FISCAL NOTE

Date Requested: January 14, 2019
Time Requested: 03:34 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1643 Introduced HB2376
CBD Subject: Crime


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Creates New Revenue, Creates New Expense



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 manufacture, sale, and possession of marijuana and establish a regulatory program for growing, selling, and testing of marijuana sold in West Virginia. According to our interpretation, the proposed bill would legalize the personal use and possession of cannabis by adults age 21. The Tax Department would collect a $250 application fee for all the growing/processing facilities and $250 renewable fee every two years from the same facilities. In addition, retail sales would presumably be subject to State and local government sales tax. The State would accept applications for marijuana cultivations beginning on June 1, 2020, for marijuana product manufacturing and testing facilities beginning on August 1, 2020, and for marijuana retail stores beginning on September 1, 2020.   It leaves the regulation divided as follows (rule proposal deadlines are in parentheses) • Tax Department (Tax) registration, regulation, and taxation of marijuana cultivation facilities (6/1/2020); • Alcohol Beverage Control Commission (ABCC), Retail sales of marijuana (9/1/2020) • Department of Agriculture (Ag), marijuana cultivation facility (6/1/2020); and • Department of Health & Human Resources (DHHR) marijuana testing facility (8/1/2020); manufacturing facilities (8/1/2020) and safety insert (8/1/2020) Each of the above listed agencies is given rule making authority with a substantial list the rules are to cover. Each agency is to set out a schedule of fees and civil fines for violations; and to provide a hearing process for the registration denial, revocation of fees. The bill sets out the requirements for labeling including a nutritional label. The regulatory agency is to issue registrations between 45 and 90 days after receipt unless the application is not in compliance or the municipality has not adopted the relevant ordinances. The bill lists considerations for each applicant. Municipalities may enact ordinances to prohibit or limit the type of marijuana establishments. The bill also specifies a $500 application fee that goes to the municipality in which an operator would like to establish a marijuana establishment. The estimated revenue from the legalization of recreational cannabis in the West Virginia is as follows: • FY2020: $1,000 in application fees. • FY2021: $900,000 in Sales Taxes, and $16,000 in application fees. • FY2022: $3.6 million in Sales Taxes, and $13,000 in application fees • FY2023: $5.0 million in Sales Taxes, and $27,000 in application fees. • FY2024: $5.4 million in Sales Taxes, and $26,000 in application fees. Sales are expected to level off within a few years and application fees for new licenses would level off or decline when market reaches full maturity. Additional administrative costs to the Tax Department would be $25,000 in FY2020 and $2,000 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 25,000 2,000
Personal Services 0 10,000 2,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 15,000 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


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


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 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. 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 the West Virginia is as follows: • FY2020: $1,000 in application fees. • FY2021: $900,000 in Sales Taxes, and $16,000 in application fees. • FY2022: $3.6 million in Sales Taxes, and $13,000 in application fees • FY2023: $5.0 million in Sales Taxes, and $27,000 in application fees. • FY2024: $5.4 million in Sales Taxes, and $26,000 in application fees. The tax revenue estimated presented in this table is based upon the time requirements that have been mandated on the State to accept and approve applications for the various types of cannabis establishments. It is estimated that the sell of recreational cannabis will not commence until March 2021. This estimate is based upon the supply chain requirements to cultivate, package, and place cannabis products in recreational dispensaries for consumers to purchase. The availability of cannabis may be further delayed if the State’s regulatory agencies fail to achieve their mandate in establishing further regulations on marijuana or the industry is slow in developing the infrastructure needed to cultivate, package, and grow cannabis. It should also be noted that the above tax revenue estimate does not include the fees and additional taxes yet to be established by the bills mandate on the State’s regulation agencies. 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 Additional administrative costs to the Tax Department would be $25,000 in FY2020 and $2,000 in subsequent fiscal years.



Memorandum


The stated purpose of this bill is to legalize the manufacture, sale, and possession of marijuana and establish a regulatory program for growing, selling, and testing of marijuana sold in West Virginia. Federal Law that makes the use, possession, and cultivation/manufacture of cannabis illegal along with financial related transactions poses a challenge to both the recreation marijuana industry and to the State. The individuals and companies who are engaged in the State sanctioned cannabis industry will always have the risk of Federal prosecution threating their business interest or personal freedom. The State faces the challenge of collecting the tax revenue and associated fees derived from the cannabis trade in a manner that is complaint with Federal banking regulations.



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