$50 million “blunder” in Prop 64?

California Board of Equalization elected Member Jerome Horton, an opponent of Proposition 64, came up with an October surprise to illustrate a weakness in the proposal. That weakness didn’t prevent its passage, but it lingers.

Member Horton alleged that a tiny, technical, last-minute drafting change in the California 2016 marijuana initiative could cost the state $50 million, starting in November. Indeed, the Board of Equalization has adopted his view and officially confirmed that the current sales tax on medical marijuana just disappears – for a while.

I don’t know how anyone would have standing to sue to reverse that ruling. So, apparently, unless the Legislature acts, the total tax on medical cannabis, over time, will be:

— 7.5%, (through the November 8 Election) then
— 0% (from certification of ballot results through 12-31-17), then
— 15% plus weight tax (starting 1-1-18).

That makes no sense to me. It’s a roller coaster ride, with no discernable rationale.  A “blunder.”

Here’s the story:  The State of California, through Election Day, November 8, made medical marijuana subject to the standard, general state sales tax. So the tax rate on medical marijuana was 7.5 percent of retail sales – through November 8.

Proposition 64 imposes new taxes on medical marijuana. These are the same new taxes it imposes on recreational marijuana: a 15-percent retail tax and a weight-based tax, $9.25 per ounce (33 cents per gram) on bud, with a lower rate on trim. Those new taxes on both medical and recreational marijuana start January 1, 2018 — when recreational sales start.

To lessen the future burden on medical marijuana, Proposition 64 repeals that 7.5 percent standard, general state sales tax on it. So it will be taxed just a little less than recreational — 7.5 percent less.

The problem is in the effective date of Proposition 64’s repeal of the 7.5 percent standard, general state sales tax. The next-to-last draft of Proposition 64 repealed it effective 1-1-18:

“(g) This section [34011] shall become effective on January 1, 2018.
“(h) The [7.5 percent] sales and use tax . . . shall not apply to retail sales of medical cannabis when a qualified patient . . .provides” a medical card.
[Stricken-through because not enacted.]

Since “(h)” would have been part of section 34011, the repeal of the 7.5 percent tax would have occurred at the very moment the new taxes kicked in – 1-1-18. (The new 15 percent tax would have been in 34011(a), effective 1-1-18, thanks to (g)’s catchall effective date.)

But no.

The actual language of Proposition 64 contains a rewritten section 34011, with the effective date not in a subsection of its own, where it could work as a catchall, but in the beginning of rewritten subsection (a):
“34011. (a) Effective January 1, 2018, a marijuana excise tax shall be imposed upon purchasers of marijuana or marijuana products sold in this state at the rate of fifteen percent (15%) of the gross receipts of any retail sale . . .”

The repeal of the standard 7.5 percent sales tax on medical marijuana is left orphaned, with no specific effective date:
“(g) The sales and use tax imposed by Part 1 of this division shall not apply to retail sales of medical cannabis . . . “

So the effective date reverts to the ordinary default, when nothing is specified: Date of enactment. That means November 9, 2016.

That’s the reading of the placement of the effective date provision, made by the BOE.  That seems hypertechnical.   What judge would think any drafters might have intended this roller coaster ride for medical marijuana taxes – disappearing temporarily, then soaring?

If the North Carolina Legislature passed this wording, I can imagine giving the legal opinion (as a North Carolina lawyer) that the ultimate result in the courts could well be to uphold the tax.

Maybe California courts don’t give drafters of initiatives the same presumption of wanting a sensible result.  But would the courts endorse this apparently inadvertent and nonsensical hypertechnical interpretation?

The only reason I can come up with for repealing the medical marijuana tax early – and creating the roller coaster ride — is to lure medical users onto the pro-64 election bandwagon. But backers of Proposition 64 did not make that claim, so far as I know, at least not before opponents pointed out the glitch.

In any event, California BOE staff indicates that the plain language tied their hands, even though any plausible rational intent is frustrated.  Look, that’s a judgment call that’s not crazy. With a Member of the Board pointing out the plain language, it’s hard for staff to infer some intent of non-elected drafters.

This kind of technical glitch happens all the time with tax drafting. Mistakes in federal income tax bills are fixed by Technical Corrections Acts. No money gets lost or gained, because the corrections are retroactive – and they become law before the next filing deadline for income tax returns. Here’s a pending example, H.R.4891, the Technical Corrections Act of 2016, https://www.congress.gov/bill/114th-congress/house-bill/4891/text. And here’s section 2(m) of that bill: “Effective Date.—The amendments made by this section shall take effect as if included in the provision of the Protecting Americans from Tax Hikes Act of 2015 to which they relate.”

But a retail tax is different. Once it’s not collected at the cash register, it’s hard for the government to go back and say it should have been collected. To stop the bleeding, the Legislature would need to act.

This clerical mistake in Proposition 64 should get fixed, and it can be. The drafters of Proposition 64 were shrewd enough to affirmatively depart from the standard rule that initiatives are unamendable. So they let the Legislature amend Proposition 64 by 2/3 vote of each House.

If this kind of error happened in a private business, it would be fixed pronto. An “obvious clerical error” in a contract, or a coupon, won’t be honored. http://media.ca11.uscourts.gov/opinions/pub/files/201414636.pdf. “Gotcha” doesn’t work in contract law, and it shouldn’t work for taxation.

