BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 567                           |Hearing    |6/22/16  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Gipson                           |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |6/15/16    Amended               |Fiscal:    |Yes      |
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          |Consultant|Bouaziz                                               |
          |:         |                                                      |
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                   Medical cannabis: regulation and taxation amnesty



          Requires the Board of Equalization, and the Employment  
          Development Department to develop and administer a tax penalty  
          amnesty for qualified taxpayers.


           Background 

           Current law imposes a sales and use tax (SUT) on the gross  
          receipts from the sale of, tangible personal property based on  
          the sales price, unless specifically exempted by statute.  The  
          current state SUT is 7.5%, but beginning January 1, 2017, the  
          state SUT rate on tangible personal property will be 7.25%.   
          Cities and Counties may increase the SUT rate up to 2% as a  
          transactions and use tax for either specific or general purposes  
          with a vote of the people.  

          Under state law, every person, retailer, and wholesaler engaged  
          in selling tangible personal property subject to sales tax must  
          apply to the Board of Equalization (BOE) for a seller's permit.   
          Failure to obtain a seller's permit is a misdemeanor crime.   
          Furthermore, persons who fail to pay their tax obligations are  
          liable for their past tax obligation including accrued interest  
          and penalties for up to eight previous calendar years.  In  
          February 2007, BOE issued a Special Notice confirming its policy  
          of subjecting medical marijuana transactions to the Sales and  
          Use Tax, as well as its requirement that businesses engaging in  







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          such transactions hold a Seller's Permit.  A permit does not  
          allow individuals to make unlawful sales, but instead merely  
          provides a way to remit any sales and use taxes due.  

          Under current law, any person who fails to pay tax to the state  
          by the due date of that tax shall be assessed interest at the  
          modified adjusted rate per month from the date the tax became  
          due and payable to the state until the date of payment.  There  
          are also an array of penalties that are imposed under a variety  
          of provisions of the Sales and Use Tax Law.  These penalties, as  
          applicable to dispensaries, are as follows:

                 For late payments generally, a penalty of 10% of the  
               amount of all unpaid taxes added to any tax not paid in  
               whole or in part within the time required by law.

                 Any person who fails to file a timely return is required  
               to pay a penalty of 10% of the amount of taxes, exclusive  
               of prepayments, with respect to the period for which the  
               return is required.

                 Any person remitting taxes by electronic funds transfer  
               is required to, on or before the due date of the  
               remittance, file a return for the preceding reporting  
               period in the form and manner prescribed by the Board. Any  
               person who fails to timely file the required return is  
               required to pay a penalty of 10% of the amount of taxes,  
               exclusive of prepayments, with respect to the period for  
               which the return is required.

                 A penalty of 10% of the amount of the tax specified in a  
               determination is added to deficiency determinations if any  
               part of the deficiency for which the determination is  
               imposed is due to negligence or intentional disregard of  
               the law.

                 A penalty of 25% of the amount of the tax specified in a  
               deficiency determination is added in the case of a  
               determination for failure to file a return, if that failure  
               is due to fraud or an intent to evade the law.

                 A penalty of 50% applies to the taxes imposed upon any  
               person who, for the purpose of evading the payment of  
               taxes, knowingly fails to obtain a valid permit prior to  








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               the date in which the first tax return is due.  The 50%  
               penalty applies to the taxes determined to be due for the  
               period during which the person engaged in business in this  
               state as a seller without a valid permit and may be added  
               in addition to the 10% penalty for failure to file a  
               return.  However, the 50% penalty does not apply if the  
               taxable sales or purchases over the period during which the  
               person was engaged in business without a valid permit  
               averaged $1,000 or less per month.

                 A penalty of 10% of the amount of the tax specified in  
               the determination shall be added to any determination not  
               paid within the time required by law.

                 A penalty of 10% applies to the taxes imposed upon any  
               person who knowingly issues a resale certificate for  
               personal gain or to evade the payment of taxes while not  
               actively engaged in business as a seller.  The penalty is  
               10% of the amount of tax or $500, whichever is greater, if  
               the purchase is made for personal gain or to evade payment  
               of taxes.

