholesaler? As noted in the BOE's analysis of this bill, the term "wholesaler" is not used by either the MCRSA or AUMA, which "could cause confusion and result in unregistered taxpayers and unreported tax." The BOE staff instead suggests using the terms "distributor" or "microbusiness" (established licensed categories) to refer to entities responsible for collecting and remitting the cultivation tax and prepayment of sales tax and marijuana excise tax.
2. Establishment of the CCET: This bill requires the BOE to create the CCET to combat criminal tax evasion associated with the marijuana industry along with representatives from the BOE, FTB, EDD, and state licensing authorities under the MCRSA and AUMA.

AB 576 (V. Perez), Chapter 614, Statutes of 2013, established the RRACE Team as a pilot program that includes the BOE, FTB, EDD, and DOJ to work cooperatively to pursue criminal tax evasion resulting from underground economic activities.^[1] The pilot program must operate using existing funding, is prohibited from requesting additional funding until a report is provided to the Legislature (due December 1, 2017) on the number of complaints processed and cases investigated or prosecuted, and is set to sunset on January 1, 2019. Prior to the formal establishment of RRACE, however, the BOE had been working since 2011 with several agencies to collaborate on underground economy cases involving felony tax evasion, leading to the establishment of the Tax Recovery and Crime Enforcement (TRACE) Team comprised of the BOE, DOJ, FTB, Department of Alcoholic Beverage Control, EDD, Federal Bureau of Investigation, and U.S. Immigration and Customs Enforcement.

The BOE's analysis of this bill notes that "[a]n appropriately funded CCET would address the additional workload generated from MTL and related tax law enhanced enforcement activities for marijuana" but "it appears that existing law already allows the RRACE Team to investigate criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories." The law does not limit the RRACE Team's investigations to specific tax programs; they just must be about the underground economy. As such, the Committee may wish to consider why it is necessary to create a new third team for purposes of marijuana-related enforcement instead of relying upon existing teams.

This bill further provides that enforcement activity costs incurred by the BOE through participation in the CCET are included as "reasonable costs" incurred by the BOE for administering and collecting taxes imposed by the MT Law, and as such, may be funded by CMT Fund revenues. However, as noted in the BOE's analysis of this bill, other taxes that may be evaded by the marijuana industry include the SUT, personal income and corporation tax (FTB), and payroll taxes (EDD). Since this bill includes the FTB and EDD as potential participants in the CCET, "BOE staff suggests a funding mechanism that fairly distributes administrative costs among the tax funds or accounts that benefit from the CCET program." The Committee may wish to consider whether any tax programs that benefit from the CCET should contribute to its administrative costs, or alternatively, whether the BOE should reimburse other tax programs for costs incurred from participation in the CCET as the BOE would be the sole recipient of CMT Fund disbursements for such purpose.

1. Additional Enforcement Mechanisms: This bill provides for additional enforcement mechanisms to help deter tax evasion:
2. Revocation of permits issued to cultivators, retailers, and wholesalers in violation of the MT Law: The BOE would be prohibited from issuing a new permit after revocation unless it is satisfied that the former permit holder will comply with the MT Law. However, it is unclear how such intent would be demonstrated to the BOE. This bill also specifies that a permit shall be issued to a former permit holder who reapplies after revocation if five years have passed. This bill should further clarify the conditions under which the BOE will issue permits.
3. Enhanced violations, fines, and penalties imposed on tax evaders: The BOE's analysis of this bill states that provisions adding "violations, fines, and penalties to the [MT Law] similar to the [CTPT Law] and [CTPL Act] allow the BOE to effectively and efficiently administer and collect the cultivation and marijuana excise taxes, and deter evasion."
4. Orders of criminal investigations cost recoupment and restitution: According to the BOE's analysis of this bill, authorizing courts to charge any person convicted of a crime under the MT Law with the costs of his or her investigation or prosecution "conforms the [MT Law] with authority already granted under the [CTPT Law] and to other California tax agencies." Additionally, the BOE notes that providing express authority to collect and deposit an order of restitution awarded to the State of California in criminal proceedings involving the MT Law in the same manner as cultivation tax and marijuana excise tax liabilities is a precedented practice under the SUT, Motor Vehicle Fuel Tax, CTPT, and Diesel Fuel Tax Laws.
5. Effectiveness of Existing Methods to Combat the Underground Economy: This bill proposes numerous changes to how the SUT, excise tax, and cultivation tax on marijuana are collected, remitted, and enforced, modeled after existing law and tax programs administered by the BOE. However, it is unclear whether existing tools may be similarly successful given the unique nature of the marijuana industry. Although some industries such as that for cigarette and tobacco products are more susceptible to illegal diversion and criminal enterprise, to which the marijuana industry will also be highly susceptible, regulating marijuana businesses will likely be even more complex given the continued classification of marijuana as an illegal drug at the federal level and the resultant impact on businesses' ability to bank.

The AUMA requires the LAO to submit a report to the Legislature by January 1, 2020 with recommendations for adjustments to the tax rate to achieve the goals of undercutting illicit market prices and discouraging marijuana use by underage individuals, while still ensuring sufficient revenues are generated. Since regulation of marijuana under the MCRSA and AUMA has yet to even begin, the Committee may wish to consider whether some provisions in this bill may be premature and whether further study of best practices may enhance solutions to the problems posed by this specific underground economy moving forward.

1. Amending the AUMA: Proposition 64 put limitations on the Legislature's ability to amend the AUMA. Although some provisions of the AUMA may be amended with a majority vote of the Legislature, the AUMA otherwise provides that its provisions may only be amended to further its purposes with a two-thirds vote of the Legislature.
2. Double-Referral: This bill was double-referred to the Committee on Business and Professions, which passed this bill on April 18, 2017, with a vote of 9-1-6. Please refer to the analysis prepared by the Committee on Business and Professions for additional implementation issues for consideration.
3. Related Legislation:
4. AB 948 (Bonta) authorizes the BOE to allow a person engaged in commercial marijuana activity to remit tax liability due in a method other than an electronic funds transfer. AB 948 is pending hearing by the Committee on Appropriations.
5. AB 1410 (Wood) authorizes the cultivation tax to be collected by a distributor instead of the cultivator upon whom the tax is imposed. AB 1410 will be heard by this Committee today.
6. SB 148 (Wiener) authorizes the BOE to allow cannabis-related businesses to remit tax liability due in a method other than an electronic funds transfer, and authorizes the BOE or a county to collect cash payments from cannabis-related businesses for a state agency or the BOE to collect cash payments from cannabis-related businesses for a county. SB 148 is pending hearing by the Senate Committee on Appropriations.

REGISTERED SUPPORT / OPPOSITION:

Support

Diane L. Harkey, Chairwoman, California State Board of Equalization

Opposition

None on file

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098

1. Governor Brown attached a signing letter to AB 576 designating the Department of Industrial Relations as the lead agency; it is believed this was done to avoid duplication of efforts with other state agencies and task forces that address elements of the underground economy (i.e., the labor laws focused on by the Joint Enforcement Strike Force and the Labor Enforcement Task Force). ↑

Date of Hearing: April 18, 2017

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Rudy Salas, Chair

ABPCA Bill Id:AB 963

Author:(Gipson) – As Amended Ver:April 5, 2017

NOTE: This bill is doubled referred, and if passed by this Committee, will be referred to the Assembly Committee on Revenue and Taxation.

SUBJECT: Taxation: marijuana.

SUMMARY: Designates the tax collected on cannabis transactions at the wholesale level as a debt to the state, held in trust at the time the transaction occurs, rather than at the time the business files the return; specifies that if a cannabis business has his/her assets and cash seized by the Federal Government, the state will have a valid claim to the tax dollars that the business is holding in trust; requires the wholesaler to collect the cultivation tax and prepayment of the marijuana excise and sales taxes under a track and trace system; and establishes the Criminal Cannabis Enforcement Team within the Board of Equalization (Board) to coordinate, investigate, and prosecute felony level untaxed or under-reported sales of cannabis.

EXISTING LAW:

1. Establishes the Bureau of Marijuana Control, also referred to as the Bureau of Medical Cannabis Regulation (Bureau), under the Department of Consumer Affairs (DCA), to establish a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of cannabis products (Business and Professions Code (BPC) § 26000 et seq.; BPC § 19302)
2. Authorizes a county to impose a tax on the privilege of cultivating, dispensing, producing, processing, preparing, storing, providing, donating, selling, or distributing medical cannabis or medical cannabis products by a licensee, as specified. (BPC § 19348)
3. Defines "person with an identification card”, for purposes of the Medical Marijuana Program to mean an individual who is a qualified patient who has applied for and received a valid identification card pursuant to this article. (Health and Safety Code (HSC) § 11362.7(c))
4. Defines "primary caregiver” for purposes of the Medical Marijuana Program to mean the individual, designated by a qualified patient or by a person with an identification card, who has consistently assumed responsibility for the housing, health, or safety of that patient or person, as specified. (HSC § 11362.7(d))
5. Requires the Department of Public Health (DPH) to establish and maintain a voluntary program for the issuance of identification cards to qualified patients who satisfy specified requirements and voluntarily apply to the identification card program. (HSC § 11362.71)
6. Establishes specified exemptions from the computation of sales tax. (Revenue and Taxation Code (RTC) § 6381 et. seq)
7. Requires effective January 1, 2018, a marijuana excise tax to be imposed upon purchasers of marijuana, or marijuana products sold in this state at a rate of 15 percent of the gross receipts of any retail sale by dispensary or other person required to be licensed, as specified, to sell marijuana and marijuana products directly to a purchaser. (RTC §34011(a))
8. States that sales and use tax does not apply to retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products or topical cannabis, as specified, when a qualified patient or primary caregiver for a qualified patient provides his or her card issued under the Medical Marijuana Program and a valid government-issued identification card. (RTC § 34011(g))
9. Requires, effective January 1, 2018, an imposed cultivation tax on all harvested marijuana that enters the commercial market, upon all persons required to be licensed to cultivate marijuana and specifies the tax is due after the marijuana is harvested. (RTC § 34012(a))
10. Specifies that all persons required to be licensed involved in the cultivation and retail sale of marijuana or marijuana products must obtain a separate fee-free permit from the Board, pursuant to regulations, and any person required to obtain a permit who engages in business as a cultivator, dispensary, retailer, microbusiness or nonprofit without a permit or after a permit has been disciplined and each officer of any corporation which engages in business is guilty of a misdemeanor. (RTC § 34014(a))
11. States that any peace officer or Board employee granted limited peace officer status, upon presenting appropriate credentials, is authorized to enter any place, as specified, to conduct inspections. (RTC § 34016(a))
12. Specifies that upon discovery by the Board or a law enforcement agency that a licensee or any other person possesses, stores, owns, or has made a retail sale of marijuana or marijuana products, without evidence of tax payment or not contained in secure packaging, the Board or law enforcement agency is authorized to seize the marijuana or marijuana products, as specified. (RTC § 34016(c))
13. Requires, beginning Fiscal Year (FY) 2017-2018, the Department of Finance to estimate revenues to be received, and to provide those estimate to the Controller no later than June 15 of each year; and, further requires the Controller to use those estimates when disbursing funds. (RTC § 34019(a))
14. Requires the Legislative Analyst’s Office to submit a report to the Legislature by January 1, 2020, with recommendations to the Legislature for adjustments to the tax rate to achieve the goals of undercutting illicit market prices and discouraging use by persons younger than 21 of age while ensuring sufficient revenues are generated. (RTC § 34017)

THIS BILL:

1. Defines, "person with identification card" and "primary caregiver" to have the same meaning as specified in current law.
2. Specifies that any purchaser who furnishes a seller with a false or falsified identification card to be liable to the state for the amount of tax that would be due if he or she had not given a card; and, in addition to the tax, the purchaser is liable to the state for a penalty of 10 percent of the tax or five hundred dollars, whichever is greater for each purchase made for personal gain or to evade the payment of tax.
   
