The Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), an initiative measure, authorizes a person who obtains a state license under AUMA to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities.

Existing law, the Cannabis Tax Law, imposes an excise tax upon purchasers of cannabis or cannabis products sold in this state at the rate of 15% of the gross receipts of any retail sale by a cannabis retailer, and prior to July 1, 2022, a cultivation tax on all harvested cannabis that entered the commercial market, as specified. Existing law provides that taxes imposed under the Cannabis Tax Law are in addition to any other tax imposed by a city or county. Existing law defines gross receipts for purposes of the Cannabis Tax Law as it is defined under the Sales and Use Tax Law.

Existing sales and use tax laws impose taxes on retailers measured by 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, measured by sales price. The Sales and Use Tax Law defines the term gross receipts for these purposes to mean the total amount of the sale or lease or rental price of the retail sales of retailers, valued in money, whether received in money or otherwise, as specified, unless an exclusion applies. The Sales and Use Tax Law defines the term sales price for these purposes to mean the total amount for which tangible personal property is sold or leased or rented, valued in money, whether received in money or otherwise, as specified, unless an exclusion applies.

This bill, beginning January 1, 2024, would exclude from the term terms gross receipts and sales price under the Sales and Use Tax Law the amount of the cannabis excise tax imposed under the Cannabis Tax Law and the amount of any tax imposed by a city or county on the privilege of engaging in commercial cannabis activity, as specified. The bill, beginning January 1, 2024, bill would also prohibit a city or county from including in the definition of gross receipts, for purposes of any local tax or fee on the privilege of engaging in commercial cannabis activity, as specified, a licensed cannabis retailer the amount of any cannabis excise tax imposed under the Cannabis Tax Law or any sales and use taxes. By imposing new requirements on local governments with respect to their taxes and fees, the bill would impose a state-mandated local program.

The bill would include findings that changes proposed by this bill address a matter of statewide concern rather than a municipal affair and, therefore, apply to all cities, including charter cities.

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, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

AUMA authorizes legislative amendment of its provisions with a ²/₃ vote of both houses, without submission to the voters, to further its purposes and intent.

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

This bill would take effect immediately as a tax levy.

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, establishes the Cannabis Tax Law. That law imposes, among other taxes, a cannabis excise tax upon purchasers of cannabis or cannabis products at a specified rate. That law defines various terms for its purposes.

This bill would make a nonsubstantive change to the provision defining those terms.

Date of Hearing: July 10, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

SBPCA Bill Id:SB 512

Author:(Bradford) – As Amended Ver:May 3, 2023

2/3 vote. Tax levy. Fiscal committee.

SENATE VOTE: 33-1

SUBJECT: Cannabis: taxation: gross receipts

SUMMARY: Reduces the amount of tax paid by licensed cannabis businesses on local cannabis business taxes, and under the Sales and Use Tax (SUT) Law and Cannabis Tax Law. Specifically, this bill:

1. Prohibits a city or county from including amounts of tax imposed under the SUT Law or the Cannabis Tax Law in the calculation of gross receipts when imposing a local cannabis business tax.
2. Excludes, beginning on January 1, 2024, any local tax or fee imposed by a city, county, or city and county on a cannabis licensee for the privilege of conducting specified activities from the definition of "sales price" and "gross receipts," under the SUT Law.
3. Provides, beginning on January 1, 2024, that the gross receipts and sales price under the SUT Law shall not include taxes imposed under the Cannabis Tax Law.
4. Requires that costs to local agencies and school districts be reimbursed if the Commission on State Mandates determines that this bill contains costs mandated by the state.
5. Makes the uncodified finding and declaration that this bill furthers the purposes and intent of the Control, Regulate, and Tax Adult Use of Marijuana Act, Proposition (Prop.) 64.
6. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW:

1. Classifies controlled substances according to a schedule of five categories based on the substance's potential for abuse and medical applicability, with Schedule I substances being most harmful and with the least medical applicability. Schedule I substances must be found to have "a high potential for abuse" and have "no medical use in treatment in the United States." (Food and Drug Code Section 812.)
2. Classifies marijuana, tetrahydrocannabinols, and cannabimimetic agents, as defined, as Schedule I controlled substances. (Food and Drug Code Section 812.)

EXISTING STATE LAW:

1. Enacts the SUT Law, which imposes a sales tax on retailers at a rate of 7.25% on the "gross receipts" from retail sales of tangible personal property (TPP), or, if the sales tax does not apply, a use tax on a purchaser at a rate of 7.25% on the "sales price" of TPP for the storage, use, or other consumption of that property. (Revenue and Taxation Code (R&TC) Sections 6051 and 6021, respectively.)
2. Defines "gross receipts" and "sales price," for the purposes of the SUT Law, as the total amount of the sale, lease, or rental price without deducting the cost of the property sold, the materials used, labor or services, interest paid, losses, or any other expenses related to the sale. (R&TC Sections 6012 and 6011, respectively.)
3. Enacts the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to implement and consolidate Prop. 64, which authorized the licensure and regulation of commercial adult-use cannabis, and the Medical Marijuana Regulation and Safety Act (MMRSA), which established a regulatory scheme for the cultivation, manufacture, distribution, sale, and product safety of medicinal-use cannabis. (Business and Professions Code Section 26000 et seq.)
4. Enacts the Cannabis Tax Law, which imposes a cannabis excise tax on cannabis purchasers at a rate of 15% on the "gross receipts" of any retail sale by a cannabis retailer, who is responsible for collecting and remitting that tax. The Cannabis Tax Law explicitly requires that the cannabis excise tax is included in "gross receipts" under the SUT Law, and defines "gross receipts" by way of cross reference to that term's definition under the SUT Law. (R&TC Section 34010 et seq.)

FISCAL EFFECT: The California Department of Tax and Fee Administration (CDTFA) estimates a total revenue loss of approximately $148.3 million.

COMMENTS:

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

SB 512 would exclude the state's cannabis excise tax as well as other local taxes from the definition of "gross receipts" under the SUT Law. Additionally, this bill would prohibit a local jurisdiction from including the state's [cannabis] excise tax in their definition of "gross receipts." This bill is in response to guidance issued by the CDTFA which has resulted in a tax-on-tax situation in some local jurisdictions, and leading to higher tax costs placed on purchasers. Many individuals in the State's legal cannabis industry are continuing to struggle due to high taxes and excessive regulations. SB 512 will help remedy this situation by ensuring taxes are calculated on the actual goods being used and sold.

1. The California Cannabis Industry Association, writing in support of this bill, states, in part:

Following the passage of AB 195 (Budget Committee), Chapter 56, Statutes of 2022, which moved collection of the excise tax from the distributor to the point-of-sale, the state's 15% excise tax is now being calculated based on the retail price of the cannabis or cannabis product, plus any locally imposed cannabis taxes or fees. This current calculation method is unfair to consumers and patients, and disadvantages licensed retailers.

SB 512 also clarifies that the SUT is the final tax. In some jurisdictions, including the City of Los Angeles, local cannabis taxes or fees are being calculated after the state excise tax is applied. This is in direct conflict with guidance provided by the CDTFA. Additional changes are needed to existing cannabis tax laws, as this conflict between state and local tax regulations makes it impossible for legal operators to properly calculate and remit their taxes.