                 For prepayments, taxpayers with taxable sales in excess  
               of $17,000 per month are required to make two prepayments  
               of the tax during each quarter) the following penalties  
               apply:


                  o         Taxpayers who fail to make a prepayment before  
                    the last day of the monthly period following the  
                    quarterly period in which the prepayment became due  
                    and who files a timely return and payment for that  
                    quarterly period is required to pay a penalty of 6% of  
                    the amount of prepayment, as specified, for each of  
                    the periods during that quarterly period for which a  
                    required prepayment was not made.

                  o         Taxpayers who fail to make a timely  
                    prepayment, but who makes the prepayment before the  
                    last day of the monthly period following the quarterly  
                    period in which the prepayment became due, is required  
                    to pay a penalty of 6% of the amount of the  
                    prepayment.









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                  o         If any part of a deficiency in prepayment is  
                    due to negligence or intentional disregard of the  
                    Sales and Use Tax Law or authorized regulations, a  
                    penalty of 10% of the deficiency is required to be  
                    paid.

          State law requires employers who pay employees  
          California-sourced income to withhold expected taxes.   
          Businesses with one or more employees in the current or  
          preceding taxable year, and who pays wages in excess of $100 per  
          quarter must register with the Employment Development Department  
          (EDD).  Employers deposit personal income tax withholding by  
          mail or electronically with EDD, along with amounts for  
          Unemployment Insurance (UI), Employment Training Taxes, and  
          State Disability Insurance (SDI).  Federal schedules determine  
          when employers make Personal Income Tax and SDI payments, while  
          UI and ETT payments are made quarterly.  Each quarter, the  
          taxpayer files a form to reconcile these deposits with actual  
          taxes due.




           Proposed Law

           Assembly Bill 567 requires the Board of Equalization and  
          Employment Development Department (EDD) to administer a tax  
          penalty amnesty program for medical cannabis-related businesses  
          for a three-month period beginning July 1, 2017 through  
          September 30, 2017. Specifically, the bill:

                 Applies to tax liabilities due and payable for tax  
               reporting periods beginning before January 1, 2015.

                 Applies to any qualified taxpayer who during the amnesty  
               period files an application for tax penalty amnesty and,  
               within 60 days after the conclusion of the amnesty period,  
               does all of the following:

                  o         Files completed tax returns reporting the  
                    non-reported or underreported tax liabilities for all  
                    tax reporting periods for which amnesty is being  
                    applied.









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                  o         Pays in full the taxes and interest due for  
                    each period for which amnesty is requested, or applies  
                    for an installment agreement.

                 Allows qualified taxpayers to request to enter into an  
               installment payment agreement, which includes interest on  
               the outstanding amount due, in lieu of full payment.  
               Failure by the qualified taxpayer to fully comply with the  
               terms of the agreement renders the waiver of penalties null  
               and void, unless BOE determines that the failure was due to  
               reasonable cause, and the total amount of tax, interest,  
               and all penalties become due and payable immediately.

                 Requires BOE to waive all penalties imposed under the  
               Sales and Use Tax Law, for the tax reporting periods for  
               which tax penalty amnesty is requested, that are owed as a  
               result of the non-reporting or underreporting of tax  
               liabilities. 

                 Prohibits any criminal action brought against the  
               qualified taxpayer based on the non-reporting or  
               underreporting of tax liabilities for the tax reporting for  
               which tax penalty amnesty is requested.

                 Does not apply to the nonpayment of any taxes for which  
               a notice of determination has previously been issued.

                 Does not apply to Sales and Use Tax Law violations, to  
               which, as of the first day of the amnesty period, the  
               qualified taxpayer is on notice of a criminal investigation  
               or a court proceeding has already been initiated.

                 Provides that no refund or credit shall be granted of  
               any penalty paid prior to the time the qualified taxpayer  
               makes a request for tax penalty amnesty.