3. Specifies that a "false or falsified" identification card includes any driver's license or other identification card issued by a governmental agency, including a card issued under the Medical Marijuana Program, as specified, that has been stolen, altered, forged, duplicated, reproduced, or counterfeited.
4. States that a seller is relived of liability for the sales tax if the purchaser furnishes the seller with valid identification cards, as specified, and the seller takes the identification cards in good faith.
5. Specifies that any person required to make prepayment may not be required to make additional prepayment provided that more than 75 percent of the gross receipts of that person are from the retail sale of marijuana or marijuana products.
6. Defines “marijuana” and “marijuana products” have the same meanings as those terms are defined in RTC § 34010.
7. Specifies that “cultivator” and “manufacturer” shall have the same meaning as those terms are defined in BPC §§ 19300 and 26000.
8. Defines “distribution” as the sale or delivery of marijuana and marijuana products from a wholesaler to a retailer.
9. Specifies that “wholesaler” has the same meaning as that term is defined in RTC § 34010.
10. Defines “sale” as the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration, or a distribution without consideration.
11. States that any time a wholesaler makes a distribution of marijuana or marijuana products in this state to a retailer, the wholesaler shall collect a prepayment of the retail sales tax, in the following manner:
    1. When the distribution is a sale, the prepayment shall be based on the gross receipts derived from that sale of marijuana or those marijuana products.
    2. If a cultivator or a manufacturer is also the retailer, the prepayment shall be based on the wholesale cost of the marijuana or marijuana products, as determined by the Board.
    3. If the wholesaler is not required to hold a seller’s permit pursuant to this part, the prepayment shall be based on the wholesale cost, as determined by the Board.
12. Requires each wholesaler to report and pay the prepayment amounts to the Board, in a form as prescribed by the Board, in the period in which the marijuana or marijuana products are distributed. The prepayment amounts shall be collected by the wholesaler from the retailer to which the marijuana or marijuana products are distributed. Subject to any credit or refund due to the retailer, the prepayment amount is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the prepayment amount shall hold the prepayment amount in trust for the state. The prepayment amount constitutes a debt owed by the wholesaler to this state until reported and paid to the Board, until satisfactory proof has been submitted to prove that the retailer of the marijuana or marijuana products has paid the retail sales tax to the Board, or until a wholesaler that has consumed the marijuana or marijuana products has paid the use tax to the Board on the sales price, if applicable, of the amount consumed.
13. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of the collection of, the prepayment amounts, which shall be separately stated on the invoice.
14. Requires each wholesaler to report to the Board, in a form as prescribed by the Board and for the period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from any sale, or the wholesale cost, whichever is applicable, the amount of sales tax prepayments collected by the wholesaler, and any other information deemed necessary by the Board.
    2. If the amount of sales tax prepayments collected by the wholesaler is greater than the amount of sales tax prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the sales tax prepayment shall hold the amount of the excess in trust for the state. The excess constitutes a debt owed by the wholesaler to the state until reported and paid to the Board, or until satisfactory proof has been submitted that the retailer of the marijuana or marijuana products has paid the tax to the Board.
15. Specifies that the amount of a prepayment paid by the retailer shall constitute a credit against its sales and use taxes due and payable for the period in which the retail sale was made. Failure of the wholesaler to report prepayments or a wholesaler’s failure to comply with any other duty under this article shall not constitute grounds for denial of the credit to the retailer, either on a temporary or permanent basis or otherwise. To be entitled to the credit, the retailer shall retain for inspection by the Board any receipts, invoices, or other documents showing the amount of sales tax prepaid to its wholesaler, together with the evidence of payment.
16. Requires that the rate of the prepayment required to be collected shall be the combined rate of tax imposed on all sales of marijuana or marijuana products sold by wholesalers in this state.
17. Permits the Board to require a wholesaler to provide the Board with a list of retailers to which the marijuana or marijuana products were distributed.
18. Permits the Board to require additional, other, or supplemental reports, in any form which the Board may require, from wholesalers with respect to their distributions of marijuana or marijuana products, which shall include, but not be limited to, the name of the retailer to whom the marijuana or marijuana products was distributed, the retailer’s license number issued, a description of the product distributed, including the weight of the marijuana included in each distribution, the date of each sale or distribution, and any gross receipts derived from each sale of marijuana or marijuana product.
19. Specifies that any wholesaler that fails to comply is guilty of a misdemeanor.
20. Requires the wholesaler to file its prepayment form together with a remittance of the prepayment amounts, if any, required to be payable to the Board, on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
21. States that any wholesaler that fails to make a timely remittance to the Board of the prepayment amounts, shall also pay a penalty of 10 percent of the amount of the prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, from the date the prepayment became due and payable to the state until the date of payment.
22. Specifies that the penalty amount shall be 25 percent if the wholesaler knowingly or intentionally fails to make a timely remittance.
23. Indicates that the following persons that have paid prepayment amounts either directly to the Board or to the wholesaler from which the marijuana or marijuana products were purchased shall be refunded those amounts:
    1. Any retailer that sells marijuana or marijuana products that are exempt from the sales or use tax.
    2. Any retailer that has lost the marijuana or marijuana products through fire, flood, theft, spoilage, or accident, prior to any retail sale.
    3. Any retailer that has paid prepayment amounts on products exempted from the sales and use tax, when the prepayment amounts paid are in excess of the amount due and payable for the period in which the retail sale of those products was made.
24. Authorizes the Board, in lieu of a refund, to authorize a credit to be taken by the person to whom the refund is due upon his or her prepayment form or sales and use tax return.
25. Permits the Board to require any wholesaler to place with the Board any security that the Board determines is necessary to ensure compliance. The amount of the security shall be fixed by the Board but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, determined in any manner that the Board deems proper, or five hundred thousand dollars ($500,000), whichever amount is less. These amounts apply regardless of the type of security placed with the Board. The amount of the security may be increased or decreased by the Board subject to the maximum amounts.
26. Permits the Board to sell the security at public auction if it becomes necessary to so do in order to recover any tax or any amount required to be collected or penalty due. Notice of the sale may be served upon the person that placed the security personally or by mail. If service is by mail, service shall be made in the manner prescribed for service of a notice of a deficiency determination and shall be addressed to the person’s address as it appears in the records of the Board. However, security in the form of a bearer bond issued by the United States or the State of California which has a prevailing market price may be sold by the Board at a private sale at a price not lower than the prevailing market price thereof. Upon any sale, any surplus above the amounts due shall be returned to the wholesaler that placed the security.
27. Specifies that a wholesaler that is not required to hold a seller’s permit pursuant shall register with the Board on a form prescribed by the Board and shall set forth the name under which the wholesaler transacts or intends to transact business, the location of the wholesaler’s place or places of business, and other information as the Board may require.
28. Defines “wholesaler” as a person that makes a distribution of marijuana or marijuana products. For purposes of this subdivision and for the imposition of marijuana excise taxes pursuant to this part, “distribution” shall mean sale or delivery of marijuana or marijuana products from a wholesaler to a retailer.
29. Defines “arm’s length transaction” as a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. A sale between relatives, related companies, or partners is presumed not to be made at “arm’s length.”
30. Defines “retailer” as a dispensary or other person required to be licensed, or a retailer, microbusiness, nonprofit, or other person required to be licensed to sell marijuana or marijuana products directly to a purchaser.
31. Defines “sale” as the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration.
32. Specifies that at any time that marijuana or marijuana products are distributed to a retailer in this state, the wholesaler shall collect a prepayment of the marijuana excise tax as follows:
    1. When the distribution is a sale, the prepayment shall be based on the gross receipts derived from the sale of marijuana or marijuana products to that retailer in an arm’s length transaction.
    2. If a cultivator or a manufacturer is also the retailer, the prepayment shall be based on the wholesale cost of the marijuana and marijuana products, as determined by the Board.
33. Requires each wholesaler to report and pay the prepayment amounts to the Board, in a form as prescribed by the Board, in the period in which the marijuana or marijuana products are distributed. The prepayment amounts shall be collected by the wholesaler from the retailer to which the marijuana or marijuana products are distributed.
34. Finds that, subject to any credit or refund due to the retailer, the prepayment amount is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the prepayment amount shall hold the prepayment amount in trust for these purposes. The prepayment amount constitutes a debt owed by the wholesaler to this state until reported and paid to the Board, or until satisfactory proof has been submitted to prove that the retailer of the marijuana or marijuana products has paid the marijuana excise tax to the Board.
35. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of the collection of, the prepayment amounts, which shall be separately stated thereon.
36. Requires each wholesaler to report to the Board, using electronic media, for the period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from the sale or wholesale cost, the amount of marijuana excise tax prepayments collected by the wholesaler, and any other information deemed necessary by the Board.
    2. If the amount of marijuana excise tax prepayments collected by the wholesaler is greater than the amount of marijuana excise tax prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the marijuana excise tax prepayments shall hold the excess in trust for these purposes. The excess constitutes a debt owed by the wholesaler to the state until reported and paid to the Board, or until satisfactory proof has been submitted that the retailer of the marijuana or marijuana products has paid the tax to the Board.
37. States that the amount of a prepayment paid by the retailer shall constitute a credit against its marijuana excise taxes due and payable for the period in which the sale was made. Failure of the wholesaler to report prepayments or a wholesaler’s failure to comply with any other duty under this part shall not constitute grounds for denial of the credit to the retailer, either on a temporary or permanent basis or otherwise. To be entitled to the credit, the retailer shall retain for inspection by the Board any receipts, invoices, or other documents showing the amount of marijuana excise tax prepaid to its wholesaler, together with the evidence of payment.
38. Requires the rate of the prepayment required to be collected to be ____ on the gross receipts or wholesale cost of the marijuana or marijuana products distributed to a retailer by a wholesaler in this state.
39. Specifies that in the case where a wholesaler does not make a sale to a dispensary at the time of distribution, the wholesaler shall maintain a copy of the contract, or other information deemed necessary by the Board, indicating the price and quantity of marijuana or marijuana products to be sold and any other information deemed necessary by the Board.
40. Specifies that in the case of a person with a Type 10A, or producing dispensary, license or other person required to be licensed where the cultivator or manufacturer and dispensary or retailer to whom the marijuana or marijuana product is distributed are the same person, a wholesaler shall maintain any information deemed necessary by the Board to ascertain wholesale cost.
41. States that returns or reports shall be authenticated in a form or pursuant to methods as may be prescribed by the Board. If the prepayment of marijuana excise tax is paid by stamp or other marking, the Board may by regulation determine when and how the tax shall be paid.
42. Permits the Board to require a wholesaler to provide the Board with a list of purchasers to which the marijuana or marijuana products were sold.
43. Permits he Board to require additional, other, or supplemental reports, in any form which the Board may require, from wholesalers with respect to their distribution of marijuana or marijuana products to a retailer, which shall include, but not be limited to, the name of the purchaser, the number of the purchaser’s license issued, a description of the product distributed, including the date of each distribution, and the wholesale cost or gross receipts derived from each sale of marijuana or marijuana products.
44. Specifies that any wholesaler that fails to comply is guilty of a misdemeanor.
45. Requires the wholesaler to file its prepayment form together with a remittance of the prepayment amounts, if any, required to be collected payable to the state Board, on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
46. States that any wholesaler that fails to make a timely remittance to the Board of the prepayment amounts, shall also pay a penalty of 10 percent of the amount of the prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, from the date the prepayment became due and payable to the state until the date of payment.
47. Specifies that the penalty amount shall be 25 percent if the wholesaler knowingly or intentionally fails to make a timely remittance.
48. Authorizes the Board to relieve the penalty imposed.
49. Specifies that any person that has paid prepayment amounts either directly to the Board or to the person from which the marijuana or marijuana products were distributed shall be refunded those amounts with respect to marijuana or marijuana products lost through fire, flood, theft, spoilage, or accident, prior to any retail sale.
50. States that in lieu of a refund, the Board may authorize a credit to be taken by the person to whom the refund is due upon his or her prepayment form or marijuana excise tax return.
51. Permits the Board to require any wholesaler subject to this part to place with the Board any security that the Board determines is necessary to ensure compliance with this part. The amount of the security shall be fixed by the Board but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, determined in any manner that the Board deems proper, or five hundred thousand dollars ($500,000), whichever amount is less. These amounts apply regardless of the type of security placed with the Board. The amount of the security may be increased or decreased by the Board subject to the maximum amounts.
52. Allows the Board to sell the security at public auction if it becomes necessary to so do in order to recover any tax or any amount required to be collected or penalty due. Notice of the sale may be served upon the person that placed the security personally or by mail. If service is by mail, service shall be made in the manner prescribed for service of a notice of a deficiency determination and shall be addressed to the person’s address as it appears in the records of the Board. However, security in the form of a bearer bond issued by the United States or the State of California which has a prevailing market price may be sold by the Board at a private sale at a price not lower than the prevailing market price thereof. Upon any sale, any surplus above the amounts due shall be returned to the wholesaler that placed the security.