1. The Public Health Institute, writing in opposition to this bill, states, in part:

In the current state budget, revenues from cannabis taxes provide funding for childcare for tens of thousands of low-income children. The allocation from Prop. 64 revenues in the previous year's state budget for childcare was $279 million. This revenue represents the only dedicated state funding stream for childcare for low-income families in our state, including many children of color. Even with these funds, we are far below meeting the need for affordable childcare. About 2.3 million children are eligible for subsidized childcare yet we are currently meeting the needs of only 11% of them. Any changes to cannabis tax rates that are not revenue neutral will result in children and families losing access to affordable and urgently needed childcare, care that also allows parents to return more fully to the workforce.

1. Committee Staff Comments:
   1. State cannabis regulation: In 2015, the Legislature enacted the MMRSA, commencing the regulation of cannabis at the state level. The MMRSA was composed of numerous proposals that regulated the cultivation, manufacturing, transportation, distribution, sale, and product safety of medicinal-use cannabis.

In November 2016, California voters approved Proposition 64, which legalized adult-use cannabis for people 21 years of age or older. Prop. 64 provided for the licensure and regulation of commercial adult-use cannabis and medicinal-use cannabis by various state agencies and permitted local jurisdictions to apply additional taxes and regulate cannabis businesses through local zoning, land-use requirements, and business license requirements.

To implement Prop. 64, the Legislature enacted the MAUCRSA in June 2017. MAUCRSA integrated the licensing and regulation of adult-use and medicinal-use cannabis activities. Enacted by SB 94 (Committee on Budget and Fiscal Review), Chapter 27, Statutes of 2017, MAUCRSA replaced references to "marijuana" with "cannabis" in existing law.

• 1. Cannabis taxation: Two taxes on cannabis were stipulated in Prop. 64, the excise tax and the cultivation tax. The excise tax is imposed at a rate of 15% on the gross receipts from the retail sale of any cannabis or cannabis products. Prop. 64 defined "gross receipts" by way of cross-reference to that term's definition under the SUT Law. The cultivation tax was a flat tax on each ounce of cannabis flowers or leaves. MAUCRSA, however, shifted the point of collection for the cannabis excise tax to distributors and, as a result, the excise tax was imposed on the wholesale cost of cannabis, plus a markup calculated by the CDTFA to reflect the lower base of a wholesale price relative to a retail sale price. Additionally, the excise tax for non-arm's length transactions was imposed on the final sales price. Non-arm's length transactions are generally those in which the seller and purchaser are owned by the same controlling entity.

Revenues derived from these taxes are deposited into the Cannabis Tax Fund, and allocated according to a stipulated schedule in Prop. 64 that prioritizes reimbursement of costs incurred by implementing state agencies, including the CDTFA and the Department of Cannabis Control (DCC). After these disbursements, Prop. 64 requires that revenues be allocated as follows, and in descending order of priority:

1. $10 million to public universities for research activities;
2. $3 million to the California Highway Patrol for establishing protocols to determine cannabis impairment while operating a vehicle;
3. $50 million to the Governor's Office of Business and Economic Development to establish a Community Reinvestments program; and,
4. $2 million to the University of California San Diego Center for Medicinal Cannabis Research to enhance the pharmacological applications and impact of cannabis.

After these allocations, the remaining revenues are allocated such that 60% are deposited into the Youth Education, Prevention, Early Intervention and Treatment Account, 20% into the Environmental Restoration and Protection Account, and 20% into the State and Local Government Enforcement Account. These final three categories are also referred to as Allocation Three entities. The Governor has discretion regarding the percentage allocation of revenues within each account. Under Prop. 64, the Legislature, beginning on July 1, 2028, has the authority to allocate funds for purposes other than those stipulated in the measure by a majority vote, but only if the changes further the purpose of the measure and the amount of funds to each account are not reduced from their 2027-28 fiscal year (FY) levels.

• 1. Restructuring cannabis taxes: Last year, the Legislature approved AB 195, which reformed the state's cannabis tax structure by suspending the cultivation tax and shifting the point-of-collection and remittance for the cannabis excise tax to the retailer, applying the 15% cannabis excise tax to the gross receipts of the retail sale of cannabis or cannabis product, and increasing enforcement authority of the CDTFA. AB 195 also required that the General Fund backfill Allocation Three entities if cannabis tax revenues fell below a baseline level in FYs 2021-22, 2022-23, and 2023-24. Additionally, AB 195 authorized the Legislature, beginning on July 1, 2025, to adjust the cannabis excise tax rate by a percentage that would generate an amount of revenue equivalent to the forgone revenue of the suspended cultivation tax, but not more than a total rate of 19%.

AB 195 included a number of proposals that lowered the tax burden on certain cannabis businesses. Specifically, cannabis retailers who had received an equity fee waiver by the DCC, among other fee waivers, were permitted to retain 20% of the cannabis excise tax they collected, and two income tax credits were created, one for high-road cannabis employers, and one for cannabis equity operators.

• 1. This bill: According to the author and supporters, this bill is intended to address double taxation that is occurring in cannabis taxes. Specifically, the author and supporters contend that the definition of "gross receipts" under both the SUT Law and the Cannabis Tax Law should not include local cannabis business taxes, and that local cannabis business taxes should not include the taxes imposed under the SUT Law and the Cannabis Tax Law. They argue that this unnecessarily increases the price of cannabis, driving consumers away from the legal market, and creates confusion for cannabis businesses when collecting and remitting the appropriate amount of taxes to the CDTFA and local jurisdictions.

While AB 195 did impose the cannabis excise tax on the gross receipts of a retail sale, rather than the wholesale cost plus a markup, this change realigned the statutory implementation of Prop. 64 with the language in the approved measure. Additionally, Prop. 64 defined gross receipts in the same manner as under the SUT Law, as noted above. The SUT Law generally requires that local business taxes be included in the definition of gross receipts. Thus, the same requirement is imposed upon the Cannabis Tax Law by Prop. 64. Additionally, Prop. 64 required that gross receipts under the SUT Law include the cannabis excise tax.

Generally, the SUT Law requires that no deduction be made for any expenses related to the sale or use, storage, or consumption of tangible personal property. One such expense would be the cannabis excise tax. In statute, however, there are exceptions, including certain state taxes or fees that are imposed on the gross receipts or sales price of vehicles, mobile homes, or commercial coaches.

• 1. Local taxing authority: Local jurisdictions have broad authority to impose taxes related to the licensure of lawful businesses transacting in that jurisdiction. The Cannabis Tax Law additionally authorizes counties to impose a tax on the privilege of conducting certain business activities related to cannabis. Local cannabis business taxes are not uniform, however; and some jurisdictions impose their local taxes on the businesses' gross receipts, such as the Cities of Los Angeles (LA City) and Sacramento. The structure of these local taxes can vary and a tax on the gross receipts of a transaction may not be typified as a tax on the privilege of conducting business. For instance, LA City includes the cannabis excise tax in its definition of gross receipts, but Sacramento does not. Indeed, the supporters of this bill point to LA City's cannabis business tax as an example of the type of tax that they seek to address. As drafted, this bill does not appear to prohibit LA City's tax from being included in the calculations under the SUT Law and the Cannabis Tax Law as this bill only prohibits the inclusion of local taxes or fees on the privilege of conducting certain business activities. This bill would, however, prevent local jurisdictions from including in their definition of gross receipts the amount of tax imposed under the SUT Law and the Cannabis Tax Law.

