FISCAL NOTE

Date Requested: February 12, 2019
Time Requested: 01:10 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
3242 Introduced HB3129
CBD Subject: Economic Development


FUND(S):

Cannabis Tax Transfer Fund, Law Enforcement and Community Fund, West Virginia Infrastructure Fund, Entrepreneur and Small Business Fund and Respect Your Elders Fund

Sources of Revenue:

Special Fund

Legislation creates:

Creates New Revenue, Creates New Expense, Increases Existing Expenses, Creates New Program, Creates New Fund: Cannabis Tax Transfer 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 cannabis, provide taxation of cannabis, and allow cannabis market activity as regulated by the Department of Commerce.
    
    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 17½ 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.
    
    Of excise tax collections deposits into the Cannabis Transfer Tax Fund, 25 percent will be deposited into the Teacher Compensation & Public Employees Insurance Agency Stability Fund, 35 percent will be deposited into the Best Virginia Infrastructure Fund, 15 percent will be allocated to the Law Enforcement and Community Services, 15 percent will be allocated to the Entrepreneur and Small Business Fund, and 10 percent to the Respect your Elders Fund. License and application fees will be deposited into the Cannabis Transfer Tax Fund. The proposed local sales tax of 6% would be collected at the point of sale by the licensed retail cannabis store. The municipality shall receive all proceeds of the local sales tax collection.
    
    It should be noted that the bill requires the State to start accepting and processing application by October 1, 2019. Based upon this date, the State will not see any revenue until FY2020. It is also assumed that it will a year before the recreational cannabis industry can establish the essential business infrastructure to sell recreational cannabis to consumers. Based upon this assumption, it is estimated that recreational cannabis sales will start in January 1, 2021. It is projected that the State would start receiving revenue from excise in February 2021 and the local municipalities would receive revenue from sales taxes in April 2021.
    
    The estimated revenue from the legalization of recreational cannabis in the West Virginia is as follows:
    
    • FY2020: $100,000 in license/application fees.
    • FY2021: $2.7 million in Excise Taxes, $1.4 million in local sales taxes, and $100,000 in license/application fees.
    • FY2022: $6.0 million in Excise Taxes, $3.6 million in local sales tax, and $100,000 in license/application fees
    • FY2023: $6.9 million in Excise Taxes, $4.5 million in local sales taxes, and $100,000 in license/application fees.
    • FY2024: $7.6 million in Excise Taxes, $5.1 million in Sales Taxes, and $100,000 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. The cannabis market would be expected to peak sometime within the first five years of effect.
    
    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 $370,000 in FY2020 and $160,000 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 0 370,000 160,000
Personal Services 0 160,000 160,000
Current Expenses 0 40,000 0
Repairs and Alterations 0 0 0
Assets 0 125,000 0
Other 0 50,000 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 17½ 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.
    
    Of excise tax collections deposits into the Cannabis Transfer Tax Fund, 25 percent will be deposited into the Teacher Compensation & Public Employees Insurance Agency Stability Fund, 35 percent will be deposited into the Best Virginia Infrastructure Fund, 15 percent will be allocated to the Law Enforcement and Community Services, 15 percent will be allocated to the Entrepreneur and Small Business Fund, and 10 percent to the Respect your Elders Fund. License and application fees will be deposited into the Cannabis Transfer Tax Fund. The proposed local sales tax of 6% would be collected at the point of sale by the licensed retail cannabis store. The municipality shall receive all proceeds of the local sales tax collection.
    
    It should be noted that the bill requires the State to start accepting and processing application by October 1, 2019. Based upon this date, the State will not see any revenue until FY2020. It is also assumed that it will a year before the recreational cannabis industry can establish the essential business infrastructure to sell recreational cannabis to consumers. Based upon this assumption, it is estimated that recreational cannabis sales will start in January 1, 2021. It is projected that the State would start receiving revenue from excise in February 2021 and the local municipalities would receive revenue from sales taxes in April 2021.
    
    The estimated revenue from the legalization of recreational cannabis in the West Virginia is as follows:
    
    • FY2020: $100,000 in license/application fees.
    • FY2021: $2.7 million in Excise Taxes, $1.4 million in local sales taxes, and $100,000 in license/application fees.
    • FY2022: $6.0 million in Excise Taxes, $3.6 million in local sales tax, and $100,000 in license/application fees
    • FY2023: $6.9 million in Excise Taxes, $4.5 million in local sales taxes, and $100,000 in license/application fees.
    • FY2024: $7.6 million in Excise Taxes, $5.1 million in Sales Taxes, and $100,000 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. The cannabis market would be expected to peak sometime within the first five years of effect.
    
    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 $370,000 in FY2020 and $160,000 in subsequent fiscal years.
    



Memorandum


    The stated purpose of this bill is to legalize cannabis, provide taxation of cannabis, and allow cannabis market activity as regulated by the Department of Commerce.
    
    The bill repeals §16A-5-10, “Prohibitions” but does not state this in the title. This is a defect. The bill adds those same provisions from §16A-5-10 in the amended §16A-15-4.
    
    The Department of Commerce does not have the authority to administer, collect or enforce tax law in the state. Only the Tax Commissioner has that authority under chapter 11. The Department of Commerce does not have authority to assign the duty of tax collection. Additionally, the bill’s local sales tax is contrary to the State and Use Tax Agreement which requires all taxes to have the same rate and requires the Tax Commissioner to collect the local tax.
    
    The bill does not address the inability to bank or move money with current federal law.
    
    



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