Date of Hearing: April 29, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 1569 (

Author:Jones-Sawyer) – As Amended Ver:April 22, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use tax: medicinal cannabis: veterans

SUMMARY: Provides, on and after January 1, 2020, a complete sales and use tax (SUT) exemption for medicinal cannabis or medicinal cannabis product purchased by a qualified patient or the primary caregiver of a qualified patient from a medicinal cannabis licensee if that qualified patient or primary caregiver provides an attending physician's recommendation for that qualified patient, a valid state government-issued identification card for that qualified patient, and a valid Veteran Health Identification Card for that qualified patient. Specifically, this bill:

1. Defines "medicinal cannabis" and "medicinal cannabis product" by reference to Business and Professions Code (B&PC) Section 26001.
2. Defines a "qualified patient" by reference to Health and Safety Code (H&SC) Section 11362.7.
3. Defines a "primary caregiver" by reference to H&SC Section 11362.7.
4. Defines a "licensee" by reference to B&PC Section 26001.
5. Defines an "attending physician" by reference to H&SC Section 11362.7.
6. Defines a "physician's recommendation" as a recommendation by a physician and surgeon that a patient use cannabis provided in accordance with the Compassionate Use Act of 1996 (Proposition 215), found at H&SC Section 11362.5.
7. Defines a "Veteran Health Identification Card" as a valid Veteran Health Identification Card (VHIC) issued by the federal Department of Veteran Affairs with a service connected disability rating displayed on the identification card.
8. Provides that the exemption provisions shall become inoperative on January 1, 2030.
9. Provides that notwithstanding existing law, the state shall not reimburse any local agency for revenues lost as a result of this exemption.
10. Takes immediate effect as a tax levy.
11. Provides that the primary goal of the SUT exemption is to increase the sales of the licensed regulated cannabis market by incentivizing veterans with a medical condition to purchase cannabis products in the legal market.
12. Provides that success of the SUT exemption shall be measured by the increase in the following metrics:
    1. The total annual and quarterly sales by retailers of medicinal cannabis or medicinal cannabis products; and,
    2. The annual number of SUT exemptions taken pursuant to this bill.
13. Specifies that the California Department of Tax and Fee Administration (CDTFA) shall have the following data collection and reporting requirements:
    1. The total annual and quarterly sales by retailers of medicinal cannabis or medicinal cannabis products; and,
    2. The annual number of SUT exemptions taken pursuant to this bill.
14. Sunsets the data collection and reporting provisions on January 1, 2031.

EXISTING FEDERAL LAW prohibits the manufacture, possession, sale, or distribution of marijuana. Congress enacted the Controlled Substances Act (CSA) as part of the Comprehensive Drug Abuse Prevention and Control Act of 1970. The CSA sets forth five "schedules" of specified drugs and other substances designated "controlled substances." For a drug or other substance to be designated as a "Schedule I" controlled substance, it must be found that the substance "has a high potential for abuse" and has "no currently accepted medical use in treatment in the United States". Federal law lists marijuana as a Schedule I controlled substance, deemed to have no accepted medical use.

EXISTING STATE LAW:

1. Authorizes a person who obtains a state license under the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances.
2. Consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).
3. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
   
4. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to CDTFA.
5. Provides various exemptions from the SUT Law including, under AUMA, an exemption for retail sales of certain medicinal cannabis and medical cannabis products when a qualified patient or primary caregiver for a qualified patient provides a specified medicinal cannabis identification card and a valid state government-issued identification card.

FISCAL EFFECT: Estimated SUT revenue losses of up to $60,000.

COMMENTS:

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

For many, including veterans, cannabis serves an important medical purpose. However, this group has limited access to medical cannabis because many of them receive health benefits through the U.S. Department of Veteran Affairs (VA), a federal agency that does not recognize the potential benefits of cannabis for conditions like chronic pain and Post-Traumatic Stress Disorder. The VA does not allow health providers to recommend cannabis to veterans or provide reimbursements for medical cannabis purchased. Veterans are currently underutilizing the medical cannabis identification card program, which waives sales and use taxes on cannabis products. One of the reasons for this is that veterans are afraid of losing the federal benefits they receive through the VA if they are on a government list that identifies them as cannabis users.

AB 1569 will increase veterans' access to cannabis products by allowing them to receive the same tax exemption afforded to medical cannabis card holders, when they present a Veterans Health Identification Card that shows a Service Connected Disability rating at a cannabis retailer. This bill will encourage veterans to buy from the legal market by reducing veterans' concerns about being on a government registry that may lead them to lose federal benefits. Additionally, by increasing access to medical cannabis, this bill will contribute to larger efforts to help veterans get off addictive prescribed opioids.