The variety of local taxes could also complicate administration of this bill. This bill does not require that local cannabis business taxes be separately stated on a receipt to be excluded. If a local cannabis business tax is imposed on the square footage of retail space, it may be difficult to determine what amounts are excluded; and the variance of rates, even within a jurisdiction based on total square footage, could complicate reporting efforts by retailers. In other words, there is no overarching "local cannabis business tax" and providing a general prohibition may only further confuse cannabis business licensees and complicate administration by the CDTFA.

This bill's prohibition may be overly broad relative to the stated intent. As drafted, this bill does not distinguish between taxes and fees imposed throughout the distribution chain. A cannabis distributor may be able to separately state its distributor licensing fees and cannabis business taxes on an invoice to a retailer, and the retailer could exclude those separately stated amounts from the retailer's gross receipts despite those amounts being incurred by the distributor and not the retailer. Therefore, any local cannabis business tax and fee imposed at every point along the distribution chain could be excluded from the calculation of gross receipts under the SUT Law and the Cannabis Tax Law.

Finally, this bill may create an incentive for local jurisdictions to increase taxes. Given the state tax burden on cannabis business would be lowered, local governments may be incentivized to increase their local cannabis business tax rates to make up for the lost revenues resulting from a shrunken gross receipts base.

• 1. Contracting the illicit market: As drafted, this bill would lower the effective tax rate on cannabis and cannabis products. Generally, consumption of a good increases as its price decreases. Supporters contend that this bill could reduce the illicit market by lowering the price of cannabis goods, thereby lowering the cost threshold for consumers that may be transacting on the illicit market. Alternatively, the loss of revenues could negatively impact law enforcement and youth prevention, which may bolster the illicit market.
  2. Aligning intent: Prop. 64 generally requires a 2/3rd vote to modify its provisions and any modification that furthers the proposition's stated purposes and intent. Included in this list of 28 purposes are reducing barriers to entry into the legal, regulated market, preventing illegal production or distribution of cannabis, and taxation of the growth and sale of cannabis in a way that drives out the illicit market for cannabis and discourages use by minors, and abuse by adults. On one hand, reducing taxes would likely incentivize some consumers to move from the illegal to the legal market, albeit likely only marginally. On the other hand, such a broad reduction in taxes could jeopardize funding for law enforcement and youth prevention and intervention programs. In fact, the Legislative Analyst's Office (LAO) already predicts a reduction in cannabis tax revenues for this year, independent of this bill's provisions^[1]. While this bill makes the uncodified finding and declaration that this bill furthers the purposes and intent of Prop. 64, the Committee may wish to consider whether, and to what extent, this bill does further the purposes and intent of Prop. 64.
  3. Why now? The recent changes to cannabis taxes enacted by AB 195 became operative on January 1, 2023. Thus, there have been less than eight months for an understanding of how these changes might impact the market. Supporters point to the reduction in cannabis tax revenues and taxable sales as evidence that these taxes are driving consumers to the illicit market. Falling from a peak of more than $180 million in cannabis excise tax revenues, and $1.57 billion in taxable sales, in the third quarter of 2021, cannabis excise tax revenues and taxable sales were approximately $104 million and $1.25 billion, respectively, in the first quarter of 2023. It could be argued that this is a result of the changes in AB 195. Committee staff will note, however, that taxable sales, and correspondingly cannabis excise tax revenues, have steadily been decreasing since their peak in 2021, even before the enactment of AB 195. The National Institutes of Health in a peer-reviewed study "Trends in Cannabis Use among U.S. Adults amid the COVID-19 Pandemic" found an overall increase in cannabis use during the pandemic, generally consistent across sociodemographic groups and state cannabis policy status. Thus, the decrease currently occurring may be, in part, due to the market settling at an equilibrium after the disruption caused by the COVID-19 Pandemic. It may be premature to attribute the changes in AB 195 to reductions in taxable sales and cannabis excise tax revenues, and the Committee may wish to consider the impact of modifying cannabis taxes in such proximity to their recent restructuring.
  4. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States 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 of them, in the form of forgone revenues. This bill would effectively lower the base under the SUT Law and Cannabis Tax Law, thereby constituting a tax expenditure.
  5. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added 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. AB 263 (Burke), Chapter 743, Statutes of 2019, extended the requirements in R&TC Section 41 to all tax expenditure measures under the Personal Income Tax Law, the Corporation Tax Law, and the SUT Law introduced on or after January 1, 2020. 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. 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. Sunsets are required because eliminating a tax expenditure generally requires a two-thirds vote. These requirements must be satisfied before a bill can receive a vote in this Committee. This bill does not comply with R&TC Section 41 and does not include an appropriate five-year sunset.

REGISTERED SUPPORT / OPPOSITION:

Support

Angeles Emeralds

Big Sur Farmers Association

California Cannabis Industry Association

California Minority Alliance

California NORML

Coachella Valley Cannabis Alliance Network

Humboldt County Growers Alliance

Jeeter

Long Beach Collective Association

Mendocino Cannabis Alliance

Nevada County Cannabis Alliance

Origins Council

San Francisco Cannabis Retailers Alliance

Silicon Valley Cannabis Alliance

Social Equity LA

The Parent Company

Trinity County Agriculture Alliance

United Cannabis Business Association

Opposition

Public Health Institute

Youth Forward

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. Seth Kerstein, "Cannabis Tax Revenue Update: May 2023," LAO. ↑

 THIRD READING  

Bill No: SB 512

Author: Bradford (D)

Amended: 5/3/23

Vote: 27- Urgency

SENATE GOVERNANCE & FIN. COMMITTEE: 4-0, 5/3/23 (FAIL)

AYES: Caballero, Durazo, Skinner, Wiener

NO VOTE RECORDED: Seyarto, Blakespear, Dahle, Glazer

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 5/10/23

AYES: Caballero, Seyarto, Blakespear, Durazo, Skinner, Wiener

NO VOTE RECORDED: Dahle, Glazer

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/18/23

AYES: Portantino, Jones, Ashby, Bradford, Seyarto, Wahab, Wiener

SUBJECT: Cannabis: taxation: gross receipts

SOURCE: Author

DIGEST:

This bill amends the definition of gross receipts and sales price in the Sales and Use Tax Law to exclude both the state cannabis excise tax and any local taxes imposed on cannabis licensees; and excludes the amount of any cannabis excise tax or sales and use tax from the definition of gross receipts for purposes of a local tax or fee imposed on a cannabis retailer.