                 Requires BOE to refuse to issue a permit to any person  
               or revoke a seller's permit issued for any person that is  
               both of the following:

                  o         Eligible to participate in the tax penalty  
                    amnesty program, but does not participate in the  
                    amnesty program.









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                  o         Engaged in retail sales of medical cannabis in  
                    this state that would have been eligible to  
                    participate in the tax penalty amnesty program as a  
                    medical cannabis-related business.

                 Requires the Department of Consumer Affairs to revoke or  
               refuse to issue, reinstate, or renew a qualified taxpayer's  
               state license who is eligible to participate in the tax  
               penalty amnesty program, but does not, and that does any of  
               the following:

                  o         Fails to register with BOE.

                  o         Has a seller's permit revoked.

                  o         Reports a gross understatement of tax. 

          AB 567 applies almost all of the same provisions from the BOE  
          amnesty program to the EDD for employment taxes.

          AB 567 becomes effective January 1, 2017.


           State Revenue Impact

           The Board of Equalization estimates a one-time General Fund  
          revenue increase of $52.8 million with 50% compliance, $79.2  
          million with 75% compliance, or $105.6 million with 100%  
          compliance.


           Comments

           1.   Purpose of the bill.   According to the Author's office, this  
          bill is necessary because many cannabis businesses have failed  
          to comply with California's business tax requirements due to  
          misunderstanding or fear of becoming a target for investigation.   
           

           2.   Issue at hand.   According to BOE, "Many medical  
          cannabis-related businesses want to be regulated, taxed, and  
          treated like other businesses.  However, these businesses have  
          been operating in the shadows for years for fear of federal  
          prosecution.  Last year, the Legislature enacted the MMRSA, a  








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          package of legislation that establishes a comprehensive  
          licensing and regulatory framework for medical marijuana  
          including cultivation, manufacturing, transportation,  
          distribution, and sale.  The MMRSA comports with the enforcement  
          priorities outlined in the U.S. Department of Justice guidance  
          to federal prosecutors regarding cannabis enforcement under the  
          Controlled Substances Act (referred to as the Cole Memo) and  
          likely will serve to shield the state's industry from federal  
          action.  As a result, medical cannabis-related businesses that  
          previously operated underground may be more willing to come  
          forward and comply with state tax and regulatory laws."

          3.   Closing the gap.   This bill aims to bring medical cannabis  
          dispensaries into compliance with sales tax laws.  BOE estimates  
          a noncompliance rate of 66% of all dispensaries selling medical  
          marijuana.  This bill provides an incentive for those  
          dispensaries who have failed to remit sales tax in the past to  
          do so prospectively.  This bill could be effective in increasing  
          prospective sales tax compliance to the extent a tax incentive  
          induces medical marijuana dispensaries to comply with sales tax  
          law.  

          4.   Employment taxes.   Assembly Bill 567 enacts an amnesty  
          program for both sales and use tax as well as employment taxes.   
          Specifically, the bill requires the Employment Development  
          Department to administer a tax penalty amnesty program for  
          medical cannabis-related businesses for a three-month period  
          beginning July 1, 2017 through September 30, 2017.  The amnesty  
          program would apply to the unemployment insurance tax and  
          employment training tax.  Similar to the sales and use tax  
          amnesty program, the goal of waiving penalties owed by out of  
          compliance businesses is to incentivize employers to remit the  
          unemployment insurance tax and employment training tax. 

          5.   Previous version.   The February 24, 2015 version of this  
          bill allowed the Board of Equalization (BOE) or the assessor to  
          disclose that a person or legal entity has filed a legal entity  
          change in ownership statement with the BOE, or that the BOE has  
          issued a determination to the assessor relating to the statement  
          filed. 

          6.  Incoming!   The Senate Business, Professions and Economic  
          Development Committee approved AB 567 by a vote of 8-1 on June  
          13, 2016. 








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           Assembly Actions

           Not relevant to this version of the bill.


           Support and  
          Opposition   (6/16/16)


           Support  :  Board of Equalization; California Chamber of Commerce.

           Opposition  :  Unknown.



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