53. Allows the Board to prescribe by regulation a method and manner for prepayment of the marijuana excise tax that utilizes tax stamps or other markings that indicate that all required tax has been paid on the product to which the tax stamp or marking is affixed.
54. Further specifies that t he Board may prescribe the following by regulation:
    1. The Board may prescribe by regulation a method and manner for payment of the cultivation tax that utilizes tax stamps or state-issued product bags that indicate that all required tax has been paid on the product to which the tax stamp is affixed or in which the marijuana is packaged.
    2. A method and manner for collection and remittance of the cultivation tax by wholesalers.
55. States that subject to any credit or refund due to the cultivator all sums of money paid by a person as the cultivation tax are public moneys that are the property of the State of California. The wholesaler required to collect and remit the cultivation tax shall hold the cultivation tax in trust for these purposes. The collected cultivation tax constitutes a debt owed to the state until reported and paid to the Board, or until satisfactory proof has been submitted that the cultivator has paid the cultivation tax to the Board. A wholesaler that has collected any amount of cultivation tax in excess of the amount of the cultivation tax actually due from a cultivator, may refund that overpayment to the cultivator, even though the overpayment has already been paid over to the Board and a corresponding credit or refund has not yet been secured. The wholesaler may claim a credit for that overpayment against the amount of cultivation tax due upon any other quarterly return, if the credit is claimed in a return dated no later than three years from the date of overpayment.
56. Requires every cultivator in this state to be liable for the cultivation tax until it has been paid to this state, except that payment to a wholesaler with a permit issued under this part is sufficient to relieve the cultivator from further liability for the tax. Any cultivation tax collected from a cultivator that has not been remitted to the Board shall be deemed public moneys that are the property of the State of California. The collected tax constitutes a debt owed to the state by the wholesaler until reported and paid to the Board. Nothing in this part shall impose any obligation upon a wholesaler to take any legal action to enforce the collection of the cultivation tax. The wholesaler shall provide the Board with amounts uncollected which total ____ dollars ($____) or more on a cumulative basis with respect to a single cultivator along with the names, addresses, and reasons of the cultivators refusing to pay the cultivation tax.
57. Requires that the tax collected by the wholesaler from the cultivator shall be stated separately from the price or value of the harvested marijuana on the invoice or other price or value displayed on any proof of sales or documentation of a transaction.
58. States that whenever any person fails to comply with any rule or regulation of the Board, the Board, upon hearing, after giving the person at least 10 days’ notice in writing specifying the time and place of the hearing and requiring the person to show cause why the permit should not be suspended or revoked, may suspend or revoke the permit held by the person. The Board shall give to the person written notice of the suspension or revocation of any of the person’s permits. The notices herein required may be served personally or by mail in the manner prescribed for service of notice of a deficiency determination. The Board shall not issue a new permit after the revocation of a permit unless it is satisfied that the former holder of the permit will comply with the provisions of this part and the regulations of the Board prescribed and adopted under this part.
59. Authorizes the Board to create a Criminal Cannabis Enforcement Team for the purpose of combating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories that may include, but not be limited to, representatives from the following:
    1. The Board.
    2. The Franchise Tax Board.
    3. Employment Development Department.
    4. State licensing authorities.
60. Permits authorized team members to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories.
61. Prohibits any member or ex-member of the Criminal Cannabis Enforcement Team, any agent employed by any agency, or any person who has at any time obtained knowledge from any of the foregoing agencies or persons from divulging or making known in any manner not provided by law, any of the confidential information received by, or reported to, the team. Information exchanged pursuant to this section shall retain its confidential status and shall remain subject to any applicable confidentiality provisions.
62. Specifies that all persons required to be licensed involved in the cultivation and retail sale cultivation, retail sale, or distribution of marijuana or marijuana products must obtain a separate permit from the Board pursuant to regulations adopted by the Board. No fee shall be charged to any person for issuance of the permit. Any person required to obtain a permit who engages in business as a cultivator, dispensary, retailer, microbusiness, distributor, or nonprofit without a permit or after a permit has been canceled, suspended, or revoked, and each officer of any corporation which so engages in business, is guilty of a misdemeanor.
63. Requires the Board to issue a permit to a cultivator, retailer, or wholesaler upon receipt of a completed application and any security required by the Board, unless any of the following apply:
    1. The cultivator, retailer, or wholesaler, or if the cultivator, retailer, or wholesaler is not an individual, any person controlling the cultivator, retailer, or wholesaler, has previously been issued a permit that is suspended or revoked by the Board for violations, as specified.
    2. The cultivator’s, retailer’s, or wholesaler’s permit was revoked or is subject to revocation proceedings for violation of any of the provisions of this division, unless it has been more than five years since a previous permit for the cultivator, retailer, or wholesaler was revoked.
    3. The cultivator, retailer, or wholesaler is applying for a permit for a premises or business that is the same as that of a cultivator, retailer, or wholesaler whose license was revoked or is subject to revocation proceedings for violation of any of the provisions of this part, unless the person applying for the permit provides the Board with documentation demonstrating that the applicant has acquired or is acquiring the premises or business in an arm’s length transaction. For purposes of this section, an “arm’s length transaction” is defined as a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. A sale between relatives, related companies, or partners, or a sale for the primary purpose of avoiding the effect of the violations of this division that occurred at the cultivator or retailer location, is presumed not to be made at “arm’s length.”
    4. The cultivator, retailer, or wholesaler, or if the cultivator, retailer, or wholesaler is not an individual, any person controlling the cultivator, retailer, or wholesaler, has been convicted of a felony.
    5. The cultivator, retailer, or wholesaler does not possess all required permits or licenses.
64. States that any cultivator, retailer, or wholesaler who is denied a permit may petition for a redetermination of the Board’s denial of the permit within 30 days after service upon that cultivator, retailer, or wholesaler, of the notice of the denial of the permit. If a petition for redetermination is not filed within the 30-day period, the determination of denial becomes final at the expiration of the 30-day period.
65. Requires that every petition for redetermination shall be in writing and shall state the specific grounds upon which the petition is founded. The petition may be amended to state additional grounds at any time prior to the date on which the Board issues its order or decision upon the petition for redetermination.
66. States that if the petition for redetermination is filed within the 30-day period, the Board shall reconsider the determination of the denial and, if the cultivator, retailer, or wholesaler has so requested in the petition, shall grant the cultivator, retailer, or wholesaler an oral hearing and shall give the cultivator, retailer, or wholesaler at least 10 days’ notice of the time and place of the hearing. The Board may continue the hearing from time to time as may be necessary.
67. Indicates that the order or decision of the Board upon a petition for redetermination becomes final 30 days after mailing of notice thereof.
68. Requires that the marijuana excise tax and cultivation tax imposed is due and payable to the Board quarterly on or before the last day of the month following each quarterly period of three months. On or before the last day of the month following each quarterly period, a return for the preceding quarterly period shall be filed with the Board by each person required to be licensed for cultivation or retail sale using electronic media. Returns shall be authenticated in a form or pursuant to methods as may be prescribed by the Board. If the cultivation tax is paid by stamp or remitted by the wholesaler the Board may by regulation determine when and how the tax shall be paid.
69. Requires any person required to make, render, sign, or verify any return or report who makes any false or fraudulent return or report with intent to defeat or evade the determination required by law to be made is guilty of a misdemeanor. The person shall for each offense be fined not less than three hundred dollars ($300) and not more than five thousand dollars ($5,000), or be imprisoned for not exceeding one year in the county jail, or be subject to both fine and imprisonment, in the discretion of the court.
70. States that any person who fails or refuses to file any report required to be made or who fails or refuses to furnish a supplemental report or other data required by the Board is guilty of a misdemeanor and subject to a fine not to exceed one thousand dollars ($1,000) for each offense.
71. States that any person who falsely or fraudulently makes, forges, alters, reuses, or counterfeits any evidence of the cultivation tax or marijuana excise tax imposed by this part, or tampers with any metering machine authorized by regulation under this part, or causes or procures to be falsely or fraudulently made, forged, altered, reused, or counterfeited, any such evidence of the cultivation tax or marijuana excise tax or knowingly and willfully utters, publishes, passes, or tenders as genuine any such false, forged, altered, reused, or counterfeited evidence of the cultivation tax or marijuana excise tax, for the purpose of evading the taxes imposed by this part, is guilty of a felony and subject to imprisonment for two, three, or four years, or to a fine of not less than one thousand dollars ($1,000) and not more than twenty-five thousand dollars ($25,000), or to both fine and imprisonment.
72. States that any person who possesses, sells or offers to sell, or buys or offers to buy, any false or fraudulent evidence of the cultivation tax or marijuana excise tax imposed by this part in a dollar amount of less than ____ dollars ($____) is guilty of a misdemeanor, punishable by a fine not to exceed five thousand dollars ($5,000) or imprisonment not exceeding one year in a county jail, or by both the fine and imprisonment.
73. States that any person who possesses, sells or offers to sell, or buys or offers to buy, any false or fraudulent evidence of the cultivation tax or marijuana excise tax imposed by this part in a dollar amount of ____ dollars ($____) or greater, is guilty of a misdemeanor, punishable by a fine not to exceed fifty thousand dollars ($50,000) or imprisonment not exceeding one year in a county jail, or by both the fine and imprisonment.
74. Authorizes the Board to destroy any evidence of the cultivation tax or marijuana excise tax seized.
75. States that any person who knowingly possesses, or keeps, stores, or retains for the purpose of sale, or sells or offers to sell, any marijuana flowers, marijuana leaves, marijuana, marijuana products, and any other product subject to tax under this part to which there is no evidence of the cultivation tax or marijuana excise tax authorized to be made upon secure packaging under this part, or on which tax is due but has not been paid, when those products have been obtained from any source whatever, is guilty of a misdemeanor and shall for each offense be fined an amount not to exceed twenty-five thousand dollars ($25,000), or be imprisoned for a period not to exceed one year in the county jail, or, at the discretion of the court, be subject to both fine and imprisonment in the county jail.
76. Exempts a permitted cultivator that possesses, keeps, stores, or retains marijuana flowers, marijuana leaves, or any other product subject to tax before the necessary evidence of cultivation tax is affixed from the provisions outlined above.
77. Authorizes the Board to revoke all permits issued to any cultivator, retailer, or wholesaler who is convicted.
78. Specifies that any person who violates the provisions in this measure with intent to defeat or evade the determination of an amount due required by law to be made is guilty of a felony when the amount of tax liability aggregates twenty-five thousand dollars ($25,000) or more in any 12-consecutive-month period. The determination shall be approved by the executive director or his or her designee. Each offense shall be punished by a fine of not less than five thousand dollars ($5,000) and not more than twenty thousand dollars ($20,000), or imprisonment for 16 months, two years, or three years, or by both the fine and imprisonment in the discretion of the court.
79. Specifies that any person convicted of a crime under the provisions in this measure may be charged the costs of investigation and prosecution at the discretion of the court.
80. Specifies that restitution orders or any other amounts imposed by a court of competent jurisdiction for criminal offenses upon a person or any other entity that are due and payable to the Board may be collected by the Board in any manner provided by law for collection of a delinquent cultivation tax or marijuana excise tax liability, including, but not limited to, issuance of an order and levy in the manner provided for earnings withholding orders for taxes.
81. Specifies that amounts imposed by a court of competent jurisdiction as an order of restitution for criminal offenses shall be treated as final and due and payable to the State of California on the date that amount is established on the records of the Board.
82. Specifies that a refund or credit shall not be allowed for any amounts paid or payments.
83. Specifies that the amount authorized to be collected may accrue interest at the greater of the rate applicable to the amounts being collected or from and after the date the amounts are established on the records of the Board.
84. Specifies that any portion of the amounts authorized to be collected under this section that remain unsatisfied may be collected by the recording of a notice of state tax lien. The Board may record or extend a recorded notice of state tax lien at any time until the amount due, including any accrued interest, is paid in full.
85. Specifies that the Controller shall disburse from the Tax Fund reasonable costs incurred by the Board for administering and collecting the taxes imposed by this measure, including enforcement activity costs incurred by the Board through participation in the Cannabis Criminal Enforcement Team provided, however, such costs shall not exceed 4 percent of tax revenues received.
86. States the following: “The Legislature finds and declares that this act furthers the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Act) by providing the Board with the authority and resources necessary to collect the taxes imposed by the Act and thereby protecting the Act’s anticipated funding for education, public health programs, law enforcement training, environmental cleanup, and marijuana business licensing. By providing the Board with the authority and resources, this act will simplify compliance with the Act’s tax laws, arrest sales of marijuana by criminal operations, level the playing field for marijuana businesses complying with the laws, prevent marijuana businesses from going underground, and further the Act’s purposes of curbing illegal growing, distribution, and retail sales of marijuana, while also driving out the illicit market.”

