California Senator Slams ‘No-Cash’ Policy for Pot Tax Payments

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By Tripp Baltz and Laura Mahoney

A California state senator sharply criticized State Board of Equalization members for refusing to take cash payments toward taxes on medical marijuana sales and expressed his concern the state’s marijuana tax system is falling behind schedule to be ready for Jan. 1—when recreational sales become legal.

Sen. Mike McGuire (D) said Feb. 14 during a Senate Committee on Governance and Finance oversight hearing on cannabis taxation it will be a “heavy lift” to prepare the state’s cannabis tax collection systems for Jan. 1, the date recreational marijuana sales become legal in California under Proposition 64, approved by the state’s voters in November.

“There is no way in hell we are going to be able to enroll all the growers into this system by Jan. 1,” he said. “We may need to advance some emergency regulations by this summer.”

He cited California Department of Food and Agriculture estimates of some 27,000 cannabis growers in the state, “but there may be close to double that. We have 20,000 from Sonoma to the Oregon border, candidly.”

Needs to Be Consistent

On SBOE offices refusing to take cash for tax payments, McGuire said: “We are either in a cash business or we are not, but we have to make it consistent, and we have to make it convenient.”

The SBOE’s policy since February 2014 is to accept cash payments from business that show complying with electronic payment rules is a hardship. But two of the four elected SBOE members aren’t approving hardship exemptions or taking cash at offices in their districts.

Member Diane Harkey (R) has said she is strictly enforcing the “no cash” policy because it isn’t safe to take cash and that differences in scale of the industry in different areas of the state warrant discretion. Member Jerome Horton (D) has said the risks to employees outweigh the risk of taking large amounts of cash.

‘Law of the State.’

“We can’t have policies in one district because a member may or may not like cannabis,” McGuire said. “It’s the law of the state, and we need to have universal policies throughout the offices and throughout the system.”

McGuire said the state must develop a specific policy with respect to cash tax collection. “It needs to be convenient for individuals to be able to deposit their cash with the BOE,” he said, adding he intends to hold another hearing in July or August and ask the SBOE about its policies at that time. “It’s going to be a cash business most likely for a few years.”

“Let’s be honest, under a Trump Administration, this industry is not going to become easier, it’s probably going to become more difficult,” he said.

The hearing covered current cannabis tax collection efforts, compliance by growers and medical marijuana dispensaries, and technology and other tax administration issues. California voters legalized medical marijuana in 1996 (Proposition 215), so the state has a track record with respect to taxation of cannabis sales, according to witnesses who testified at the meeting. Most medical marijuana businesses pay their taxes in cash, panelists said.

Two New Taxes

Seth Kerstein, economist in the California Legislative Analyst’s Office, said Proposition 64 created two new excise taxes on marijuana: (1) a tax on cultivators of $9.25 per ounce for flowers and $2.75 per ounce for leaves, with exceptions for certain medical marijuana sales and cultivation, and (2) a 15 percent tax on retail marijuana sales.

Michele Pielsticker, chief of the board’s legislative and research division, said the state currently collects about $65 million in sales and use taxes on medical marijuana. That’s about a 61 percent compliance rate, she said. “It would be about $112 million if we had 100 percent compliance.”

Pielsticker and Jim Houston, undersecretary in the CDFA, said having a “track and trace” system will be “critical to ensuring compliance and tax collection, and will give law enforcement and local governments the ability they need to enforce against people who are not complying with the system.” Track and trace follows the progress of marijuana products from nursery to grower and then to labs for testing, onto manufacture and then to dispensary for retail sale, he said.

Low Access to Banking

Inadequate access to banking forces most marijuana sellers to conduct their business in cash and leads to lower rates of compliance with tax collection obligations, Pielsticker and Houston said.

Federal regulation of banks “is the reason it is so difficult to get banking,” Pielsticker said. “Marijuana is a Schedule 1 drug under federal law, and banks have to be so diligent to make sure money is not being laundered.”

Sen. Jim Beall (D) asked panelists about California’s consideration of starting a state bank to handle marijuana accounts, credit card processing and payroll processing. The SBOE is participating in a group led by California Treasurer John Chiang to examine the feasibility of a state bank. Chiang sent a letter to President Donald Trump in January seeking guidance on a possible federal solution to the banking problem.

Colorado Experience

Banking remains a chief concern in Colorado, where recreational marijuana has been legal since January 2014. Colorado Gov. John Hickenlooper (D) addressed the oversight hearing about the issues the state has wrestled with in the last two years, including tax compliance, lack of access to banking, youth education and public safety.

Medical marijuana in Colorado is taxed at the state sales tax rate of 2.9 percent. Recreational marijuana was assessed a 15 percent excise tax at the wholesale level, a 10 percent special sales tax at the retail level, plus the state sales tax for a total tax of almost 28 percent. Taxes were lowered a year ago, he said.

Tax policy on marijuana can be used “not to solve some kind of social problem, but to address the unintended consequences of recreational marijuana, as well as to obliterate the black market,” he said. “We felt the lower rate would more rapidly exterminate the black market.”

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bna.com and Laura Mahoney in Sacramento, Calif., at lmahoney@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

A video of the committee hearing is at http://senate.ca.gov/media-archive.

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