ANALYSIS:

Existing law:

1. Imposes the sales tax on every retailer “engaged in business in this state” as a percentage of the gross receipts from the sale of tangible personal property, and requires them to register with the California Department of Tax and Fee Administration (CDTFA), and remit any tax collected to CDFTA.
2. Permits cities, counties, and specified special districts to increase the sales and use tax within their jurisdictions.
3. Enacts the Control, Regulate and Tax Adult Use of Marijuana Act, which legalized commercial adult-use cannabis for adults age 21 and older (Proposition 64, 2016) which contained two specific taxes on cannabis: the excise tax and the cultivation tax. Under Proposition 64, the Cannabis Excise Tax:
   1. Is equal to 15 percent of the gross receipts of any cannabis or cannabis products retail sale.
   2. Includes the cannabis excise tax within the gross receipts from the sale of marijuana or marijuana products for sales and use tax purposes.
   3. Defines “gross receipts,” which serves as the base for the cannabis excise tax, by reference to the definition in the sales and use tax.
4. Allows, under Proposition 64, the Legislature to amend certain provisions so long as the amendments further the intent and purposes of the Act.
5. Enacts the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), which provided that distributors, not retailers, are responsible for remitting cannabis excise taxes to CDTFA (SB 94, Committee on Budget and Fiscal Review, Chapter 27, Statutes of 2017). As a result, MAUCRSA measured the tax based on the wholesale cost of the cannabis or cannabis products sold to the retailer plus a markup calculated by CDTFA, except for non-arm’s length transactions which are based on the final sales price
6. Suspends the cultivation tax, moves the point of collection of the excise tax from the distributor to the retailer, and maintains the previous excise tax rate at 15% until July 1, 2025, at which point CDTFA must adjust the excise tax every two years by a rate, not to exceed 19%, that would generate an amount of revenue equivalent to what would have been collected from the cultivation tax (AB 195, Committee on Budget, Chapter 56, Statutes of 2022).
7. Allows cities and counties to license any legal business conducted within its jurisdiction, and impose license fees and taxes, some of which are measured by a business’s gross receipts, and can be applied to cannabis retailers.

This bill:

1. Excludes both the state cannabis excise tax and any local taxes imposed on the privilege of cultivating, manufacturing, producing, processing, preparing, storing, providing, donating, selling, distributing, or delivering cannabis or cannabis products by a holder of a state cannabis license from the definition of sales price and gross receipts in the Sales and Use Tax Law.
2. Makes a conforming change to the Cannabis Tax Law.
3. Amends three sections of law authorizing cities and counties to impose business license fees and taxes to exclude the amount of any cannabis excise tax or sales and use tax from the definition of gross receipts for purposes of these taxes.
4. Applies its provisions to charter cities.
5. States that it furthers the purposes and intent of the Control, Regulate and Tax Adult Use of Marijuana Act.

Background

Many local agencies that permit cannabis businesses in their jurisdictions impose local cannabis taxes. These taxes vary, but can often be business license or retail taxes measured by gross receipts, in addition to other taxes based on per square foot of area used for cultivation, among others. Local agencies have imposed license taxes measured by gross receipts at several points along the production chain, such as cultivation, distribution, and retail, which can cause a cascade effect as each point on the chain embeds the tax in the price paid at the next point. The Legislative Analyst’s Office (LAO) estimated in 2019 that local taxes in California are equivalent to a 14% tax on retail cannabis sales

Currently, the state’s cannabis excise tax and sales tax applies to the cannabis business tax amount if added as a separate amount to a customer’s' invoice or receipt to cover the local tax. Assuming an 8.5 percent sales tax rate and a 10 percent cannabis business tax, tax is calculated as follows:

Excise tax calculation:

• Selling price of cannabis: $35.00
• Local cannabis business tax ($35.00 × 10%) +$3.50
• Delivery fee + $5.00
• Subtotal subject to excise tax: $43.50
• Cannabis excise tax rate: 15%
• Excise tax ($43.50 × 15%) = $6.53

Subtotal subject to sales tax ($43.50 + $6.53) = $50.03

• Sales tax ($50.03 x 8.5%) = $4.25
• Total due ($50.03 + $4.24) = $54.28

However, some cities, including the City of Los Angeles, include receipts collected to pay the Excise tax when calculating local taxes (applying to the $50.03 total, not $43.50 in the above example), further increasing the tax burden on cannabis retailers.

SB 512 reduces effective cannabis tax rates in two ways - removing the cannabis excise tax and any local taxes measured by gross receipts from the sales and use tax base, and any cannabis excise or sales and use taxes from the tax base of any local tax measured by gross receipts, like in Los Angeles. These changes should lower final sales prices to consumers in the regulated market to help compete against the illicit market. However, doing so will result in lower state and local sales and use tax revenues, and cannabis excise tax revenues.

Comments

Intent? Proposition 64 permits the Legislature to amend its provisions by 2/3 vote, so long as the amendments “further the intent and purpose of the initiative.” SB 512 includes a finding and declaration that it furthers the purpose and intent of the initiative; however, it’s possible that courts may disagree. Proposition 64 explicitly states that its cannabis excise tax must be included in the sales and use tax base. However, the initiative references the tax “imposed by this section,” which the Legislature suspended, then moved to an adjacent code section in AB 195.

Additionally, Proposition 64 allocates cannabis tax revenues to the Cannabis Tax Fund, with the highest priority to fund costs incurred by state agencies implementing Proposition 64, including CDTFA, and the Department of Cannabis Control, among others. After those costs are reimbursed, Proposition 64 programs revenues to a variety of programs. Any Cannabis Excise Tax revenue reductions resulting from SB 512 will reduce funding for these programs. However, Proposition 64 purposes and intent may conflict in this regard: in once part it says that its purpose is to “generate hundreds of millions of dollars in new state revenue annually for restoring and repairing the environment, youth treatment and prevention, community investment, and law enforcement,” but also states in the immediately preceding subdivision that its purpose is also to “tax the growth and sale of marijuana in a way that drives out the illicit market for marijuana and discourages use by minors, and abuse by adults.”

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee:

• CDTFA estimates that this bill would result in a first-year revenue loss of $148 million, distributed as follows (all numbers are rounded):
  • General Fund sale and use tax revenue: $39 million.
  • Local sales and use tax revenue: $45 million.
  • Cannabis Excise Tax revenue (California Cannabis Tax Fund): $65 million).
• CDTFA’s costs to implement this bill have yet to be determined. The Department anticipates increased costs related to computer programming, updating publications, taxpayer outreach and answering public inquiries.

SUPPORT: (Verified 5/18/23)

Americans for Safe Access

Angeles Emeralds

Big Sur Farmers Association

California Cannabis Industry Association

California Minority Alliance

California NORML

Coachella Valley Cannabis Alliance

Edgrow LLC

Humboldt County Growers Alliance

Lompoc Valley Cannabis Association, Santa Barbara County

Long Beach Collective Association

Mendocino Cannabis Alliance

Nevada County Cannabis Alliance

Origins Council

Reason Foundation

San Francisco Cannabis Retailers Alliance

Silicon Valley Cannabis Alliance

Social Equity California

Social Equity LA

The Parent Company

Trinity County Agricultural Alliance

United Cannabis Business Association

OPPOSITION: (Verified 5/18/23)

None received

ARGUMENTS IN SUPPORT: According to the author, “SB 512 would exclude the state’s cannabis excise tax as well as other local taxes from the definition of ‘gross receipts’ under the Sales and Use Tax Law. Additionally, this bill would prohibit a local jurisdiction from including the state’s excise tax in their definition of “gross receipts.” This bill is in response to guidance issued by CA Department of Tax and Fee Administration which has resulted in a tax-on-tax situation in some local jurisdictions, and leading to higher tax costs placed on purchasers. Many individuals in the State’s legal cannabis industry are continuing to struggle due to high taxes and excessive regulations. SB 512 will help remedy this situation by ensuring taxes are calculated on the actual goods being used and sold.”

