California Association of County Treasurers and Tax Collectors (CACTTC) Cannabis Tax Collection Taxes, Regulatory & Local Measure Handbook October 2017
Table of Contents I. Tax Terminology...1 a. Excise Tax b. Sale Tax c. Ad Valorem d. Taxes vs- Fee II. CA Cannabis History...2 III. Prop 64 Cannabis Excise & Cultivation Tax...4 IV. Regulatory Agencies and Technology Solutions...4 V. Local Measure Advantages/Disadvantages...3 VI. Alcohol Excise Tax...7 VII. San Joaquin Public Engagement...8
Tax Terminology What is an 'Excise Tax? A gross receipts tax or gross excise tax is a tax on the total gross revenues of a company, regardless of their source. A gross receipts tax is similar to a sales tax, but it is levied on the seller of goods or service consumers. An excise tax is an indirect tax charged on the sale of a particular good. Indirect means the tax is not directly paid by an individual consumer. The producer or merchant passes the tax onto the consumer by including it in the product's price. An excise tax may also be a tax on an activity. Approval can be set on perimeters to grow cannabis within a maximum square footage of grow area whereby the excise tax is calculated by a dollar amount times the square footage of that grow area. What is a 'Sales Tax'? A sales tax is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the retailer and passed on to the government. A business is liable for sales taxes in a given jurisdiction. What is an 'Ad Valorem Tax'? An ad valorem tax is based on the assessed value of an item such as real estate or personal property. The most common ad valorem taxes are property taxes levied on real estate; however, ad valorem taxes may extend to a number of tax applications, such as import duty taxes on goods from abroad. Ad valorem property taxes are typically a major, if not the major, revenue source for both state and municipal governments, and municipal property ad valorem taxes are commonly referred to as simply "property taxes." Tax vs- Fee CA Proposition 218 Right to Vote on Taxes Act requires all new taxes to be voter approved. A governing body must approve a tax measure to be place on the ballot seeking voter approval. The voter approved tax can be based on gross sales or other metrics like a square footage of storefront or grow area based on the tax measure language approved by the governing body. Prop 64 had both an excise tax and a cultivator tax in the measure approved by the voters. A fee can only be set to recover the local agency s actual cost of providing the service. A fee can be collected as a one-time or annual permitting requirement and based on a flat fee, sliding scale or per an applicable measure. As an example many local agencies have adopted an ordinance that requires cannabis permits to recover the cost - 1 - P a g e
of compliance and monitoring. The fee can only recover the actual cost of providing the service. A local jurisdiction can have both a cannabis tax and cannabis fee upon adoption of a cannabis ordinance and a voter approved tax measure. Cannabis Laws in California Cannabis History Today Proposition 215: The Compassionate Use Act 1996 The Medical Cannabis and Regulatory Safety Act- 2015 Proposition 64: Adult Use of Marijuana Act 2016 SB 94: Conforms MCRSA and AUMA into a single system of state regulation and tax collection. 2017 Proposition 64 Vote - 2 - P a g e
National Cannabis Legalization Dark Green: Medical Cannabis Legal Light Green: Recreational Cannabis Legal Cannabis Laws: Local Authority Proposition 64 includes multiple local control provisions that respect local government powers to: Permit, regulate and tax commercial cannabis activity Ban commercial cannabis activity Ban outdoor home cultivation However, no local jurisdiction may ban: The personal consumption of cannabis within its jurisdiction The allowance of up to six plants for personal use The transportation of cannabis through the jurisdiction - 3 - P a g e
Prop 64 Cannabis Excise Tax and Cultivation Tax Beginning January 1, 2018, two new cannabis taxes apply as follow: 1. A 15 percent excise tax is imposed upon purchasers of cannabis and cannabis products. Retailers of cannabis and cannabis products are required to collect the 15 percent excise tax from the purchaser based on the average market price of any retail sale and pay it to their cannabis distributor. 2. A cultivation tax is imposed upon cannabis cultivators on all harvested cannabis that enters the commercial market. Cannabis cultivators are required to pay the cultivation tax to either their distributor or their manufacturer. The rate of the cultivation tax is: o $9.25 per dry-weight ounce of cannabis flowers that enter the commercial market, and o $2.75 per dry-weight ounce of cannabis leaves that enter the commercial market. Beginning January 1, 2020, the CDTFA is required to annually adjust the cultivation tax rates to account for inflation. Regulatory Agencies & Technology Solutions: Medical Cannabis and Regulatory Safety Act (MCRSA) 2015/16 Assembly Bill 266 enacts the Medical Cannabis Regulation and Safety Act for the licensure and regulation of medical cannabis and establishes within the Department of Consumer Affairs the Bureau of Medical Cannabis Regulation, under the supervision and control of the Director of Consumer Affairs; requires the Board of Equalization, in consultation with the