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

COMMENTS:

Purpose. This bill is sponsored by the Honorable Jerome Horton, member of the Board of Equalization. According to the author, “AB 963 seeks to create an ease of tax collection and enforce accountability for cannabis by centralizing tax collection and creating a Cannabis Criminal Enforcement Team to audit the collection. This will be done by requiring the cultivation tax and a prepayment of the retail tax to be collected by the distributor. By centralizing the tax collection it creates a more efficient way of reporting and paying tax on cannabis.”

Background. Proposition 64: Adult Use of Marijuana Act (AUMA). In 2016, the voters approved Proposition 64, which legalizes cannabis for adults 21 and older, regulates nonmedical cannabis, and imposes an excise tax of 15 percent on retail sales of cannabis, and a cannabis cultivation tax of $9.25 per ounce of flowers and $2.75 per ounce of leaves.

Currently, significant income, payroll and sales tax evasion exist within the medical cannabis industry, as well as the cannabis underground economy. According to the author, there are a number of problems with current law as outlined below:

1. Tax Compliance. California law lacks sufficient tax compliance competencies, specifically, a separation of duties, checks and balances, and detailed legislative tax administration requirements to ensure the collection of over $1 billion in tax revenue forecasted for recreational cannabis to protect California’s infrastructure.
2. Medical Cannabis Market Noncompliance. California has been losing $73.3 million annually, since 2000, in sales, use, income and payroll taxes from the sale of medical cannabis due to the lack of voluntary compliance by legitimate businesses operating in the medical cannabis industry.

Indicative of the noncompliance in Los Angeles County, 51 percent of the cannabis entities are not registered with any California taxing agencies. Criminal cannabis businesses continue to pay zero taxes.

1. Recreational Cannabis Market Noncompliance. Based on other states’ experiences, when Proposition 64 is implemented in January of 2018, it is estimated that only 15 to 20 percent of the illegal businesses will convert to legitimate businesses in the State of California. However, without adequate policies, regulations, and enforcement funding in place it will be impossible for the Board to audit, investigate, and enforce the tax laws. Accordingly, it is estimated that there will be 40 to 60 percent noncompliance with provisions in Proposition 64.
2. Criminal Market Noncompliance. Criminals who have little incentive to comply with California law are still unlikely to comply resulting in losing an additional $341 million in sales tax and $624 million in cannabis excise tax on cannabis sales, assuming an 80 percent non-compliance rate on industrywide black market transactions.
3. Track and Trace System. While the track and trace system will allow the tracking of a single plant from the cultivator to the dispensary/retailer, as the one plant becomes many products and these products move along the track and trace distribution chain, it will become more difficult to definitively trace back to the source cultivator and/or specific plant, and the opportunity for tax evasion will increase. Recent cannabis retail sales data from Colorado and Washington indicate that alternative methods of consumption (edibles, oils, vaporizers, beverages, etc.) are outpacing traditional flower sales.
4. Regulatory Processes. Because the Federal Government has not decriminalized cannabis, California taxpayers in the cannabis industry avoid proper reporting and payment of tax, and lack access to traditional banking services typical of other government sanctioned businesses resulting in cash based transactions, and cash aggregation- circumstances susceptible to criminal activity.

According to the author, the established regulatory framework in this measure designs a system to move the cannabis industry from an industry operating predominantly underground, to an industry that operates in the open market. This is accomplished via the following provisions in the bill:

1. Requires a "wholesaler," which this bill would define as a person that makes a sale or distribution of cannabis or cannabis products to a retailer, to collect prepayments of both the cannabis excise and sales taxes on the cannabis or cannabis products processed for sale at retail;
2. Provides for the suspension or revocation of permits to businesses within the cannabis industry, and would authorize the Board to deny an application for a permit if the applicant had previously been issued a permit that was suspended or revoked, among other reasons, and would set forth the process for appealing permit suspensions, revocations, and application denials;
3. Imposes specific criminal penalties, including fines and imprisonment, for certain violations of the provisions relating to the cultivation and excise taxes on cannabis; prohibits permit transfers between related parties; allows the Board to recoup Marijuana Tax Law criminal investigation costs; and provides the Board with the authority to collect and deposit an order of restitution;
4. Establishes the Cannabis Criminal Enforcement Team within the Board in cooperation with Revenue Recovery and Collaborative Enforcement Team Act (RRACE) for the purpose of combating criminal tax evasion associated with cannabis, cannabis products, and cannabis accessories;
5. Provides that the prepaid taxes collected as part of a transaction between the “wholesaler” and retailer is a debt to the state at the time the transaction occurs;
6. Moves the sales and use tax exemption from the Marijuana Tax Law to the Sales and Use Tax Law to maintain statutory consistency;
7. Clarifies that the Board administration costs includes the enforcement activities associated with the Cannabis Criminal Enforcement Team; and,
8. Permits the Board to prescribe by regulation that a wholesaler may collect and remit the cultivation tax.

Diesel Fuel and Cigarette Product Tax Collection. This measure is modeled after provisions in Senate Bill 840 (Presley, Chapter 912, Statutes of 1994), AB 71 (Horton, Chapter 890, Statutes of 2003), and AB 576 (V.M. Perez, Chapter 576, Statutes of 2013). These measures were created to address the problem of criminal cartels which were selling billions in illegal cigarette and diesel products without paying the excise and sales tax. These measures required prepayment of the sales tax at a centralized point where the product is processed to prevent tax fraud and provide an effective audit trail. Additionally, the RRACE was created to require all California taxing agencies to collaborate on the enforcement of criminal sales in the black market.

IMPLEMENTATION ISSUES FOR CONSIDERATION:

Board Staff Analysis. An analysis of this measure was published on April 5, 2017 by staff of the Board. In the analysis, a number of questions regarding the implementation feasibility of provisions of this measure are raised including the following:

• 1. Qualified Patient. Existing RTC § 34011 requires the “qualified patient” or “primary caregiver” to provide the seller with both their medical marijuana identification card and a valid government-issued identification card to qualify for the sales and use tax exemption. However, HSC § 11362.7 defines a “qualified patient” to mean a person who is entitled to certain specified protections, but who does not have an identification card. Since the person must provide the seller with his or her medical marijuana identification card to qualify for the sales tax exemption, the law should correctly refer to a “person with an identification card” rather than a “qualified patient.”
  2. Tax Prepayment. Since individuals who cultivate illegally operate outside the legitimate distributions structure, it is unclear to Board staff how the tax prepayments proposed by this measure will address tax evasion by underground cultivators and retailers.

