FISCAL NOTE

Date Requested: January 11, 2019
Time Requested: 02:58 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1102 Introduced HB2331
CBD Subject: Health


FUND(S):

Cannabis Transfer Tax Fund, Public Employee Insurance Fund, Fight Substance Abuse Fund, Division of Justice & Community Service Grants, General Revenue Fund, Fees to Department of Health & Human Resources, and municipal funds

Sources of Revenue:

General Fund

Legislation creates:

Creates New Revenue, Creates New Expense, Creates New Program, Creates New Fund: Cannabis Transfer Tax Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The stated purpose of this bill is to legalize the personal use and possession of cannabis by adults; providing for a county option election to allow for the production and sales in that county; providing for the regulation by the Bureau of Health; authorizing an excise and local sales tax on cannabis; prohibiting underage use; and preserving current laws relating to allowing employers and property owners to prohibit use of possession. According to our interpretation, the proposed bill would legalize for State purposes only the personal use and possession of cannabis by adults aged 21 and over and would allow county governments the option of allowing production and sale on cannabis within county borders. The legislation would levy an excise tax of 15 percent on the sale of price of cannabis to benefit the Cannabis Transfer Tax Fund and would impose a local sales tax of 6 percent but not subject such sales to the regular State sales tax. The proposed bill also provides for licensing, renewal, and application fees, among others, for the operation of cannabis establishments. The fiscal note does not attempt to quantify the amount of fees that may be collected or residual fiscal impacts resulting from the employment and business activity related to the bill. Of excise tax collections deposits into the Cannabis Transfer Tax Fund, 50 percent will be deposited into the Public Employees Insurance Agency Stability Fund, 25 percent will be deposited into the Fight Substance Abuse Fund, 12.5 percent will be allocated to the Justice and Community Services, and 12.5 percent will be allocated to the General Revenue Fund for the purpose of state employee pay raises. License fees and administrative penalties are allocated to the Department of Health and Human Resources. The proposed local sales tax would be collected at the point of sale with the county government receiving all proceeds and distributing as follows: 50 percent retained by the county and 50 percent to municipalities within the county on a per capita basis. If all counties choose to participate, the estimated revenue from the legalization of recreational cannabis in the West Virginia is as follows: • FY2020: $50,000 in license/application fees. • FY2021: $2.3 million in Excise Taxes, $1.4 million in local sales taxes, and $275,000 in license/application fees. • FY2022: $5.2 million in Excise Taxes, $3.6 million in local sales tax $270,000 in license/application fees • FY2023: $6.6 million in Excise Taxes, $4.9 million in local sales taxes, and $270,000 in license/application fees. • FY2024: $4.7 million in Excise Taxes, $4.9 million in Sales Taxes, and $225,000 in license and application fees However, given that revenue yield is dependent on local county option election results, we are unable readily to estimate yield of the State excise tax or timing of receipts for the various State funds. It is estimated that the State will start collecting application fees from recreational dispensaries and growers/processors in June 2020. Cannabis sales are estimated to start in January 2021 along with the collection of excise and sales taxes. The cannabis market would be expected to peak sometime within the first five years of effect. Given that the proposed bill provides that “the bureau” will begin accepting applications to operate a cannabis establishment by October 1, 2019, it is likely that any revenues realized in FY2020 would be minimal. It is likely provisions in this bill would phase in slowly, as the approval process for business and the required voter referenda for county governments to allow for the sale of such products would take time to complete. This analysis does not attempt to determine when full implementation, and thus estimated revenue yield, of the proposed bill may occur. In addition, there are likely to be significant compliance concerns as the legalized cannabis industry begins in West Virginia. Adherence Compliance, a Colorado-based cannabis compliance company, found that compliance in Colorado scores an average of 82.9 out of 100 while compliance in California scores an average of 74.4 out of 100. It is important to note that Colorado has been regulating recreational marijuana since the law passed in 2012 while California has only recently legalized recreational use and sales. In addition, both states decriminalized marijuana in the 1970s and legalized medical marijuana in 2000 and 1996 respectively. It is expected compliance may take several years to reach reasonable levels, which will impact potential revenue yield. Additional administrative costs to the Tax Department would be $756,500 in FY2020 and $250,000 in subsequent fiscal years.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 756,500 250,000
Personal Services 0 250,000 250,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 156,500 0
Other 0 350,000 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