On the revenue number, my friend CANORML head Dale Gieringer says the ultimate revenue loss will be less than $50 million, because few medical cannabis patients now have the cards required for the donut-hole tax exemption, and it’s a hassle to get a card. I certainly don’t vouch for the accuracy of the $50 million number.

But this glitch costs some money, and it’s inadvertent. Government these days has a trust problem. People don’t think it can do anything right – that it’s pitiful and helpless. If this obvious, unintended error bleeds money from the state from now until 2018, people’s worst opinions will be confirmed.

Meanwhile, there may be other glitches in Proposition 64 that need fixing. Some fixes may be less controversial than correcting this inadvertent error to tax patients – and noncontroversial fixes could create momentum for a legislative omnibus bill.

A final, personal note: I cast no stones at the drafters. I regret to say that I single-handedly made a somewhat most costly blunder (in dollar terms) myself, as a staffer for the Joint Committee on Taxation during the Tax Reform Act of 1986, but so many billions were flying around then that my mistake passed virtually unnoticed. These drafters were not so lucky.

+++++

Appendix: Legislative language:

As enacted:

  1. (a) Effective January 1, 2018, a marijuana excise tax shall be imposed upon purchasers of marijuana or marijuana products sold in this state at the rate of fifteen percent (15%) of the gross receipts of any retail sale by a dispensary or other person required to be licensed pursuant to Chapter 3. 5 of Division 8 of the Business and Professions Code or a retailer, micro business, nonprofit, or other person required to be licensed pursuant to Division 10 of the Business and Professions Code to sell marijuana and marijuana products directly to a purchaser.

(b) Except as otherwise provided by regulation, the tax levied under this section shall apply to the full price, if non-itemized, of any transaction involving both marijuana or marijuana products and any other otherwise distinct and identifiable goods or services, and the price of any goods or services, if a reduction in the price of marijuana or marijuana products is contingent on purchase of those goods or services.

(c) A dispensary or other person required to be licensed pursuant to Chapter 3.5 of Division 8 of the Business and Professions Code or a retailer, microbusiness, nonprofit, or other person required to be licensed pursuant to Division 10 of the Business and Professions Code shall be responsible for collecting this tax and remitting it to the board in accordance with rules and procedures established under law and any regulations adopted by the board.

(d) The excise tax imposed by this section shall be in addition to the sales and use tax imposed by the state and local governments.

(e) Gross receipts from the sale of marijuana or marijuana products for purposes of assessing the sales and use tax under Part 1 of this division shall include the tax levied pursuant to this section.

(f) No marijuana or marijuana products may be sold to a purchaser unless the excise tax required by law has been paid by the purchaser at the time of sale.

(g) The sales and use tax imposed by Part 1 of this division shall not apply to retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products or topical cannabis as those terms are defined in Chapter 3.5 of Division 8 of the Business and Professions Code when a qualified patient (or primary caregiver for a qualified patient) provides his or her card issued under Section 11362.71.

https://www.oag.ca.gov/system/files/initiatives/pdfs/15-0103%20(Marijuana)_1.pdf?

+++

Here’s the unenacted October 14 version, whose effective date, in bolded (g) below, works for all of 34011. If the Proposition 64 had this structure, the sales tax on medical marijuana would not have been repealed until 1-1-18, and there would be no roller coaster ride, and no donut hole:

  1. Marijuana excise tax.

(a) An excise tax at the rate of fifteen percent (15%) of the gross receipts of any retailer required to be licensed pursuant to Chapter 3.5 of Division 8 of the Business and Professions Code or Division 10 of the Business and Professions Code from the sale of marijuana or marijuana products sold in this state is hereby imposed.

(b) Except as otherwise provided by regulation, the tax levied under this section shall apply to the full price, if non-itemized, of any transaction involving both marijuana or marijuana products and any other otherwise distinct and identifiable goods or services, and the price of any goods or services, if a reduction in the price of marijuana or marijuana products is contingent on purchase of those goods or services.

(c) A retailer required to be licensed shall be responsible for collecting this tax and remitting it to the board in accordance with rules and procedures established under law and any regulations adopted by the board.

(d) The excise tax imposed by this section shall be in addition to the sales and use tax imposed by the state and local governments.

(e) Gross receipts from the sale of marijuana or marijuana products for purposes of assessing the sales and use tax under part 1 of this division shall include the tax levied pursuant to this section.

(f) No marijuana or marijuana products may be sold to a consumer unless the excise tax required by law has been paid.

(g) This section shall become effective on January 1, 2018.

 (h) The sales and use tax imposed by part 1 of this division shall not apply to retail sales of medical cannabis, cannabis concentrate, edible medical cannabis product or topical cannabis as those terms are defined in Chapter 3.5 of Division 8 of the Business and Professions Code when a qualified patient (or primary caregiver for a qualified patient) provides his or her card issued under section 11362.71 of the Health and Safety Code and a valid government issued identification card.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

1 thought on “$50 million “blunder” in Prop 64?”

  1. The other drafting concern was to include this exemption as 34011(g) instead of where all the Sales and Use Tax exemptions are generally stored (i.e. Chapter 4 of Part 1 of Division 2 of Revenue and Taxation Code). This odd placement choice clearly caused him some confusion in adequately conveying the effective dates of the tax and exemption.

    With a long list of state and local taxes taking effect, will this “blunder” lead to a heightened feeling of sticker shock on Jan 1, 2018? What’s the likelihood that most consumers will stop looking to untaxed black/grey market sales after 01/01/2018?

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