This provision requires sales and excise tax prepayments from a wholesaler, who is also the retailer. In other words, the wholesaler would be collecting the prepayment from their retail-arm based on wholesale cost. Does the author intend for a person that is both a wholesaler and retailer to prepay the sales and excise tax on distributions to themselves?

• 1. Wholesaler License. As amended, the bill creates a wholesaler category for prepayment and cultivation tax purposes. However, current law does not reference that term as a licensee. Adding an additional person for tax purposes that does not conform to current law could cause confusion and result in unregistered taxpayers and unreported tax. The Board staff suggests using the terms “distributor” and “microbusiness,” established licensed categories, which would distribute marijuana and marijuana products to a dispensary or retailer after presale quality assurance, testing, and inspection.
  2. Cultivation Tax Collection. Typically, Board staff recommends that excise taxes and fees be imposed as high in the distribution chain as possible, since there are fewer taxpayers and therefore less potential for tax evasion. This concern is magnified with respect to the cannabis industry, as historically it has been unregulated with a low rate of tax compliance. The highest point in the marijuana distribution chain is the cultivator. As such, the cultivation tax collection at the distributor/wholesaler level may be more appropriate.
  3. Weight-Based Cultivation Tax. Since the wholesaler may receive the marijuana in a processed form in addition to dry-weight ounces of flowers and leaves, how would wholesalers determine and collect the weight-based cultivation tax?
  4. RRACE Team Oversight. Existing law established the RRACE Team to combat criminal tax evasion. The law does not limit the RRACE Team’s investigations to specific tax programs, but they must be associated with the underground economy. Therefore, it appears that existing law already allows the RRACE Team to investigate criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories.

Legislative Analyst Office Audit Report. The Board reports that approximately 40 percent of taxes on medical cannabis are not reported. This measure’s intent is to increase tax collection by addressing illegal marketplace activity. The provisions of this measure are intended to go into effect commencing January 1, 2018 or July 1, 2018. However, it is important to note that part of the provisions of the AUMA state that the Legislative Analyst should create a report by January 1, 2020 with recommendations to the Legislature for adjustments to the tax rate to “achieve the goals of undercutting illicit market prices and discouraging use by persons younger than 21 of age while ensuring sufficient revenues are generated.” The Committee may wish to ask the author to explain why this measure is needed prior to the release of the Legislative Analyst’s study. Would it be more useful to see the results of the Legislative Analyst’s study before implementing the changes proposed via this measure?

REGISTERED SUPPORT:

The Honorable Diane Harkey

California District Attorneys Association

California Teamsters

California State Council of Laborers

REGISTERED OPPOSITION:

None on file.

Analysis Prepared by: Le Ondra Clark Harvey, Ph.D. / B. & P. / 916-319-3301

Date of Hearing:

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Rudy Salas, Chair

ABPCA Bill Id:AB 963

Author:(Gipson) – As Amended Ver:April 5, 2017

NOTE: This bill is doubled referred, and if passed by this Committee, will be referred to the Assembly Committee on Revenue and Taxation.

SUBJECT: Taxation: marijuana.

SUMMARY: Designates the tax collected on cannabis transactions at the wholesale level as a debt to the state, held in trust at the time the transaction occurs, rather than at the time the business files the return; specifies that if a cannabis business has his/her assets and cash seized by the Federal Government, the state will have a valid claim to the tax dollars that the business is holding in trust; requires the wholesaler to collect the cultivation tax and prepayment of the marijuana excise and sales taxes under a track and trace system; and establishes the Criminal Cannabis Enforcement Team within the Board of Equalization (Board) to coordinate, investigate, and prosecute felony level untaxed or under-reported sales of cannabis.

EXISTING LAW:

1. Establishes the Bureau of Marijuana Control, also referred to as the Bureau of Medical Cannabis Regulation (Bureau), under the Department of Consumer Affairs (DCA), to establish a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of cannabis products (Business and Professions Code (BPC) § 26000 et seq.; BPC § 19302)
2. Authorizes a county to impose a tax on the privilege of cultivating, dispensing, producing, processing, preparing, storing, providing, donating, selling, or distributing medical cannabis or medical cannabis products by a licensee, as specified. (BPC § 19348)
3. Defines "person with an identification card”, for purposes of the Medical Marijuana Program to mean an individual who is a qualified patient who has applied for and received a valid identification card pursuant to this article. (Health and Safety Code (HSC) § 11362.7(c))
4. Defines "primary caregiver” for purposes of the Medical Marijuana Program to mean the individual, designated by a qualified patient or by a person with an identification card, who has consistently assumed responsibility for the housing, health, or safety of that patient or person, as specified. (HSC § 11362.7(d))
5. Requires the Department of Public Health (DPH) to establish and maintain a voluntary program for the issuance of identification cards to qualified patients who satisfy specified requirements and voluntarily apply to the identification card program. (HSC § 11362.71)
6. Establishes specified exemptions from the computation of sales tax. (Revenue and Taxation Code (RTC) § 6381 et. seq)
7. Requires effective January 1, 2018, a marijuana excise tax to be imposed upon purchasers of marijuana, or marijuana products sold in this state at a rate of 15 percent of the gross receipts of any retail sale by dispensary or other person required to be licensed, as specified, to sell marijuana and marijuana products directly to a purchaser. (RTC §34011(a))
8. States that sales and use tax does not apply to retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products or topical cannabis, as specified, when a qualified patient or primary caregiver for a qualified patient provides his or her card issued under the Medical Marijuana Program and a valid government-issued identification card. (RTC § 34011(g))
9. Requires, effective January 1, 2018, an imposed cultivation tax on all harvested marijuana that enters the commercial market, upon all persons required to be licensed to cultivate marijuana and specifies the tax is due after the marijuana is harvested. (RTC § 34012(a))
10. Specifies that all persons required to be licensed involved in the cultivation and retail sale of marijuana or marijuana products must obtain a separate fee-free permit from the Board, pursuant to regulations, and any person required to obtain a permit who engages in business as a cultivator, dispensary, retailer, microbusiness or nonprofit without a permit or after a permit has been disciplined and each officer of any corporation which engages in business is guilty of a misdemeanor. (RTC § 34014(a))
11. States that any peace officer or Board employee granted limited peace officer status, upon presenting appropriate credentials, is authorized to enter any place, as specified, to conduct inspections. (RTC § 34016(a))
12. Specifies that upon discovery by the Board or a law enforcement agency that a licensee or any other person possesses, stores, owns, or has made a retail sale of marijuana or marijuana products, without evidence of tax payment or not contained in secure packaging, the Board or law enforcement agency is authorized to seize the marijuana or marijuana products, as specified. (RTC § 34016(c))
13. Requires, beginning Fiscal Year (FY) 2017-2018, the Department of Finance to estimate revenues to be received, and to provide those estimate to the Controller no later than June 15 of each year; and, further requires the Controller to use those estimates when disbursing funds. (RTC § 34019(a))
14. Requires the Legislative Analyst’s Office to submit a report to the Legislature by January 1, 2020, with recommendations to the Legislature for adjustments to the tax rate to achieve the goals of undercutting illicit market prices and discouraging use by persons younger than 21 of age while ensuring sufficient revenues are generated. (RTC § 34017)

THIS BILL:

1. Defines, "person with identification card" and "primary caregiver" to have the same meaning as specified in current law.
2. Specifies that any purchaser who furnishes a seller with a false or falsified identification card to be liable to the state for the amount of tax that would be due if he or she had not given a card; and, in addition to the tax, the purchaser is liable to the state for a penalty of 10 percent of the tax or five hundred dollars, whichever is greater for each purchase made for personal gain or to evade the payment of tax.
   