Department of Food and Agriculture, to adopt a system for reporting the movement of commercial cannabis and cannabis products. Adult Use of Marijuana Act (AUMA) 2016 voter initiative (Proposition 64) to legalize cannabis in California. The full name of the measure is the "Control, Regulate and Tax Adult Use of Marijuana Act". The initiative passed with 57% voter approval and became law on November 9, 2016. Bureau of Cannabis Control (BCC) Previously Bureau of Medical Cannabis Regulation established under Department of Consumer Affairs. The Bureau is responsible for the regulation over distribution, dispensary and testing. BCC is the lead agency for cannabis regulation and is developing regulations along with the Department of Public Health (Office of Manufactured Cannabis Safety), and Department of Food and Agriculture (CalCannabis Cultivation Licensing). The three licensing agencies have issued draft regulations for manufacturing, cultivation, a track-and-trace system, laboratory testing, dispensaries, and other cannabis related activities. - 4 - P a g e
Office of Manufactured Cannabis Safety (OMCS) established within the Center for Environmental Health of the California Department of Public Health (CDPH) for regulation over cannabis manufacturing and testing for adult use only. CalCannabis Cultivation Licensing: CDFA established under California Department of Food & Agriculture (CDFA) for regulation over cannabis cultivation for both medical and adult use. CalCannabis will be deploying both an online licensing system (Accela) and a track and trace system (Metrc). California Department of Tax and Fee Administration (CDTFA) The Taxpayer Transparency and Fairness Act of 2017, which took effect July 1, 2017, restructured the State Board of Equalization and separated its functions among three separate entities to guarantee impartiality, equity, and efficiency in tax appeals, protect civil service employees, ensure fair tax collection statewide, and uphold the California Taxpayers' Bill of Rights. The State Board of Equalization (Board, BOE) will continue to perform the duties assigned to it by the state Constitution, while all other duties will be transferred to the newly established California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals. As a result, the newly formed tax and fee collection division CDTFA is the exclusive agency tasked with the collections of sales taxes, use taxes and fees. Accela Software Cannabis Licensing System that streamlines land, permitting, asset, licensing, to be deployed for the medical and recreational cannabis industry under CalCannabis authority. Metrc Marijuana Enforcement Tracking Reporting Compliance system is the state approved seed to sale track and trace solution to be deployed for the medical and recreational cannabis industry under CalCannabis authority. - 5 - P a g e
LOCAL MEASURE Advantages / Disadvantages (PRO/CON) Advantages: PROs 1. Local measure authorizes local government to charge an excise tax to provide funding for environmental/safety compliance demands impacting the Ag Commissioner and Sheriff. Measure should include: a. Language failure to register as a legitimate business does not relieve obligation to pay excise tax approved by voters. b. Distinguishes nursery from cultivation definition still pending at state level. c. Track & Trace as per state adopted system. d. If adequate funding is provided the Ag & Sheriff will have the funding to provide environmental/safety enforcement on legal cannabis business and curtail offenders. 2. Establishes legitimate cannabis business guidance. a. Website information related to cannabis will be available to all for reference. b. FAQs will be available to answer measure related questions c. Phone numbers and Personnel for permitting and / or business licensing will become readily available d. The cannabis industry will become a part of, and will contribute to, the local economy. e. Permitted cannabis operators will report non-permitted cannabis operators if an anonymous method of reporting is made available. f. Enforcement will become more of a community effort because an everyone should pay their fair share mentality will gradually permeate the municipality. 3. Provide access to (some) State grant funding. 4. Creates jobs. a. As the cannabis industry is legitimized collateral and supportive businesses will be started. b. Local non-cannabis economy will be supported by cannabis cash being spent on goods and services. c. New Industry Development: 1. Medicinal supplements 2. Edibles 3. Tourism of cannabis operations / sampling (like winery tourism) 5. Has the potential for increased land values. - 6 - P a g e