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

5/25/23 16:06:07

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 512 (Bradford) - Cannabis: taxation: gross receipts

Bill Summary:

SB 512 would amend the definition of gross receipts and sales price in the Sales and Use Tax Law to exclude both the state cannabis excise tax and any local taxes imposed on cannabis licensees. Additionally, the bill would exclude the amount of any cannabis excise tax or sales and use tax from the definition of gross receipts for purposes of a local tax or fee imposed on a cannabis retailer.

Fiscal Impact:

• The California Department of Tax and Fee Administration (CDTFA) estimates that this bill would result in a first-year revenue loss of $148 million, distributed as follows (all numbers are rounded):
  • General Fund sale and use tax revenue: $39 million.
  • Local sales and use tax revenue: $45 million.
  • Cannabis Excise Tax revenue (California Cannabis Tax Fund): $65 million).
• CDTFA’s costs to implement the bill have yet to be determined. The Department anticipates increased costs related to computer programming, updating publications, taxpayer outreach and answering public inquiries.

Background:

Except where a specific exemption or exclusion is provided, current law imposes a sales and use (SUT) on all retailers for the privilege of selling tangible personal property (TPP) at retail in California, or on the storage, use, or other consumption in this state of TPP purchased from a retailer. Unless purchasers pay the sales tax to the retailer, they are liable for the use tax, which the law imposes on any person consuming tangible personal property in the state. The use tax is the same rate as the sales tax.

After CDTFA collects SUT revenue ($78 billion in 2021-22), it allocates the money to various state and local funds. Roughly half—collected from an approximately 3.9 percent rate—goes to the General Fund and can be spent on any state program, such as education, health care, and criminal justice. Another 1.25 percent, known as the Bradley-Burns rate, goes to cities and counties for general purposes. Three sales tax funds have uniform state rates and support specified programs—a 1.0625 percent rate for 2011 realignment (county-administered criminal justice, mental health, and social service programs); a 0.5 percent rate for 1991 realignment (county-administered health and social services programs); and a 0.5 percent rate for city and county public safety programs pursuant to Proposition 172 (1993). Additionally, some local governments levy optional local rates—known as Transactions and Use Taxes (TUTs)—and a small portion of these funds are used for general purposes. As of December 31, 2022, the average statewide SUT rate was 8.56 percent.

Current law imposes on purchasers of cannabis or cannabis products a 15 percent excise tax upon the gross receipts of any retail sale of cannabis or cannabis products. This excise tax is part of the sales tax base.

Likewise, local business taxes on cannabis are also included in the sales tax base. Specifically, local agencies have imposed license taxes measured by gross receipts at several points along the production chain, such as cultivation, distribution, and retail, which can cause a cascade effect as each point on the chain embeds the tax in the price paid at the next point. The Legislative Analyst’s Office (LAO) estimated in 2019 that local taxes in California are equivalent to a 14 percent tax on retail cannabis sales.

Proposed Law:

This bill would exclude the cannabis excise tax from the state and local SUT, as well as from local taxes measured by gross receipts. Specifically, among other things, the bill would do the following:

• Amend the definition of sales price and gross receipts in the SUT Law to exclude both the state cannabis excise tax and any local taxes imposed on the privilege of cultivating, manufacturing, producing, processing, preparing, storing, providing, donating, selling, distributing, or delivering cannabis or cannabis products by a holder of a state cannabis license.
• Amend relevant law authorizing cities and counties to impose business license taxes on licensed cannabis retailers to exclude the amount of any cannabis excise tax or SUT from the definition of gross receipts for purposes of these taxes.

Staff Comments:

As noted above, this bill would reduce effective cannabis tax rates in two ways: removing (1) the cannabis excise tax and any local taxes measured by gross receipts from the SUT tax base, and (2) any cannabis excise or SUT from the tax base of any local tax measured by gross receipts. Standard microeconomic theory indicates that these changes should lower final sales prices to consumers in the regulated market to help compete against the unregulated market.

CDTFA indicates that in 2022, legal retail cannabis was sold in 82 California cities or counties, nearly all of which imposed a tax of some kind. Most taxes were assessed as percentage of gross sales, though others, especially cultivation taxes, were sometimes based on the square footage of the cannabis operation. CDTFA staff identified the tax rates imposed on retailers, distributors, manufacturers, cultivators, and testing laboratories for all 82 jurisdictions by examining their municipal codes. Staff then estimated the statewide total local tax by applying those tax rates to the jurisdiction-level retail cannabis sales reported to CDTFA. Using this information, and a variety of assumptions, CDTFA staff estimates that in 2024, local cannabis retailer, distributor, manufacturer, laboratory, and cultivation business taxes will total $431 million. Additionally, the Department estimates 2024 statewide excise tax revenues at $546 million.

Thus, under CDTFA’s estimates, this bill would reduce the sales tax base by $977 million. This smaller tax base would reduce General Fund revenues (3.94 percent tax rate) by $39 million.

CDTFA estimates that the exclusion of local business taxes (the $431 million cited above) from the 15 percent statewide excise tax would result in a revenue loss of $65 million.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Anna M. Caballero, Chair

2023 - 2024 Regular

Cannabis: taxation: gross receipts

Amends the definition of gross receipts and sales price in the Sales and Use Tax Law to exclude both the state cannabis excise tax and any local taxes imposed on cannabis licensees; excludes the amount of any cannabis excise tax or sales and use tax from the definition of gross receipts for purposes of a local tax or fee imposed on a cannabis retailer.

Background

Federal law relating to cannabis. Federal law prohibits the manufacture, possession, sale, or distribution of cannabis. In 1970, Congress enacted the Controlled Substances Act (CSA) which sets forth five schedules of specified drugs. For a drug to be designated a Schedule I controlled substance, CSA states the substance must have “a high potential for abuse," and have "no currently accepted medical use” in the United States. Federal law lists cannabis as a Schedule I controlled substance.

Cannabis licensing. In 1996, California voters approved Proposition 215, known as the Compassionate Use Act of 1996 (CUA). Under CUA, qualified patients with specified illnesses, and their primary caregivers, cannot be prosecuted for possessing or cultivating medical cannabis upon the written or oral recommendation or approval of an attending physician.

The medical cannabis industry remained largely unregulated at the state level until 2015, when the Legislature enacted the Medical Marijuana Regulation and Safety Act (MMRSA). MMRSA comprised a package of legislation that comprehensively regulated many aspects of medicinal use cannabis including cultivation, manufacturing, transportation, distribution, sale, and product safety. In 2016, several bills made slight changes to MMRSA, including renaming MMRSA to the Medical Cannabis Regulation and Safety Act.

On November 8^th, 2016, California voters approved Proposition 64—the Control, Regulate and Tax Adult Use of Marijuana Act, which legalized commercial adult-use cannabis for adults age 21 and older. The Act allows for the licensure and regulation of both commercial adult-use and medicinal use cannabis activities by various state agencies.

Less than a year later in June 2017, the Legislature enacted SB 94 (Committee on Budget and Fiscal Review), which integrated MMRSA with the Act to create the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA). Among other things, MAUCRSA consolidated the licensure and regulation of both commercial adult-use and medicinal use cannabis activities. It established a system of over 20 license categories, which includes distributor, retailer, and microbusiness, among others.