3. Specifies that a "false or falsified" identification card includes any driver's license or other identification card issued by a governmental agency, including a card issued under the Medical Marijuana Program, as specified, that has been stolen, altered, forged, duplicated, reproduced, or counterfeited.
4. States that a seller is relived of liability for the sales tax if the purchaser furnishes the seller with valid identification cards, as specified, and the seller takes the identification cards in good faith.
5. Specifies that any person required to make prepayment may not be required to make additional prepayment provided that more than 75 percent of the gross receipts of that person are from the retail sale of marijuana or marijuana products.
6. Defines “marijuana” and “marijuana products” have the same meanings as those terms are defined in RTC § 34010.
7. Specifies that “cultivator” and “manufacturer” shall have the same meaning as those terms are defined in BPC §§ 19300 and 26000.
8. Defines “distribution” as the sale or delivery of marijuana and marijuana products from a wholesaler to a retailer.
9. Specifies that “wholesaler” has the same meaning as that term is defined in RTC § 34010.
10. Defines “sale” as the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration, or a distribution without consideration.
11. States that any time a wholesaler makes a distribution of marijuana or marijuana products in this state to a retailer, the wholesaler shall collect a prepayment of the retail sales tax, in the following manner:
    1. When the distribution is a sale, the prepayment shall be based on the gross receipts derived from that sale of marijuana or those marijuana products.
    2. If a cultivator or a manufacturer is also the retailer, the prepayment shall be based on the wholesale cost of the marijuana or marijuana products, as determined by the Board.
    3. If the wholesaler is not required to hold a seller’s permit pursuant to this part, the prepayment shall be based on the wholesale cost, as determined by the Board.
12. Requires each wholesaler to report and pay the prepayment amounts to the Board, in a form as prescribed by the Board, in the period in which the marijuana or marijuana products are distributed. The prepayment amounts shall be collected by the wholesaler from the retailer to which the marijuana or marijuana products are distributed. Subject to any credit or refund due to the retailer, the prepayment amount is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the prepayment amount shall hold the prepayment amount in trust for the state. The prepayment amount constitutes a debt owed by the wholesaler to this state until reported and paid to the Board, until satisfactory proof has been submitted to prove that the retailer of the marijuana or marijuana products has paid the retail sales tax to the Board, or until a wholesaler that has consumed the marijuana or marijuana products has paid the use tax to the Board on the sales price, if applicable, of the amount consumed.
13. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of the collection of, the prepayment amounts, which shall be separately stated on the invoice.
14. Requires each wholesaler to report to the Board, in a form as prescribed by the Board and for the period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from any sale, or the wholesale cost, whichever is applicable, the amount of sales tax prepayments collected by the wholesaler, and any other information deemed necessary by the Board.
    2. If the amount of sales tax prepayments collected by the wholesaler is greater than the amount of sales tax prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the sales tax prepayment shall hold the amount of the excess in trust for the state. The excess constitutes a debt owed by the wholesaler to the state until reported and paid to the Board, or until satisfactory proof has been submitted that the retailer of the marijuana or marijuana products has paid the tax to the Board.
15. Specifies that the amount of a prepayment paid by the retailer shall constitute a credit against its sales and use taxes due and payable for the period in which the retail sale was made. Failure of the wholesaler to report prepayments or a wholesaler’s failure to comply with any other duty under this article shall not constitute grounds for denial of the credit to the retailer, either on a temporary or permanent basis or otherwise. To be entitled to the credit, the retailer shall retain for inspection by the Board any receipts, invoices, or other documents showing the amount of sales tax prepaid to its wholesaler, together with the evidence of payment.
16. Requires that the rate of the prepayment required to be collected shall be the combined rate of tax imposed on all sales of marijuana or marijuana products sold by wholesalers in this state.
17. Permits the Board to require a wholesaler to provide the Board with a list of retailers to which the marijuana or marijuana products were distributed.
18. Permits the Board to require additional, other, or supplemental reports, in any form which the Board may require, from wholesalers with respect to their distributions of marijuana or marijuana products, which shall include, but not be limited to, the name of the retailer to whom the marijuana or marijuana products was distributed, the retailer’s license number issued, a description of the product distributed, including the weight of the marijuana included in each distribution, the date of each sale or distribution, and any gross receipts derived from each sale of marijuana or marijuana product.
19. Specifies that any wholesaler that fails to comply is guilty of a misdemeanor.
20. Requires the wholesaler to file its prepayment form together with a remittance of the prepayment amounts, if any, required to be payable to the Board, on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
21. States that any wholesaler that fails to make a timely remittance to the Board of the prepayment amounts, shall also pay a penalty of 10 percent of the amount of the prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, from the date the prepayment became due and payable to the state until the date of payment.
22. Specifies that the penalty amount shall be 25 percent if the wholesaler knowingly or intentionally fails to make a timely remittance.
23. Indicates that the following persons that have paid prepayment amounts either directly to the Board or to the wholesaler from which the marijuana or marijuana products were purchased shall be refunded those amounts:
    1. Any retailer that sells marijuana or marijuana products that are exempt from the sales or use tax.
    2. Any retailer that has lost the marijuana or marijuana products through fire, flood, theft, spoilage, or accident, prior to any retail sale.
    3. Any retailer that has paid prepayment amounts on products exempted from the sales and use tax, when the prepayment amounts paid are in excess of the amount due and payable for the period in which the retail sale of those products was made.
24. Authorizes the Board, in lieu of a refund, to authorize a credit to be taken by the person to whom the refund is due upon his or her prepayment form or sales and use tax return.
25. Permits the Board to require any wholesaler to place with the Board any security that the Board determines is necessary to ensure compliance. The amount of the security shall be fixed by the Board but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, determined in any manner that the Board deems proper, or five hundred thousand dollars ($500,000), whichever amount is less. These amounts apply regardless of the type of security placed with the Board. The amount of the security may be increased or decreased by the Board subject to the maximum amounts.
26. Permits the Board to sell the security at public auction if it becomes necessary to so do in order to recover any tax or any amount required to be collected or penalty due. Notice of the sale may be served upon the person that placed the security personally or by mail. If service is by mail, service shall be made in the manner prescribed for service of a notice of a deficiency determination and shall be addressed to the person’s address as it appears in the records of the Board. However, security in the form of a bearer bond issued by the United States or the State of California which has a prevailing market price may be sold by the Board at a private sale at a price not lower than the prevailing market price thereof. Upon any sale, any surplus above the amounts due shall be returned to the wholesaler that placed the security.
27. Specifies that a wholesaler that is not required to hold a seller’s permit pursuant shall register with the Board on a form prescribed by the Board and shall set forth the name under which the wholesaler transacts or intends to transact business, the location of the wholesaler’s place or places of business, and other information as the Board may require.
28. Defines “wholesaler” as a person that makes a distribution of marijuana or marijuana products. For purposes of this subdivision and for the imposition of marijuana excise taxes pursuant to this part, “distribution” shall mean sale or delivery of marijuana or marijuana products from a wholesaler to a retailer.
29. Defines “arm’s length transaction” as a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. A sale between relatives, related companies, or partners is presumed not to be made at “arm’s length.”
30. Defines “retailer” as a dispensary or other person required to be licensed, or a retailer, microbusiness, nonprofit, or other person required to be licensed to sell marijuana or marijuana products directly to a purchaser.
31. Defines “sale” as the transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of marijuana or marijuana products to a retailer for a consideration.
32. Specifies that at any time that marijuana or marijuana products are distributed to a retailer in this state, the wholesaler shall collect a prepayment of the marijuana excise tax as follows:
    1. When the distribution is a sale, the prepayment shall be based on the gross receipts derived from the sale of marijuana or marijuana products to that retailer in an arm’s length transaction.
    2. If a cultivator or a manufacturer is also the retailer, the prepayment shall be based on the wholesale cost of the marijuana and marijuana products, as determined by the Board.
33. Requires each wholesaler to report and pay the prepayment amounts to the Board, in a form as prescribed by the Board, in the period in which the marijuana or marijuana products are distributed. The prepayment amounts shall be collected by the wholesaler from the retailer to which the marijuana or marijuana products are distributed.
34. Finds that, subject to any credit or refund due to the retailer, the prepayment amount is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the prepayment amount shall hold the prepayment amount in trust for these purposes. The prepayment amount constitutes a debt owed by the wholesaler to this state until reported and paid to the Board, or until satisfactory proof has been submitted to prove that the retailer of the marijuana or marijuana products has paid the marijuana excise tax to the Board.
35. Requires each wholesaler to provide the retailer with an invoice for, or other evidence of the collection of, the prepayment amounts, which shall be separately stated thereon.
36. Requires each wholesaler to report to the Board, using electronic media, for the period in which the marijuana and marijuana products were distributed, all of the following:
    1. The amount of marijuana and marijuana products distributed, the gross receipts derived from the sale or wholesale cost, the amount of marijuana excise tax prepayments collected by the wholesaler, and any other information deemed necessary by the Board.
    2. If the amount of marijuana excise tax prepayments collected by the wholesaler is greater than the amount of marijuana excise tax prepayments made by the wholesaler, then subject to any credit or refund due to the retailer, the excess is deemed to be public moneys that are the property of the State of California. The wholesaler required to collect and remit the marijuana excise tax prepayments shall hold the excess in trust for these purposes. The excess constitutes a debt owed by the wholesaler to the state until reported and paid to the Board, or until satisfactory proof has been submitted that the retailer of the marijuana or marijuana products has paid the tax to the Board.
37. States that the amount of a prepayment paid by the retailer shall constitute a credit against its marijuana excise taxes due and payable for the period in which the sale was made. Failure of the wholesaler to report prepayments or a wholesaler’s failure to comply with any other duty under this part shall not constitute grounds for denial of the credit to the retailer, either on a temporary or permanent basis or otherwise. To be entitled to the credit, the retailer shall retain for inspection by the Board any receipts, invoices, or other documents showing the amount of marijuana excise tax prepaid to its wholesaler, together with the evidence of payment.
38. Requires the rate of the prepayment required to be collected to be ____ on the gross receipts or wholesale cost of the marijuana or marijuana products distributed to a retailer by a wholesaler in this state.
39. Specifies that in the case where a wholesaler does not make a sale to a dispensary at the time of distribution, the wholesaler shall maintain a copy of the contract, or other information deemed necessary by the Board, indicating the price and quantity of marijuana or marijuana products to be sold and any other information deemed necessary by the Board.
40. Specifies that in the case of a person with a Type 10A, or producing dispensary, license or other person required to be licensed where the cultivator or manufacturer and dispensary or retailer to whom the marijuana or marijuana product is distributed are the same person, a wholesaler shall maintain any information deemed necessary by the Board to ascertain wholesale cost.
41. States that returns or reports shall be authenticated in a form or pursuant to methods as may be prescribed by the Board. If the prepayment of marijuana excise tax is paid by stamp or other marking, the Board may by regulation determine when and how the tax shall be paid.
42. Permits the Board to require a wholesaler to provide the Board with a list of purchasers to which the marijuana or marijuana products were sold.
43. Permits he Board to require additional, other, or supplemental reports, in any form which the Board may require, from wholesalers with respect to their distribution of marijuana or marijuana products to a retailer, which shall include, but not be limited to, the name of the purchaser, the number of the purchaser’s license issued, a description of the product distributed, including the date of each distribution, and the wholesale cost or gross receipts derived from each sale of marijuana or marijuana products.
44. Specifies that any wholesaler that fails to comply is guilty of a misdemeanor.
45. Requires the wholesaler to file its prepayment form together with a remittance of the prepayment amounts, if any, required to be collected payable to the state Board, on or before the last day of the month following the monthly period to which the prepayment form or each prepayment relates.
46. States that any wholesaler that fails to make a timely remittance to the Board of the prepayment amounts, shall also pay a penalty of 10 percent of the amount of the prepayment due but not paid, plus interest at the modified adjusted rate per month, or fraction thereof, from the date the prepayment became due and payable to the state until the date of payment.
47. Specifies that the penalty amount shall be 25 percent if the wholesaler knowingly or intentionally fails to make a timely remittance.
48. Authorizes the Board to relieve the penalty imposed.
49. Specifies that any person that has paid prepayment amounts either directly to the Board or to the person from which the marijuana or marijuana products were distributed shall be refunded those amounts with respect to marijuana or marijuana products lost through fire, flood, theft, spoilage, or accident, prior to any retail sale.
50. States that in lieu of a refund, the Board may authorize a credit to be taken by the person to whom the refund is due upon his or her prepayment form or marijuana excise tax return.
51. Permits the Board to require any wholesaler subject to this part to place with the Board any security that the Board determines is necessary to ensure compliance with this part. The amount of the security shall be fixed by the Board but shall not be greater than three times the estimated average liability of wholesalers required to file returns for monthly periods, determined in any manner that the Board deems proper, or five hundred thousand dollars ($500,000), whichever amount is less. These amounts apply regardless of the type of security placed with the Board. The amount of the security may be increased or decreased by the Board subject to the maximum amounts.