1. This bill is supported by Americans for Safe Access, which notes the following:

Economic relief for our veterans who depend upon medical cannabis for the management of injuries arising from their service to our country is long overdue. It is absolutely essential that the Honorable Members pass AB 1569 when it comes before them.

Veterans benefit greatly from the use of medical cannabis. Often medical cannabis is the only thing that works for them. Soldiers may come home to find their injuries, whether physical or mental, serve as a bar to good paying jobs. By removing taxation, you remove a meaningful barrier to safe access to medical cannabis.

People who have put their lives on the line to ensure the freedom of all Americans should not suffer in agony because taxes and regulatory costs put medical cannabis beyond their reach. By eliminating taxation, the State of California helps veterans achieve the safe access they need to manage their injuries.

1. Committee Staff Comments:
   1. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues).
      

As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.

• 1. An overview of the SUT Law: The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 70 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In FY 2019-20, SUT revenues are estimated to comprise only 19% of the state's GF revenues, down from nearly 60% in FY 1950-51.
  2. What accounts for the state's reduced reliance on SUT revenues? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

• 1. What would this bill do? Beginning on and after January 1, 2020, this bill provides a SUT exemption for medicinal cannabis or medicinal cannabis product purchased by a qualified patient or the primary caregiver of a qualified patient from a medicinal cannabis licensee if that qualified patient or primary caregiver provides an attending physician's recommendation, a valid state government-issued identification card, and a valid Veteran Health Identification Card for that qualified patient.
  2. The current tax regime: While the SUT Law does not exempt medicinal cannabis generally, existing law does provide an exemption for retail sales of medicinal cannabis, medicinal cannabis concentrate, edible medicinal cannabis products, or topical cannabis when a qualified patient or primary caregiver provides a medical marijuana identification card and a valid government-issued identification card. A qualified patient without a medical marijuana identification card who only possesses a physician's recommendation is not eligible for this SUT exemption.
  3. Getting carded: As noted above, a medical marijuana identification card is required to benefit from the existing SUT exemption. A physician's recommendation, however, is only the first step in obtaining such a card. A qualified patient must also file an application with the county health department and provide requested information. The county health department then verifies the physician recommendation. CDTFA audit staff, in turn, can easily verify a patient's medical marijuana identification card which contains, among other things, the cardholder's unique user identification number. In addition, the California Department of Public Health maintains an online registry for law enforcement and the public to validate a patient or primary caregiver's card.
  4. So, what is the problem? According to the author, some veterans fear losing their benefits if they acquire a medical marijuana identification card, which current law requires to obtain a SUT exemption. Specifically, the author notes that VA health care providers are barred from recommending marijuana or assisting veterans in obtaining it. That said, the U.S. Department of Veterans Affairs’ Web site clearly states that, "[v]eteran participation in state marijuana programs does not affect eligibility for VA care and services." Moreover, the VA notes that "VA providers can and do discuss marijuana use with Veterans as part of comprehensive care planning, and adjust treatment plans as necessary." As such, the Committee may wish to consider whether it is necessary or appropriate to provide a special SUT exemption for individuals without a state medical marijuana identification card.
  5. Administrative complications: This bill requires a qualified patient to provide a physician's recommendation, a valid state government-issued identification card, and a valid Veteran Health Identification Card to benefit from the proposed exemption. It would be extremely difficult, however, for CDTFA to validate a physician's recommendation. Generally, CDTFA auditors may not access a patient's name or contact the patient's physician to confirm medical information since such information is confidential; this would render CDTFA enforcement difficult if not impossible.
  6. Must a veteran be disabled to obtain the proposed exemption? This bill defines a “Veteran Health Identification Card” as a valid card issued by the federal Department of Veteran Affairs "with a service connected disability rating displayed on the identification card." It is not entirely clear, however, whether this bill is intended to apply to all veterans or only those with a service connected disability. The author may wish to take clarifying amendments to address this potential ambiguity.
  7. Policy on tax expenditures: SB 1335 (Leno), Chapter 845, Statutes of 2014, added Revenue and Taxation Code (R&TC) Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015.  This Committee has recently adopted a new policy, requiring that all new tax expenditure proposals (including SUT exemptions) comply with the requirements of R&TC Section 41.  A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives.  A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements.  This bill has been amended to specify the goals being advanced by providing a SUT exemption for veterans purchasing medical marijuana.  
     
     In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote.  According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean ten years.  This bill has been amended to add a 10-year sunset consistent with Committee policy.

REGISTERED SUPPORT / OPPOSITION:

Support

Americans for Safe Access

Eaze Solutions, Inc.

Southern California Coalition

Opposition

None on file

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