BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 567 |Hearing |6/22/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Gipson |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |6/15/16 Amended |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Bouaziz | |: | | ----------------------------------------------------------------- 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 AB 567 (Gipson) 6/15/16 Page 2 of ? 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 AB 567 (Gipson) 6/15/16 Page 3 of ? 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. AB 567 (Gipson) 6/15/16 Page 4 of ? 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. AB 567 (Gipson) 6/15/16 Page 5 of ? 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. AB 567 (Gipson) 6/15/16 Page 6 of ? 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 AB 567 (Gipson) 6/15/16 Page 7 of ? 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. AB 567 (Gipson) 6/15/16 Page 8 of ? 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. -- END --