Cannabis taxes. Prop. 64 contained two specific taxes on cannabis: the excise tax and the cultivation tax. A customer who purchases cannabis or cannabis products in the state is subject to the cannabis excise tax, which is equal to 15 percent of the gross receipts of any cannabis or cannabis products retail sale. However, under MAUCRSA, distributors, not retailers, are responsible for remitting the tax to the California Department of Tax and Fee Administration (CDTFA). As a result, MAUCRSA measures the tax instead based on the wholesale cost of the cannabis or cannabis products sold to the retailer plus a markup calculated by CDTFA, except for non-arm’s length transactions which are based on the final sales price.

Prop. 64 explicitly provides that gross receipts from the sale of marijuana or marijuana products for sales and use tax purposes includes the cannabis excise tax. Prop. 64 defines “gross receipts,” which serves as the base for the cannabis excise, by reference to the sales and use tax.

Proposition 64 allocates cannabis tax revenues from these taxes to the Cannabis Tax Fund, with the highest priority to fund costs incurred by state agencies implementing Proposition 64, including CDTFA, and the Department of Cannabis Control, among others. The second priority sets aside $10 million annually to public universities for various cannabis research efforts, and then $3 billion to the California Highway Patrol to establish protocols for determining if someone is operating a vehicle while impaired. Proposition 64 then programs up to $50 million for the Governor’s Office of Business and Economic Development and other agencies to administer a community reinvestment grants program, and $2 million to the University of California San Diego Center for medical cannabis research. After the first and second priorities are met, remaining funds are then allocated in the following way:

• 60 percent of the remaining revenues are deposited into the Youth Education, Prevention, Early Intervention and Treatment Account,
• 20 percent are deposited in the Environmental Restoration and Protection Account, and
• 20 percent goes to the State and Local Government Law Enforcement Account.

Prop. 64 sets the above percentage shares, but allows the Governor to determine how the remaining funds are allocated within each share. Beginning January 1, 2028, Proposition 64 permits the Legislature by majority vote to allocate funds to purposes other than those listed above, but only to further its purposes, and only so long as the amount of funds to accounts in fiscal year 2027–2028 is not reduced.

AB 195. Last year, the Legislature comprehensively reformed cannabis taxation, including suspending the cultivation tax, and shifting the point of collection of the excise tax from cannabis distributors to retailers, among other changes (AB 195, Committee on Budget, 2022). Among other provisions, AB 195:

• Maintains the previous excise tax rate at 15% until July 1, 2025, at which point CDTFA must adjust the excise tax every two years by a rate, not to exceed 19%, that would generate an amount of revenue equivalent to what would have been collected from the cultivation tax.
• Allows equity retailers who have received an equity fee waiver from the Department of Cannabis Control to retain 20% of the excise tax they collect.
• Allows cannabis equity operators to claim tax credits of up to $10,000 beginning in the 2023 taxable year, for a program total of $20 million.
• Allows high-road cannabis employers to claim tax credits of up to $250,000 beginning in the 2023 taxable year, for a program total of $20 million.

Sales and use taxes. State law imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with CDTFA, and remit taxes collected from purchasers to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. Prop. 64 specifically exempts retail sales of cannabis and cannabis products for medicinal use from the sales and use tax when a patient or primary caregiver provides his or her identification card and a valid government issued identification card. However, sales and use tax applies to all other retail sales of cannabis, which is collected by the retailer and remitted to CDTFA, and includes the cannabis excise tax in the tax base.

Local cannabis taxes. Additionally, many local agencies that permit cannabis businesses in their jurisdictions impose local cannabis taxes. These taxes vary, but can often be business license or retail taxes measured by gross receipts, in addition to other taxes based on per square foot of area used for cultivation, among others. Local agencies have imposed license taxes measured by gross receipts at several points along the production chain, such as cultivation, distribution, and retail, which can cause a cascade effect as each point on the chain embeds the tax in the price paid at the next point. The Legislative Analyst’s Office (LAO) estimated in 2019 that local taxes in California are equivalent to a 14% tax on retail cannabis sales.

Proposition 64 set a very high tax burden on the regulated cannabis market by enacting cultivation and excise taxes, requiring excise taxes to be part of the sales tax base, and reinforcing local tax authority. Seeking to reduce the tax burden on the regulated cannabis market, the author wants to exclude the cannabis excise tax from state and local sales and use taxes, as well as from local taxes measured by gross receipts.

Proposed Law

Senate Bill 512 amends the definition of sales price and gross receipts in the Sales and Use Tax Law to exclude both the state cannabis excise tax and any local taxes imposed on the privilege of cultivating, manufacturing, producing, processing, preparing, storing, providing, donating, selling, distributing, or delivering cannabis or cannabis products by a holder of a state cannabis license. The measure also makes a conforming change to the Cannabis Tax Law.

The bill amends three sections of law authorizing cities and counties to impose business license taxes on licensed cannabis retailers. These changes exclude the amount of any cannabis excise tax or sales and use tax from the definition of gross receipts for purposes of these taxes. The measure applies this change to charter cities, and makes technical and conforming changes.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “SB 512 would exclude the state’s cannabis excise tax as well as other local taxes from the definition of ‘gross receipts’ under the Sales and Use Tax Law. Additionally, this bill would prohibit a local jurisdiction from including the state’s excise tax in their definition of “gross receipts.” This bill is in response to guidance issued by CA Department of Tax and Fee Administration which has resulted in a tax-on-tax situation in some local jurisdictions, and leading to higher tax costs placed on purchasers. Many individuals in the State’s legal cannabis industry are continuing to struggle due to high taxes and excessive regulations. SB 512 will help remedy this situation by ensuring taxes are calculated on the actual goods being used and sold.”

2. Something’s got to give. Proposition 64 created the legal, regulated adult use of cannabis economy in California, launching a market for a product legal in the eyes of the state but still outlawed as a dangerous drug under federal law. The initiative created a state regulatory licensing structure, affirmed local regulatory and tax authority, and funded a myriad of programs with the revenues generated from the taxes it imposed. Even though the Legislature reformed cannabis taxation with last year’s AB 195, the industry - especially smaller and equity operators - continues to struggle, suggesting that Proposition 64’s structure was fatally flawed from inception. SB 512 reduces effective cannabis tax rates in two ways - removing the cannabis excise tax and any local taxes measured by gross receipts from the sales and use tax base, and any cannabis excise or sales and use taxes from the tax base of any local tax measured by gross receipts. These changes should lower final sales prices to consumers in the regulated market to help compete against the illicit market. However, doing so will result in lower state and local sales and use tax revenues, and cannabis excise tax revenues that flow to pay for Proposition 64’s programs. The Committee may wish to consider the benefit of SB 512’s tax reductions compared to its revenue effects.

3. Intent? Proposition 64 permits the Legislature to amend its provisions by 2/3 vote, so long as the amendments “further the intent and purpose of the initiative.” SB 512 includes a finding and declaration that it furthers the purpose and intent of the initiative; however, it’s possible that courts may disagree. Proposition 64 explicitly states that its cannabis excise tax must be included in the sales and use tax base. However, the initiative references the tax “imposed by this section,” which the Legislature suspended, then moved to an adjacent code section in AB 195. While this measure does require a 2/3 vote, and little case law exists as yet to specify the initiative’s limits on legislative amendment, the Committee may wish to consider whether and how SB 512 furthers the intent and purpose of Proposition 64.