6. Before the measure is passed there are plenty of public meetings for the public to express their opinions about the measure and the language that is contained therein. 7. Gives cover for county action / regulation because it will be approved by the voters. Disadvantages: CONs 1. Cash based cannabis operations and the lack of viable banking alternatives increases crime due to the amount of non-bankable cash kept in businesses, homes and on personal property. 2. Impacts on surrounding properties. a. Neighbors being upset and voicing their concerns to Board of Supervisors and local media. b. Continued environmental degradation from non-permitted cultivators. Surrounding properties may lose value due to stream diversions, unauthorized tree removal, unauthorized grading of property, change of natural surroundings 3. Increased staffing costs for enforcement and oversight. a. Unforeseen costs not accounted for in cannabis taxation structure b. Ongoing meetings of Principles & Staff involved in county regulation, taxation, and enforcement will spend a lot more time than anticipated on forward looking solutions to address problems discovered after the measure is passed. 4. Conflicts with Federal Law. a. Some Staff may be unwilling to get involved with cannabis tax related billing and collection due to their being concerned about their personal culpability for violating federal law. b. Black market cannabis cultivators and related business ventures will continue to seek the shadows and not apply for permits because they are afraid of being found out by federal authorities. 5. The necessity to determine the all-inclusive costs for impacted departments to ensure adequate cost recovery is incorporated in the voter approved measure. a. If adequate funding is NOT provided the county will have unanticipated demands on limited resources to provide environmental/safety services. - 7 - P a g e
6. A land / property valuation bubble may develop when measure is passed because cannabis will be legitimized; then values may drop after the rush to take advantage dissipates. Alcohol Excise Tax Information Federal Alcohol Excise Tax - A tax of $16 per proof gallon would equal about 25 cents per ounce of alcohol. Under this option, the federal excise tax on a 750-milliliter bottle (commonly referred to as a fifth) of distilled spirits would rise from about $2.14 to $2.54. The tax on a six-pack of beer would jump from about 33 cents to 81 cents, and the tax on a 750-milliliter bottle of wine would increase by a similar amount, from about 21 cents to 70 cents. State Alcohol Excise Tax runs from $0 (WY) to $35.22 (WA) with CA at $3.30. This rate can include fixed-rate per volume taxes; wholesale taxes that are usually a percentage of the value of the product; distributor taxes (usually structured as license fees but are usually a percentage of revenues); retail taxes, in which retailers owe an extra percentage of revenues; case or bottle fees (which can vary based on size of container); and additional sales taxes (note that this measure does not include general sales tax, only those in excess of the general rate). California Liquor Tax (Alcohol Excise) - $3.30 / gallon. California's general sales tax of 6.00% also applies to the purchase of liquor. In California, liquor vendors are responsible for paying a state excise tax of $3.30 per gallon, plus Federal excise taxes, for all liquor sold. California Alcoholic Beverage Tax Continued Rate Per Wine Gallon July 15, 1991 Present Distilled Spirits (100 proof or less) $3.30 Distilled Spirits (over 100 proof) $6.60 Beer $0.20 Wine $0.20 Sparkling hard cider $0.20 Champagne and sparkling wine $0.30-8 - P a g e
Community Input San Joaquin County Cannabis Policy Project Public Engagement Report July 2017 Summarized Key Take Away Points Respondents generally favored regulations that would allow commercial cannabis businesses in the County. Respondents felt that benefits of allowing regulated commercial cannabis businesses in the County included economic opportunities for revenue and jobs, reducing black market activities, and increased accessibility to cannabis for patients and consumers. Many respondents are already in or plan to enter the cannabis industry. Concerns raised by respondents both in favor of and opposed to allowing commercial cannabis businesses were increased criminal activity that cannabis businesses may create, the increased exposure of cannabis to children and youth, the rising costs of law enforcement, and odor impacts. Community Input: Commercial Cannabis Cultivation Indoor and mixed-light commercial cannabis cultivation are more discreet and secure in comparison to outdoor cultivation. Outdoor commercial cannabis cultivation could be secure through fencing and/or setbacks. Commercial cannabis businesses, similar to other businesses with high-value product, provide the appropriate level of security to avoid criminal activity. Taxation of cannabis could effectively pay for any extra law enforcement costs. The preference is for outdoor and mixed-light cultivation on agriculturally-zoned land and indoor cultivation on industrially-zoned land or existing infrastructure on agriculturallyzoned land. Outdoor cultivation created greater concerns because of odor and visibility than indoor or mixed-light cultivation. There is a concern that cultivation will result in increased law enforcement costs. Tax revenue from the cannabis industry could compensate for any extra law enforcement costs. Community Input: Retail and Dispensaries - 9 - P a g e