According to our interpretation, the proposed bill would legalize for State purposes only the personal use and possession of cannabis by adults aged 21 and over and would allow county governments the option of allowing production and sale on cannabis within county borders. The legislation would levy an excise tax of 15 percent on the sale of price of cannabis to benefit the Cannabis Transfer Tax Fund and would impose a local sales tax of 6 percent but not subject such sales to the regular State sales tax. The proposed bill also provides for licensing, renewal, and application fees, among others, for the operation of cannabis establishments. The fiscal note does not attempt to quantify the amount of fees that may be collected or residual fiscal impacts resulting from the employment and business activity related to the bill. Of excise tax collections deposits into the Cannabis Transfer Tax Fund, 50 percent will be deposited into the Public Employees Insurance Agency Stability Fund, 25 percent will be deposited into the Fight Substance Abuse Fund, 12.5 percent will be allocated to the Justice and Community Services, and 12.5 percent will be allocated to the General Revenue Fund for the purpose of state employee pay raises. License fees and administrative penalties are allocated to the Department of Health and Human Resources. The proposed local sales tax would be collected at the point of sale with the county government receiving all proceeds and distributing as follows: 50 percent retained by the county and 50 percent to municipalities within the county on a per capita basis. The financial analysis of this bills is based upon research of the cannabis industry research data and the programs of other states that have passed and enacted similar recreational cannabis legislation like being proposed by West Virginia. It is estimated that West Virginia has a population segment of 272,000 people out of 1.8 million in-state residents who use cannabis. It is also projected that approximately 76,000 residents that live in the border states would cross the state line to participate in the West Virginia cannabis economy. The total participation in the West Virginia Cannabis Economy is estimated to be approximately 348,000 people. It is estimated that the average cannabis consumer uses about 193 grams per year. The projected amount of total cannabis consumption for the West Virginia market is approximately 68 million grams. Based upon an industry study of consumer habits, cannabis consumption is classified in the following categories along with its share of the market: • Black Market: 48%, • Home Grown: 17%, • Medical Dispensary: 14%, and • Recreational Dispensary: 21%. The total amount of consumption of cannabis that would be purchased at recreational dispensary is approximately 14 million grams. It should be noted that this analysis assumes that the State has medical dispensaries in service and the users of medical cannabis would not participate in the recreational portion of the market. In order to determine the amount of revenue the state would receive from the exercise and sales taxes along with the license/application fees, the number of growers/processors and recreational dispensaries must estimated. For this fiscal note, a comparison analysis of the Colorado cannabis market was used to determine/estimate the number of recreational dispensaries and growers/processors would be required to support cannabis consumption in West Virginia. Based upon this approach, it was it estimated that it takes approximately 178 recreational dispensaries and 40 grower/processors to support the West Virginia cannabis market. It should also be noted that the legalized recreational cannabis market in Colorado has been in place for the past 4 years. The first two years of this market has been in a transition phase with the price of recreational cannabis being on average $14 per gram in 2014 and falling to a price of near $5.00 per gram in 2017. Colorado has experienced increased sales tax revenue from the sales of cannabis despite the falling prices over the past few years due to an increase in consumption by the general population and to an increase in out-of state tourists who consume recreational cannabis. It is expected that the West Virginia cannabis market would develop similarly to the one in Colorado and take four years to reach maximum consumption. If all counties choose to participate, the estimated sales price of recreational cannabis in West Virginia is $13.68 per gram ($14.50 with sales tax) for FY2021 and decreasing to $7.31 per gram ($7.75 with sales tax) in FY2024.   The estimated revenue from the legalization of recreational cannabis in West Virginia is as follows: • FY2020: $50,000 in license/application fees. • FY2021: $2.3 million in Excise Taxes, $1.4 million in local sales taxes, and $275,000 in license/application fees. • FY2022: $5.2 million in Excise Taxes, $3.6 million in local sales taxes, and $270,000 in license/application fees • FY2023: $6.6 million in Excise Taxes, $4.9 million in local sales taxes, and $270,000 in license/application fees. • FY2024: $4.7 million in Excise Taxes, $4.9 million in local sales taxes, and $225,000 in license and application Fees It is estimated that the State will start collecting application fees from recreational dispensaries and growers/processors in June 2020. Cannabis sales are estimated to start in January 2021 along with the collection of excise and sales taxes. Given that the proposed bill provides that “the bureau” will begin accepting applications to operate a cannabis establishment by October 1, 2019, it is likely that any revenues realized in FY2020 would be minimal. It is likely provisions in this bill would phase in slowly, as the approval process for business and the required voter referenda for county governments to allow for the sale of sch products would take time to complete. This analysis does not attempt to determine when full implementation, and thus estimated revenue yield, of the proposed bill may occur. In addition, there are likely to be significant compliance concerns as the legalized cannabis industry begins in West Virginia. Adherence Compliance, a Colorado-based cannabis compliance company, found that compliance in Colorado scores an average of 82.9 out of 100 while compliance in California scores an average of 74.4 out of 100. It is important to note that Colorado has been regulating recreational marijuana since the law passed in 2012 while California has only recently legalized recreational use and sales. In addition, both states decriminalized marijuana in the 1970s and legalized medical marijuana in 2000 and 1996 respectively. It is expected compliance may take several years to reach reasonable levels, which will impact potential revenue yield. Additional administrative costs to the Tax Department would be $756,500 in FY2020 and $250,000 in subsequent fiscal years.



Memorandum


The stated purpose of this bill is to legalize the personal use and possession of cannabis by adults; providing for a county option election to allow for the production and sales in that county; providing for the regulation by the Bureau of Health; authorizing an excise and local sales tax on cannabis; prohibiting underage use; and preserving current laws relating to allowing employers and property owners to prohibit use of possession. As written, the taxation of the legalized sale of cannabis cannot be administered for the following reasons: • The Department of Revenue does not have the statutory mandate to administer, collect, and enforce taxation, the Tax Commissioner as head of the Tax Division does have such statutory authority. • The bill has provisions contrary to the Streamlined Sales and Use Tax Agreement to which West Virginia is a member. The bill implies that the county will collect and administer the local sales tax. West Virginia Code §11-15B-33 requires the Tax Commissioner to collect any municipal sales and use taxes, to distribute them, to audit for the local taxes. Sellers are only required to register with, file returns, and remit funds to the Tax Commissioner. • Further, the base of local sales is to be identical to the sales and use tax of the state. The bill does not allow state sales tax and use tax, only the county tax. This is contrary to West Virginia Code §11-15B-34. • This bill does not consider the effective date of sales and use tax under West Virginia Code §11-15B-35. • Federal law still prohibits the use and possession of marijuana though federal law currently prevents the Department of Justice from spending money to enforce certain federal laws where the state has legalized medical cannabis where the person acts within the state law. The financing remains a problem given that banks do not want to risk the liability of accepting money from a federally illegal trade. • Though there are dates for the bureau to act, there is no internal effective date.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov