FISCAL NOTE

Date Requested: February 12, 2018
Time Requested: 01:48 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2516 Introduced HB4491
CBD Subject: Health


FUND(S):

General Revenue Fund, Cannabis Transfer Tax Fund

Sources of Revenue:

General Fund Cannabis Transfer Tax Fund

Legislation creates:

Creates New Revenue, Increases Revenue From Existing Sources, Increases Existing Expenses, 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 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 or possession. According to our interpretation, the proposed bill would legalize the personal use and possession of cannabis by adults aged 21 and older and would allow county governments the option of allowing production and sale of cannabis within county borders. The legislation would levy an excise tax of 15 percent on the sale 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 operation of cannabis establishments. This fiscal note does not attempt to quantify the amount of fees that may be collected or residual fiscal impacts resulting from employment and business activity related to the proposed 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 Division of 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. Based on revenue trends in existing markets, the proposed bill could yield annual excise tax revenues of roughly $14.3 million upon full implementation. In addition, local sales tax collections could yield up to $5.7 million upon full implementation and assuming all local governments legalize cannabis sales within county borders. In total, the proposed bill could yield an estimated $20.0 million per year upon full implementation to the benefit of the Cannabis Transfer Tax Fund and local governments. It is unlikely, however, that full implementation of the proposed taxes would occur in the short term. Given that the proposed bill provides that “the bureau” will begin accepting applications to operate a cannabis establishment by October 1, 2018, it is likely that any revenues realized in FY2019 would be minimal. It is likely provisions of this bill would phase-in slowly, as the approval process for businesses 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 will likely 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 costs incurred by the State Tax Department are expected to be $172,000 in FY2019 and $100,000 per year for each fiscal year thereafter. As the bill is silent as to what government entity would be responsible for administering the tax, these costs reflect the implementation and desk audit of the excise tax and the county tax along with distribution formulas.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2018
Increase/Decrease
(use"-")
2019
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 172,000 100,000
Personal Services 0 100,000 100,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 2,000 0
Other 0 70,000 0
2. Estimated Total Revenues 0 0 20,000,000


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


According to our interpretation, the proposed bill would legalize the personal use and possession of cannabis by adults aged 21 and older and would allow county governments the option of allowing production and sale of cannabis within county borders. The legislation would levy an excise tax of 15 percent on the sale 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 operation of cannabis establishments. This fiscal note does not attempt to quantify the amount of fees that may be collected or residual fiscal impacts resulting from employment and business activity related to the proposed 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 Division of 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. Based on revenue trends in existing markets, the proposed bill could yield annual excise tax revenues of roughly $14.3 million upon full implementation. In addition, local sales tax collections could yield up to $5.7 million upon full implementation and assuming all local governments legalize cannabis sales within county borders. In total, the proposed bill could yield an estimated $20.0 million per year upon full implementation to the benefit of the Cannabis Transfer Tax Fund and local governments. It is unlikely, however, that full implementation of the proposed taxes would occur in the short term. Given that the proposed bill provides that “the bureau” will begin accepting applications to operate a cannabis establishment by October 1, 2018, it is likely that any revenues realized in FY2019 would be minimal. It is likely provisions of this bill would phase-in slowly, as the approval process for businesses 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 will likely 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 costs incurred by the State Tax Department are expected to be $172,000 in FY2019 and $100,000 per year for each fiscal year thereafter. As the bill is silent as to what government entity would be responsible for administering the tax, these costs reflect the implementation and desk audit of the excise tax and the county tax along with distribution formulas.



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 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 or possession. As written, the proposed bill contains title issues in that the title gives much authority to the Bureau for Public Health but the bill itself only refers to “the bureau.” Further, the proposed bill does not clearly state which entity or entities are to administer various parts of the bill, making administration difficult. The definition of “department” is the Department of Revenue or its successor agency. This definition creates issues with the Department of Revenue administering a tax, as it is the Tax Commissioner who is given authority to administer, collect, and enforce state taxation under Chapter 11 of the West Virginia Code. The proposed bill also charges “the bureau” with adopting legislative rules by July 1, 2018. This term is undefined. In addition, this time period of just a couple months may be too short to promulgate wide-ranging rules. The proposed bill implied, but does not explicitly state, that the county will be administering, collecting, and enforcing the local sales tax. The counties are not prepared to administer a sales tax. Further, this provision is in violation of the Streamlined Sales and Use Tax Agreement (SSUTA), specifically W.Va. Code §§11-15B-33 and 11-15B-34. Certain provisions of the proposed bill’s language are confusing. For example, the proviso that “this article does not permit consumption that is conducted openly and publicly or in a manner that endangers others, and for state and local governments to prohibit use on government owned property…” seems to imply that state and local governments cannot prohibit consumption on government-owned property. The bill also levies a 6 percent local sales tax, but the wording of the ballot specifies a “special sales tax of 5 percent” to benefit county and municipal governments. Other concerns include that section 5 of the proposed bill does not follow the statutory subdivisions. Also, current Code retains criminal sanctions for “marijuana” use, sale, and possession. Presumably, criminal code could be used where someone does not act within the bill’s parameters.



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