Allowance of regulated commercial cannabis retail/dispensary businesses could reduce or eliminate the local cannabis black market. Participants felt that the County should capitalize on local tax revenue. Security issues for this business type are seen as being similar to bars, banks, and jewelry stores. Education must be provided if retail/dispensary businesses are allowed, including warning labels on products and information on the potential dangers of cannabis for children, expectant mothers, and the general public. Retail and dispensary businesses may appropriately be located in commercial or industrial areas. New tax revenue could support law enforcement and cannabis education. Concerns were mainly about loitering, driving under the influence, and keeping products away from children. Community Input: Logistics (Manufacturing, Testing, Distribution, and Transportation) Strong support for the permitting of cannabis logistic businesses. Strong support for enhanced security requirements for cannabis logistic businesses. Benefits of these types of businesses include economic growth from tax revenue and job creation. San Joaquin County has the potential to be a cannabis logistics hub for the state market. Heightened safety concerns because of the value of cannabis products, especially after the completion of the manufacturing process. Negative consequences could overwhelm the economic benefits. Community Input: Personal Cannabis Cultivation Allowing cannabis plants to be grown outdoors could draw unwanted attention, possibly bringing crime to a neighborhood. Strong odors from the cannabis plants at harvest time, from both indoor and outdoor cultivation, could bother neighbors. - 10 - P a g e
Odor from plants grown indoor or in an accessory structure could be mitigated with local requirements for air filtration systems. Residential landlords may hold discretion over personal cannabis cultivation on the rental property. Growing plants indoors, in the privacy of a home, could remove the risk of attracting unwanted attention. Parents are responsible for keeping children safe from cannabis plants and products. Online Survey - Total Responses: 460 Should San Joaquin County allow commercial cannabis businesses to operate in the county? Allow commercial cannabis businesses to operate just like any other legal business 47.4% Ban commercial cannabis businesses from operating in the unincorporated county. 36.3% Allow some commercial cannabis businesses in the unincorporated county, but not all types of commercial cannabis businesses. 16.3% Do you believe San Joaquin County should: Only in certain, limited areas, away from residential neighborhoods? The online survey results showed a majority (63.7 percent) in favor of allowing regulated commercial cannabis businesses in San Joaquin County s unincorporated area. Industry Input: Retail and Dispensary Regulation of alcohol, tobacco, and over-the-counter medications could serve as a more useful model than pharmaceuticals and opioids. License types could be designed to allow for a wine model, similar to wineries, with consumption and cultivation sharing one location. Labeling and packaging is important to mitigate public health risks of accidental consumption and overuse. Zoning could encourage location of retail/dispensaries near enough to cities that choose not to license cannabis retail and dispensaries to help drive the black market out of those cities. The number of retail/dispensary businesses will be limited by the available retail space, therefore, there would be no need to restrict the number of approved businesses. A specific license type for delivery-only service would be useful for the industry. There is value in distinguishing between recreational and medical cannabis. Public health concerns of overuse or accidental consumption can be mitigated through labeling and packaging regulations. - 11 - P a g e
Industry Input: Cultivation odor. Outdoor cannabis cultivation produces a superior product. Indoor commercial cultivation has certain advantages, such as mitigating visibility and Regulation of outdoor cannabis should be no more extensive than that for other agricultural products; taxation should be by acreage instead of by seeds planted. Outdoor commercial cultivation should be done in areas zoned for agriculture; indoor could be done in areas zoned as commercial and/or industrial. Businesses require a minimum range of 12 to 18 hours of operation per day. The County should offer an unlimited number of licenses and prioritize local and smaller businesses. The market is already oversaturated due to extensive exporting outside the state. Industry Input: Logistics Manufacturing facilities could be appropriately located in commercial or industrial areas, with consideration that some may use volatile substances. Testing facilities could be appropriately located in a commercial or light industrial area. Transportation and distribution businesses require locations for storage and would need to be able to be near enough to other businesses to comply with mandated time limits. Track and Trace program should include pesticide usage. The county could serve as a transportation hub, but would require a sufficient number of licenses for all logistical types. Fire protection agencies should be informed of hazards they could encounter in manufacturing facilities. Manufacture of concentrates accounts for approximately 60 percent of the statewide market; the County should consider this to ensure that local businesses can effectively compete. Businesses should be allowed to obtain local co-approval for distribution and transportation for more efficient supply chain management. Testing requires workers with advanced degrees. - 12 - P a g e
Too much restriction on the number and capacity of testing facilities would restrict the entire market. - 13 - P a g e