California clean-up bill does not fix tax blunder

California Board of Equalization elected Member Jerome Horton came up with an October surprise to illustrate a tax weakness in Prop 64, the California marijuana legalization initiative.  That weakness didn’t prevent its passage, but it lingers.  And a new 79-page clean-up bill does not fix it.

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).

For details, see this old post: https://newrevenue.org/2016/11/12/5032/.

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 The next-to-last draft of Proposition 64 repealed it effective 1-1-18: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.

There’s a proposed clean bill, but the tax problem is not solved in the new proposed bill:

The effective date of the repeal of the standard 7.5 percent sales tax on medical marijuana is still left orphaned.  The state is losing money every day.  Why?  A friend tells me that since you need a patient card to get the exemption and few cards have been issued, some think a change isn’t necessary.  But we are bewildered by the notion that that merchants check for cards in a system where tax compliance is so poor already.  The likelihood is they just aren’t collecting tax.  Maybe we’ll see data.

You might think that since few cards have been issued, a fix would be non-disruptive.  Again, why not fix it?

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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.

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