4. Consumption. While voters approved Proposition 64 in 2016, concerns remain about the public health impacts of cannabis use, the possession and distribution of which remains illegal in other states and under federal law. LAO identifies reducing harmful use, including using high potency cannabis products, youth use, and high-frequency use, as one of the most important priorities for the Legislature to consider when crafting cannabis tax policy, and recommends imposing a tax based on the potency of the cannabis or cannabis product. Generally, higher prices discourage consumption. The Committee may wish to consider SB 512’s benefit to the regulated market when competing against the illicit market is worth the potential harms of any potential increase in consumption due to lower prices.

5. Charter city. The California Constitution allows cities that adopt charters to control their own “municipal affairs.” In all other matters, charter cities must follow the general, statewide laws. Because the Constitution does not define “municipal affairs,” the courts determine whether a topic is a municipal affair or an issue of statewide concern. SB 512 states that its statutory provisions apply to charter cities, but does not contain a legislative finding supporting this application.

6. Mandate. The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because SB 512 reduces local revenues, Legislative Counsel states that it imposes a new state mandate. The bill provides that the state shall not reimburse local agencies for any property tax revenue losses resulting from its expanded welfare exemption.

7. Update. On May 3^rd, the March 20^th version of SB 512 failed passage in the Committee by a vote of 4 to 0. The author then amended the bill to incorporate suggested technical amendments.

8. Technical. The measure’s changes to the definition of sales price and gross receipts in the Sales and Use Tax Law should be amended to conform with recent amendments to SB 512’s local tax changes. SB 512’s local tax changes now refer to any local tax on a cannabis retailer, instead of a tax on the privilege of a non-retailer cannabis business.

Support and Opposition

(5/5/2023)

Support: Americans for Safe Access
Angeles Emeralds
California Cannabis Industry Association
California Minority Alliance
California Norml (UNREG)
Coachella Valley Cannabis Alliance
Edgrow LLC
Long Beach Collective Association
Reason Foundation
San Francisco Cannabis Retailers Alliance
Silicon Valley Cannabis Alliance
Social Equity California
Social Equity LA
The Parent Company
United Cannabis Business Association

Opposition: None submitted.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Anna M. Caballero, Chair

2023 - 2024 Regular

Cannabis: taxation: gross receipts

Amends the definition of gross receipts in the Sales and Use Tax Law to exclude both the state cannabis excise tax and any local taxes imposed on cannabis licensees; excludes the amount of any cannabis excise tax from the definition of gross receipts for purposes of a local tax or fee imposed on a state cannabis licensee.

Background

Federal law relating to cannabis. Federal law prohibits the manufacture, possession, sale, or distribution of cannabis. In 1970, Congress enacted the Controlled Substances Act (CSA) which sets forth five schedules of specified drugs. For a drug to be designated a Schedule I controlled substance, CSA states the substance must have “a high potential for abuse," and have "no currently accepted medical use” in the United States. Federal law lists cannabis as a Schedule I controlled substance.

Cannabis licensing. In 1996, California voters approved Proposition 215, known as the Compassionate Use Act of 1996 (CUA). Under CUA, qualified patients with specified illnesses, and their primary caregivers, cannot be prosecuted for possessing or cultivating medical cannabis upon the written or oral recommendation or approval of an attending physician.

The medical cannabis industry remained largely unregulated at the state level until 2015, when the Legislature enacted the Medical Marijuana Regulation and Safety Act (MMRSA). MMRSA comprised a package of legislation that comprehensively regulated many aspects of medicinal use cannabis including cultivation, manufacturing, transportation, distribution, sale, and product safety. In 2016, several bills made slight changes to MMRSA, including renaming MMRSA to the Medical Cannabis Regulation and Safety Act.

On November 8^th, 2016, California voters approved Proposition 64—the Control, Regulate and Tax Adult Use of Marijuana Act, which legalized commercial adult-use cannabis for adults age 21 and older. The Act allows for the licensure and regulation of both commercial adult-use and medicinal use cannabis activities by various state agencies.

Less than a year later in June 2017, the Legislature enacted SB 94 (Committee on Budget and Fiscal Review), which integrated MMRSA with the Act to create the Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA). Among other things, MAUCRSA consolidated the licensure and regulation of both commercial adult-use and medicinal use cannabis activities. It established a system of over 20 license categories, which includes distributor, retailer, and microbusiness, among others.

Cannabis taxes. Prop. 64 contained two specific taxes on cannabis: the excise tax and the cultivation tax. A customer who purchases cannabis or cannabis products in the state is subject to the cannabis excise tax, which is equal to 15 percent of the gross receipts of any cannabis or cannabis products retail sale. However, under MAUCRSA, distributors, not retailers, are responsible for remitting the tax to the California Department of Tax and Fee Administration (CDTFA). As a result, MAUCRSA measures the tax instead based on the wholesale cost of the cannabis or cannabis products sold to the retailer plus a markup calculated by CDTFA, except for non-arm’s length transactions which are based on the final sales price.

Prop. 64 explicitly provides that gross receipts from the sale of marijuana or marijuana products for sales and use tax purposes includes the cannabis excise tax. Prop. 64 defines “gross receipts,” which serves as the base for the cannabis excise, by reference to the sales and use tax.

Proposition 64 allocates cannabis tax revenues from these taxes to the Cannabis Tax Fund, with the highest priority to fund costs incurred by state agencies implementing Proposition 64, including CDTFA, and the Department of Cannabis Control, among others. The second priority sets aside $10 million annually to public universities for various cannabis research efforts, and then $3 billion to the California Highway Patrol to establish protocols for determining if someone is operating a vehicle while impaired. Proposition 64 then programs up to $50 million for the Governor’s Office of Business and Economic Development and other agencies to administer a community reinvestment grants program, and $2 million to the University of California San Diego Center for medical cannabis research. After the first and second priorities are met, remaining funds are then allocated in the following way:

• 60 percent of the remaining revenues are deposited into the Youth Education, Prevention, Early Intervention and Treatment Account,
• 20 percent are deposited in the Environmental Restoration and Protection Account, and
• 20 percent goes to the State and Local Government Law Enforcement Account.

Prop. 64 sets the above percentage shares, but allows the Governor to determine how the remaining funds are allocated within each share. Beginning January 1, 2028, Proposition 64 permits the Legislature by majority vote to allocate funds to purposes other than those listed above, but only to further its purposes, and only so long as the amount of funds to accounts in fiscal year 2027–2028 is not reduced.

AB 195. Last year, the Legislature comprehensively reformed cannabis taxation, including suspending the cultivation tax, and shifting the point of collection of the excise tax from cannabis distributors to retailers, among other changes (AB 195, Committee on Budget, 2022). Among other provisions, AB 195:

• Maintains the previous excise tax rate at 15% until July 1, 2025, at which point CDTFA must adjust the excise tax every two years by a rate, not to exceed 19%, that would generate an amount of revenue equivalent to what would have been collected from the cultivation tax.
• Allows equity retailers who have received an equity fee waiver from the Department of Cannabis Control to retain 20% of the excise tax they collect.
• Allows cannabis equity operators to claim tax credits of up to $10,000 beginning in the 2023 taxable year, for a program total of $20 million.
• .Allows high-road cannabis employers to claim tax credits of up to $250,000 beginning in the 2023 taxable year, for a program total of $20 million.