52. Allows the Board to sell the security at public auction if it becomes necessary to so do in order to recover any tax or any amount required to be collected or penalty due. Notice of the sale may be served upon the person that placed the security personally or by mail. If service is by mail, service shall be made in the manner prescribed for service of a notice of a deficiency determination and shall be addressed to the person’s address as it appears in the records of the Board. However, security in the form of a bearer bond issued by the United States or the State of California which has a prevailing market price may be sold by the Board at a private sale at a price not lower than the prevailing market price thereof. Upon any sale, any surplus above the amounts due shall be returned to the wholesaler that placed the security.
53. Allows the Board to prescribe by regulation a method and manner for prepayment of the marijuana excise tax that utilizes tax stamps or other markings that indicate that all required tax has been paid on the product to which the tax stamp or marking is affixed.
54. Further specifies that t he Board may prescribe the following by regulation:
    1. The Board may prescribe by regulation a method and manner for payment of the cultivation tax that utilizes tax stamps or state-issued product bags that indicate that all required tax has been paid on the product to which the tax stamp is affixed or in which the marijuana is packaged.
    2. A method and manner for collection and remittance of the cultivation tax by wholesalers.
55. States that subject to any credit or refund due to the cultivator all sums of money paid by a person as the cultivation tax are public moneys that are the property of the State of California. The wholesaler required to collect and remit the cultivation tax shall hold the cultivation tax in trust for these purposes. The collected cultivation tax constitutes a debt owed to the state until reported and paid to the Board, or until satisfactory proof has been submitted that the cultivator has paid the cultivation tax to the Board. A wholesaler that has collected any amount of cultivation tax in excess of the amount of the cultivation tax actually due from a cultivator, may refund that overpayment to the cultivator, even though the overpayment has already been paid over to the Board and a corresponding credit or refund has not yet been secured. The wholesaler may claim a credit for that overpayment against the amount of cultivation tax due upon any other quarterly return, if the credit is claimed in a return dated no later than three years from the date of overpayment.
56. Requires every cultivator in this state to be liable for the cultivation tax until it has been paid to this state, except that payment to a wholesaler with a permit issued under this part is sufficient to relieve the cultivator from further liability for the tax. Any cultivation tax collected from a cultivator that has not been remitted to the Board shall be deemed public moneys that are the property of the State of California. The collected tax constitutes a debt owed to the state by the wholesaler until reported and paid to the Board. Nothing in this part shall impose any obligation upon a wholesaler to take any legal action to enforce the collection of the cultivation tax. The wholesaler shall provide the Board with amounts uncollected which total ____ dollars ($____) or more on a cumulative basis with respect to a single cultivator along with the names, addresses, and reasons of the cultivators refusing to pay the cultivation tax.
57. Requires that the tax collected by the wholesaler from the cultivator shall be stated separately from the price or value of the harvested marijuana on the invoice or other price or value displayed on any proof of sales or documentation of a transaction.
58. States that whenever any person fails to comply with any rule or regulation of the Board, the Board, upon hearing, after giving the person at least 10 days’ notice in writing specifying the time and place of the hearing and requiring the person to show cause why the permit should not be suspended or revoked, may suspend or revoke the permit held by the person. The Board shall give to the person written notice of the suspension or revocation of any of the person’s permits. The notices herein required may be served personally or by mail in the manner prescribed for service of notice of a deficiency determination. The Board shall not issue a new permit after the revocation of a permit unless it is satisfied that the former holder of the permit will comply with the provisions of this part and the regulations of the Board prescribed and adopted under this part.
59. Authorizes the Board to create a Criminal Cannabis Enforcement Team for the purpose of combating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories that may include, but not be limited to, representatives from the following:
    1. The Board.
    2. The Franchise Tax Board.
    3. Employment Development Department.
    4. State licensing authorities.
60. Permits authorized team members to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories.
61. Prohibits any member or ex-member of the Criminal Cannabis Enforcement Team, any agent employed by any agency, or any person who has at any time obtained knowledge from any of the foregoing agencies or persons from divulging or making known in any manner not provided by law, any of the confidential information received by, or reported to, the team. Information exchanged pursuant to this section shall retain its confidential status and shall remain subject to any applicable confidentiality provisions.
62. Specifies that all persons required to be licensed involved in the cultivation and retail sale cultivation, retail sale, or distribution of marijuana or marijuana products must obtain a separate permit from the Board pursuant to regulations adopted by the Board. No fee shall be charged to any person for issuance of the permit. Any person required to obtain a permit who engages in business as a cultivator, dispensary, retailer, microbusiness, distributor, or nonprofit without a permit or after a permit has been canceled, suspended, or revoked, and each officer of any corporation which so engages in business, is guilty of a misdemeanor.
63. Requires the Board to issue a permit to a cultivator, retailer, or wholesaler upon receipt of a completed application and any security required by the Board, unless any of the following apply:
    1. The cultivator, retailer, or wholesaler, or if the cultivator, retailer, or wholesaler is not an individual, any person controlling the cultivator, retailer, or wholesaler, has previously been issued a permit that is suspended or revoked by the Board for violations, as specified.
    2. The cultivator’s, retailer’s, or wholesaler’s permit was revoked or is subject to revocation proceedings for violation of any of the provisions of this division, unless it has been more than five years since a previous permit for the cultivator, retailer, or wholesaler was revoked.
    3. The cultivator, retailer, or wholesaler is applying for a permit for a premises or business that is the same as that of a cultivator, retailer, or wholesaler whose license was revoked or is subject to revocation proceedings for violation of any of the provisions of this part, unless the person applying for the permit provides the Board with documentation demonstrating that the applicant has acquired or is acquiring the premises or business in an arm’s length transaction. For purposes of this section, an “arm’s length transaction” is defined as a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. A sale between relatives, related companies, or partners, or a sale for the primary purpose of avoiding the effect of the violations of this division that occurred at the cultivator or retailer location, is presumed not to be made at “arm’s length.”
    4. The cultivator, retailer, or wholesaler, or if the cultivator, retailer, or wholesaler is not an individual, any person controlling the cultivator, retailer, or wholesaler, has been convicted of a felony.
    5. The cultivator, retailer, or wholesaler does not possess all required permits or licenses.
64. States that any cultivator, retailer, or wholesaler who is denied a permit may petition for a redetermination of the Board’s denial of the permit within 30 days after service upon that cultivator, retailer, or wholesaler, of the notice of the denial of the permit. If a petition for redetermination is not filed within the 30-day period, the determination of denial becomes final at the expiration of the 30-day period.
65. Requires that every petition for redetermination shall be in writing and shall state the specific grounds upon which the petition is founded. The petition may be amended to state additional grounds at any time prior to the date on which the Board issues its order or decision upon the petition for redetermination.
66. States that if the petition for redetermination is filed within the 30-day period, the Board shall reconsider the determination of the denial and, if the cultivator, retailer, or wholesaler has so requested in the petition, shall grant the cultivator, retailer, or wholesaler an oral hearing and shall give the cultivator, retailer, or wholesaler at least 10 days’ notice of the time and place of the hearing. The Board may continue the hearing from time to time as may be necessary.
67. Indicates that the order or decision of the Board upon a petition for redetermination becomes final 30 days after mailing of notice thereof.
68. Requires that the marijuana excise tax and cultivation tax imposed is due and payable to the Board quarterly on or before the last day of the month following each quarterly period of three months. On or before the last day of the month following each quarterly period, a return for the preceding quarterly period shall be filed with the Board by each person required to be licensed for cultivation or retail sale using electronic media. Returns shall be authenticated in a form or pursuant to methods as may be prescribed by the Board. If the cultivation tax is paid by stamp or remitted by the wholesaler the Board may by regulation determine when and how the tax shall be paid.
69. Requires any person required to make, render, sign, or verify any return or report who makes any false or fraudulent return or report with intent to defeat or evade the determination required by law to be made is guilty of a misdemeanor. The person shall for each offense be fined not less than three hundred dollars ($300) and not more than five thousand dollars ($5,000), or be imprisoned for not exceeding one year in the county jail, or be subject to both fine and imprisonment, in the discretion of the court.
70. States that any person who fails or refuses to file any report required to be made or who fails or refuses to furnish a supplemental report or other data required by the Board is guilty of a misdemeanor and subject to a fine not to exceed one thousand dollars ($1,000) for each offense.
71. States that any person who falsely or fraudulently makes, forges, alters, reuses, or counterfeits any evidence of the cultivation tax or marijuana excise tax imposed by this part, or tampers with any metering machine authorized by regulation under this part, or causes or procures to be falsely or fraudulently made, forged, altered, reused, or counterfeited, any such evidence of the cultivation tax or marijuana excise tax or knowingly and willfully utters, publishes, passes, or tenders as genuine any such false, forged, altered, reused, or counterfeited evidence of the cultivation tax or marijuana excise tax, for the purpose of evading the taxes imposed by this part, is guilty of a felony and subject to imprisonment for two, three, or four years, or to a fine of not less than one thousand dollars ($1,000) and not more than twenty-five thousand dollars ($25,000), or to both fine and imprisonment.
72. States that any person who possesses, sells or offers to sell, or buys or offers to buy, any false or fraudulent evidence of the cultivation tax or marijuana excise tax imposed by this part in a dollar amount of less than ____ dollars ($____) is guilty of a misdemeanor, punishable by a fine not to exceed five thousand dollars ($5,000) or imprisonment not exceeding one year in a county jail, or by both the fine and imprisonment.
73. States that any person who possesses, sells or offers to sell, or buys or offers to buy, any false or fraudulent evidence of the cultivation tax or marijuana excise tax imposed by this part in a dollar amount of ____ dollars ($____) or greater, is guilty of a misdemeanor, punishable by a fine not to exceed fifty thousand dollars ($50,000) or imprisonment not exceeding one year in a county jail, or by both the fine and imprisonment.
74. Authorizes the Board to destroy any evidence of the cultivation tax or marijuana excise tax seized.
75. States that any person who knowingly possesses, or keeps, stores, or retains for the purpose of sale, or sells or offers to sell, any marijuana flowers, marijuana leaves, marijuana, marijuana products, and any other product subject to tax under this part to which there is no evidence of the cultivation tax or marijuana excise tax authorized to be made upon secure packaging under this part, or on which tax is due but has not been paid, when those products have been obtained from any source whatever, is guilty of a misdemeanor and shall for each offense be fined an amount not to exceed twenty-five thousand dollars ($25,000), or be imprisoned for a period not to exceed one year in the county jail, or, at the discretion of the court, be subject to both fine and imprisonment in the county jail.
76. Exempts a permitted cultivator that possesses, keeps, stores, or retains marijuana flowers, marijuana leaves, or any other product subject to tax before the necessary evidence of cultivation tax is affixed from the provisions outlined above.
77. Authorizes the Board to revoke all permits issued to any cultivator, retailer, or wholesaler who is convicted.
78. Specifies that any person who violates the provisions in this measure with intent to defeat or evade the determination of an amount due required by law to be made is guilty of a felony when the amount of tax liability aggregates twenty-five thousand dollars ($25,000) or more in any 12-consecutive-month period. The determination shall be approved by the executive director or his or her designee. Each offense shall be punished by a fine of not less than five thousand dollars ($5,000) and not more than twenty thousand dollars ($20,000), or imprisonment for 16 months, two years, or three years, or by both the fine and imprisonment in the discretion of the court.
79. Specifies that any person convicted of a crime under the provisions in this measure may be charged the costs of investigation and prosecution at the discretion of the court.
80. Specifies that restitution orders or any other amounts imposed by a court of competent jurisdiction for criminal offenses upon a person or any other entity that are due and payable to the Board may be collected by the Board in any manner provided by law for collection of a delinquent cultivation tax or marijuana excise tax liability, including, but not limited to, issuance of an order and levy in the manner provided for earnings withholding orders for taxes.
81. Specifies that amounts imposed by a court of competent jurisdiction as an order of restitution for criminal offenses shall be treated as final and due and payable to the State of California on the date that amount is established on the records of the Board.
82. Specifies that a refund or credit shall not be allowed for any amounts paid or payments.
83. Specifies that the amount authorized to be collected may accrue interest at the greater of the rate applicable to the amounts being collected or from and after the date the amounts are established on the records of the Board.
84. Specifies that any portion of the amounts authorized to be collected under this section that remain unsatisfied may be collected by the recording of a notice of state tax lien. The Board may record or extend a recorded notice of state tax lien at any time until the amount due, including any accrued interest, is paid in full.
85. Specifies that the Controller shall disburse from the Tax Fund reasonable costs incurred by the Board for administering and collecting the taxes imposed by this measure, including enforcement activity costs incurred by the Board through participation in the Cannabis Criminal Enforcement Team provided, however, such costs shall not exceed 4 percent of tax revenues received.
86. States the following: “The Legislature finds and declares that this act furthers the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act (Act) by providing the Board with the authority and resources necessary to collect the taxes imposed by the Act and thereby protecting the Act’s anticipated funding for education, public health programs, law enforcement training, environmental cleanup, and marijuana business licensing. By providing the Board with the authority and resources, this act will simplify compliance with the Act’s tax laws, arrest sales of marijuana by criminal operations, level the playing field for marijuana businesses complying with the laws, prevent marijuana businesses from going underground, and further the Act’s purposes of curbing illegal growing, distribution, and retail sales of marijuana, while also driving out the illicit market.”