Sales and use taxes. State law imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with CDTFA, and remit taxes collected from purchasers to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. Prop. 64 specifically exempts retail sales of cannabis and cannabis products for medicinal use from the sales and use tax when a patient or primary caregiver provides his or her identification card and a valid government issued identification card. However, sales and use tax applies to all other retail sales of cannabis, which is collected by the retailer and remitted to CDTFA, and includes the cannabis excise tax in the tax base.

Local cannabis taxes. Additionally, many local agencies that permit cannabis businesses in their jurisdictions impose local cannabis taxes. These taxes vary, but can often be business license or retail taxes measured by gross receipts, in addition to other taxes based on per square foot of area used for cultivation, among others. Local agencies have imposed license taxes measured by gross receipts at several points along the production chain, such as cultivation, distribution, and retail, which can cause a cascade effect as each point on the chain embeds the tax in the price paid at the next point. The Legislative Analyst’s Office (LAO) estimated in 2019 that local taxes in California are equivalent to a 14% tax on retail cannabis sales.

Proposition 64 set a very high tax burden on the regulated cannabis market by enacting cultivation and excise taxes, requiring excise taxes to be part of the sales tax base, and reinforcing local tax authority. Seeking to reduce the tax burden on the regulated cannabis market, the author wants to exclude the cannabis excise tax from state and local sales and use taxes, as well as from local taxes measured by gross receipts.

Proposed Law

Senate Bill 512 amends the definition of gross receipts in the Sales and Use Tax Law to exclude both the state cannabis excise tax and any local taxes imposed on the privilege of cultivating, manufacturing, producing, processing, preparing, storing, providing, donating, selling, distributing, or delivering cannabis or cannabis products by a holder of a state cannabis license.

The bill excludes from the definition of gross receipts for purposes of a local tax or fee imposed on a state cannabis licensee the amount of any cannabis excise tax. The measure applies this change to charter cities, and makes technical and conforming changes.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “SB 512 would exclude the state’s cannabis excise tax as well as other local taxes from the definition of ‘gross receipts’ under the Sales and Use Tax Law. Additionally, this bill would prohibit a local jurisdiction from including the state’s excise tax in their definition of “gross receipts.” This bill is in response to guidance issued by CA Department of Tax and Fee Administration which has resulted in a tax-on-tax situation in some local jurisdictions, and leading to higher tax costs placed on purchasers. Many individuals in the State’s legal cannabis industry are continuing to struggle due to high taxes and excessive regulations. SB 512 will help remedy this situation by ensuring taxes are calculated on the actual goods being used and sold.”

2. Something’s got to give. Proposition 64 created the legal, regulated adult use of cannabis economy in California, launching a market for a product legal in the eyes of the state but still outlawed as a dangerous drug under federal law. The initiative created a state regulatory licensing structure, affirmed local regulatory and tax authority, and funded a myriad of programs with the revenues generated from the taxes it imposed. Even though the Legislature reformed cannabis taxation with last year’s AB 195, the industry - especially smaller and equity operators - continues to struggle, suggesting that aspects of Proposition 64’s structure was fatally flawed from inception. SB 512 reduces effective cannabis tax rates in two ways - removing both the cannabis excise tax and any local taxes from the sales and use tax base, and any cannabis excise taxes from the tax base of any local tax measured by gross receipts - which should lower final sales prices to consumers in the regulated market to help compete against the illicit market. However, doing so will result in lower state and local sales and use tax revenues, and cannabis excise tax revenues that flow to pay for Proposition 64’s programs. The Committee may wish to consider the benefit of SB 512’s tax reductions compared to its revenue effects.

3. Intent? Proposition 64 permits the Legislature to amend its provisions by 2/3 vote, so long as the amendments “further the intent and purpose of the initiative.” SB 512 includes a finding and declaration that it furthers the purpose and intent of the initiative; however, it’s possible that courts may disagree. Proposition 64 explicitly states that its cannabis excise tax must be included in the sales and use tax base. However, the initiative references the tax “imposed by this section,” which the Legislature suspended, then moved to an adjacent code section in AB 195. While this measure does require a 2/3 vote, and little case law exists as yet to specify the initiative’s limits on legislative amendment, the Committee may wish to consider whether and how SB 512 furthers the intent and purpose of Proposition 64.

4. Consumption. While voters approved Proposition 64 in 2016, concerns remain about the public health impacts of cannabis use, the possession and distribution of which remains illegal in other states and under federal law. LAO identifies reducing harmful use, including using high potency cannabis products, youth use, and high-frequency use, as one of the most important priorities for the Legislature to consider when crafting cannabis tax policy, and recommends imposing a tax based on the potency of the cannabis or cannabis product. Generally, higher prices discourage consumption. The Committee may wish to consider SB 512’s benefit to the regulated market when competing against the illicit market is worth the potential harms of any potential increase in consumption due to lower prices.

5. Technicals. Committee staff recommend the following technical amendments:

• Make a conforming change to Revenue and Taxation Code §6011’s definition of sales price to reflect the measure’s change to the definition of “gross receipts” in §6012.
• Replace the reference to privilege taxes with one to “any local tax or fee imposed” because not all local taxes are imposed for the privilege of a cannabis licensee engaging in a cannabis business.
• While local taxes measured by gross receipts apply to cannabis business engaged in several points in the supply chain, only retailers collect and remit sales and cannabis excise taxes. The bill should only specify that this treatment applies to licensed cannabis retailers.
• Not all increments of the sales tax are included in SB 512’s changes. It should also include taxes imposed under Section 35 of Article XIII of the California Constitution, the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200)) and the Transactions and Use Tax Law (Part 1.6 (commencing with Section 7251)).
• The measure’s local tax limitation adds language to Revenue and Taxation Code §34021, which is part of the State’s Cannabis Tax Law. Because the bill affects local business license taxes, it should be relocated to Business and Professions Code Sections 16000 and 16100.

6. Charter city. The California Constitution allows cities that adopt charters to control their own “municipal affairs.” In all other matters, charter cities must follow the general, statewide laws. Because the Constitution does not define “municipal affairs,” the courts determine whether a topic is a municipal affair or an issue of statewide concern. SB 512 states that its statutory provisions apply to charter cities, but does contain a legislative finding supporting this application.

7. Mandate. The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because SB 512 reduces local revenues, Legislative Counsel states that it imposes a new state mandate. The bill provides that the state shall not reimburse local agencies for any property tax revenue losses resulting from its expanded welfare exemption.

Support and Opposition

(4/28/23)

Support:
Americans for Safe Access
Angeles Emeralds
California Cannabis Industry Association
California Minority Alliance
California Norml (UNREG)
Coachella Valley Cannabis Alliance
Edgrow LLC
Long Beach Collective Association
San Francisco Cannabis Retailers Alliance
Silicon Valley Cannabis Alliance
Social Equity California
Social Equity LA
The Parent Company
United Cannabis Business Association

Opposition: None received.

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