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

COMMENTS:

Purpose. This bill is sponsored by the Honorable Jerome Horton, Chair of the Board of Equalization. According to the author, “AB 963 seeks to create an ease of tax collection and enforce accountability for cannabis by centralizing tax collection and creating a Cannabis Criminal Enforcement Team to audit the collection. This will be done by requiring the cultivation tax and a prepayment of the retail tax to be collected by the distributor. By centralizing the tax collection it creates a more efficient way of reporting and paying tax on cannabis.”

Background. Proposition 64: Adult Use of Marijuana Act (AUMA). In 2016, the voters approved Proposition 64, which legalizes cannabis for adults 21 and older, regulates nonmedical cannabis, and imposes an excise tax of 15 percent on retail sales of cannabis, and a cannabis cultivation tax of $9.25 per ounce of flowers and $2.75 per ounce of leaves.

Currently, significant income, payroll and sales tax evasion exist within the medical cannabis industry, as well as the cannabis underground economy. According to the author, there are a number of problems with current law as outlined below:

1. Tax Compliance. California law lacks sufficient tax compliance competencies, specifically, a separation of duties, checks and balances, and detailed legislative tax administration requirements to ensure the collection of over $1 billion in tax revenue forecasted for recreational cannabis to protect California’s infrastructure.
2. Medical Cannabis Market Noncompliance. California has been losing $73.3 million annually, since 2000, in sales, use, income and payroll taxes from the sale of medical cannabis due to the lack of voluntary compliance by legitimate businesses operating in the medical cannabis industry.

Indicative of the noncompliance in Los Angeles County, 51 percent of the cannabis entities are not registered with any California taxing agencies. Criminal cannabis businesses continue to pay zero taxes.

1. Recreational Cannabis Market Noncompliance. Based on other states’ experiences, when Proposition 64 is implemented in January of 2018, it is estimated that only 15 to 20 percent of the illegal businesses will convert to legitimate businesses in the State of California. However, without adequate policies, regulations, and enforcement funding in place it will be impossible for the Board to audit, investigate, and enforce the tax laws. Accordingly, it is estimated that there will be 40 to 60 percent noncompliance with provisions in Proposition 64.
2. Criminal Market Noncompliance. Criminals who have little incentive to comply with California law are still unlikely to comply resulting in losing an additional $341 million in sales tax and $624 million in cannabis excise tax on cannabis sales, assuming an 80 percent non-compliance rate on industrywide black market transactions.
3. Track and Trace System. While the track and trace system will allow the tracking of a single plant from the cultivator to the dispensary/retailer, as the one plant becomes many products and these products move along the track and trace distribution chain, it will become more difficult to definitively trace back to the source cultivator and/or specific plant, and the opportunity for tax evasion will increase. Recent cannabis retail sales data from Colorado and Washington indicate that alternative methods of consumption (edibles, oils, vaporizers, beverages, etc.) are outpacing traditional flower sales.
4. Regulatory Processes. Because the Federal Government has not decriminalized cannabis, California taxpayers in the cannabis industry avoid proper reporting and payment of tax, and lack access to traditional banking services typical of other government sanctioned businesses resulting in cash based transactions, and cash aggregation- circumstances susceptible to criminal activity.

According to the author, the established regulatory framework in this measure designs a system to move the cannabis industry from an industry operating predominantly underground, to an industry that operates in the open market. This is accomplished via the following provisions in the bill:

1. Requires a "wholesaler," which this bill would define as a person that makes a sale or distribution of cannabis or cannabis products to a retailer, to collect prepayments of both the cannabis excise and sales taxes on the cannabis or cannabis products processed for sale at retail;
2. Provides for the suspension or revocation of permits to businesses within the cannabis industry, and would authorize the Board to deny an application for a permit if the applicant had previously been issued a permit that was suspended or revoked, among other reasons, and would set forth the process for appealing permit suspensions, revocations, and application denials;
3. Imposes specific criminal penalties, including fines and imprisonment, for certain violations of the provisions relating to the cultivation and excise taxes on cannabis; prohibits permit transfers between related parties; allows the Board to recoup Marijuana Tax Law criminal investigation costs; and provides the Board with the authority to collect and deposit an order of restitution;
4. Establishes the Cannabis Criminal Enforcement Team within the Board in cooperation with Revenue Recovery and Collaborative Enforcement Team Act (RRACE) for the purpose of combating criminal tax evasion associated with cannabis, cannabis products, and cannabis accessories;
5. Provides that the prepaid taxes collected as part of a transaction between the “wholesaler” and retailer is a debt to the state at the time the transaction occurs;
6. Moves the sales and use tax exemption from the Marijuana Tax Law to the Sales and Use Tax Law to maintain statutory consistency;
7. Clarifies that the Board administration costs includes the enforcement activities associated with the Cannabis Criminal Enforcement Team; and,
8. Permits the Board to prescribe by regulation that a wholesaler may collect and remit the cultivation tax.

Diesel Fuel and Cigarette Product Tax Collection. This measure is modeled after provisions in Senate Bill 840 (Presley, Chapter 912, Statutes of 1994), AB 71 (Horton, Chapter 890, Statutes of 2003), and AB 576 (V.M. Perez, Chapter 576, Statutes of 2013). These measures were created to address the problem of criminal cartels which were selling billions in illegal cigarette and diesel products without paying the excise and sales tax. These measures required prepayment of the sales tax at a centralized point where the product is processed to prevent tax fraud and provide an effective audit trail. Additionally, the RRACE was created to require all California taxing agencies to collaborate on the enforcement of criminal sales in the black market.

IMPLEMENTATION ISSUES FOR CONSIDERATION:

Board Staff Analysis. An analysis of this measure was published on April 5, 2017 by staff of the Board. In the analysis, a number of questions regarding the implementation feasibility of provisions of this measure are raised including the following:

• 1. Qualified Patient. Existing RTC § 34011 requires the “qualified patient” or “primary caregiver” to provide the seller with both their medical marijuana identification card and a valid government-issued identification card to qualify for the sales and use tax exemption. However, HSC § 11362.7 defines a “qualified patient” to mean a person who is entitled to certain specified protections, but who does not have an identification card. Since the person must provide the seller with his or her medical marijuana identification card to qualify for the sales tax exemption, the law should correctly refer to a “person with an identification card” rather than a “qualified patient.”
  2. Tax Prepayment. Since individuals who cultivate illegally operate outside the legitimate distributions structure, it is unclear to Board staff how the tax prepayments proposed by this measure will address tax evasion by underground cultivators and retailers.

This provision requires sales and excise tax prepayments from a wholesaler, who is also the retailer. In other words, the wholesaler would be collecting the prepayment from their retail-arm based on wholesale cost. Does the author intend for a person that is both a wholesaler and retailer to prepay the sales and excise tax on distributions to themselves?

• 1. Wholesaler License. As amended, the bill creates a wholesaler category for prepayment and cultivation tax purposes. However, current law does not reference that term as a licensee. Adding an additional person for tax purposes that does not conform to current law could cause confusion and result in unregistered taxpayers and unreported tax. The Board staff suggests using the terms “distributor” and “microbusiness,” established licensed categories, which would distribute marijuana and marijuana products to a dispensary or retailer after presale quality assurance, testing, and inspection.
  2. Cultivation Tax Collection. Typically, Board staff recommends that excise taxes and fees be imposed as high in the distribution chain as possible, since there are fewer taxpayers and therefore less potential for tax evasion. This concern is magnified with respect to the cannabis industry, as historically it has been unregulated with a low rate of tax compliance. The highest point in the marijuana distribution chain is the cultivator. As such, the cultivation tax collection at the distributor/wholesaler level may be more appropriate.
  3. Weight-Based Cultivation Tax. Since the wholesaler may receive the marijuana in a processed form in addition to dry-weight ounces of flowers and leaves, how would wholesalers determine and collect the weight-based cultivation tax?
  4. RRACE Team Oversight. Existing law established the RRACE Team to combat criminal tax evasion. The law does not limit the RRACE Team’s investigations to specific tax programs, but they must be associated with the underground economy. Therefore, it appears that existing law already allows the RRACE Team to investigate criminal tax evasion associated with marijuana, marijuana products, and marijuana accessories.

Legislative Analyst Office Audit Report. The Board reports that approximately 40 percent of taxes on medical cannabis are not reported. This measure’s intent is to increase tax collection by addressing illegal marketplace activity. The provisions of this measure are intended to go into effect commencing January 1, 2018 or July 1, 2018. However, it is important to note that part of the provisions of the AUMA state that the Legislative Analyst should create a report by January 1, 2020 with recommendations to the Legislature for adjustments to the tax rate to “achieve the goals of undercutting illicit market prices and discouraging use by persons younger than 21 of age while ensuring sufficient revenues are generated.” The Committee may wish to ask the author to explain why this measure is needed prior to the release of the Legislative Analyst’s study. Would it be more useful to see the results of the Legislative Analyst’s study before implementing the changes proposed via this measure?

REGISTERED SUPPORT:

The Honorable Diane Harkey

California District Attorneys Association

California Teamsters

California State Council of Laborers

REGISTERED OPPOSITION:

None on file.

Analysis Prepared by: Le Ondra Clark Harvey, Ph.D. / B. & P. / 916-319-3301