Fiona Ma for State Assembly
News

California regulators will be swamped by $1 billion in pot taxes

California’s chief marijuana tax collector, Board of Equalization member Fiona Ma, and her staff have an easy job at their Oakland collection offices on a recent Monday morning. Just $30,000 in cash comes in the door from a medical cannabis delivery service paying its 10 percent retail sales taxes.

On other days, the intake can be hundreds of thousands of dollars. “Sometimes if one of the big dispensaries loses their banking capability, we have $400,000 to a half a million dollars coming in cash. It’s just not efficient, nor is it safe,” says Ma, an elected official, whose job it is to oversee Cali-fornia’s sales tax collections.

In any given month, hundreds of thousands of dollars in pungent $20s, $50s, and $100s show up throughout California at Board of Equalization offices — the state’s tax collectors. Counting cash eats up staff hours and creates a security risk. Staff check each note to be sure it’s not counterfeit.

Now, multiply the problem 50-fold.

Already the medical marijuana industry pays around $40 million per year in sales taxes — cash. If marijuana legalization measure Proposition 64 passes Tuesday, that could balloon to $1 billion, the Legislative Analyst Office estimates.

And federal prohibition would still be in place, and legal pot industries in dozens of states would continue to lack access to banking services. While more and more payments zip around the globe electronically, 90 percent of California’s cash tax payments come from the cannabis industry, as if stuck in 11th century China. Add in four additional state agencies and untold local ones that will also be collecting fees and other revenue, and Ma’s job will there will be even tougher, if not overwhelming.

That poses huge challenges as well as security risks in California, the world’s seventh largest economy and soon, perhaps, the capital of the cannabis industry.

Ma knows what she’s talking about. For four years, she served as a Supervisor in San Francisco, one of the few cities to regulate and tax medical pot dispensaries. She won a seat on the Board of Equalization and is its first certified public accountant. A Asian-American woman trained under Democratic political maven John Burton, she sees normalizing relations with the cannabis industry as a matter of standing up for what’s right. Her mission is to make sure that includes pot taxes.

So Ma has championed normalizing banking relations with legal pot, with the goal of boosting tax compliance and state revenue. In 2016, she advocated for the creation of the first state marijuana bank. The idea never got off the ground, but after the election, she’ll be back at the issue with renewed urgency.

Legalization — it turns out — isn’t as simple as a vote. It will be a years-long civic project.

Today, roughly half the state’s population has tried pot and about 13 percent of California adults are regular users. But California has made few cannabis rules since it criminalized marijuana in 1913. In 1996, Californians legalized medical marijuana, but the Compassionate Use Act said nothing in the way of regulations. Local law, court cases and official guidelines filled in the gaps. Only the Medical Ma-rijuana Program Act in 2003 prescribes an ID card system.

In the coming weeks and months, Proposition 64 would direct $35 million toward ramping up state regulations of the pot trade. That would only be a start. To regulate the crop from seed to sale, state agencies would need to spend hundreds of millions of dollars per year, paid for by excise taxes at retail shops and farms. State agencies have until Jan. 1, 2018 to figure out protocols.

In October 2015, legislators took a big step and regulated medical cannabis from seed to sale. The state is just now in the process of issuing draft rules for medical cannabis. Adult-use legalization is designed to mostly lay atop the new medical rules.

Ma is looking into the feasibility of California Department of Motor Vehicle branches becoming depositories for fees. She’s in talks with major banks about accepting cannabis sales tax deposits at their branches, on behalf of the Board of Equalization. The BOE already uses Bank of America, she notes.

Federal regulators have given banks a “yellow light” to serve legal pot businesses, writing guidelines for banks to take the money. But the compliance costs are massive. A tiny fraction of the banking system is just beginning to test the waters.

“It’s kind of exciting because they are starting to do it. The more banks willing to do it, the better,” Ma says.

Until then, Ma is asking legislators to delay by two or three years any new fees or taxes — pot or otherwise. The Board of Equalization is in the middle of computer system modernization, and it can’t be re-coded for new levies.

“Something’s gotta give,” she says, “or the sales tax system is going to slow down and go into manual mode.”

As tough as Ma’s challenge, she at least has experience. Proposition 64 keeps local leaders in the driver’s seat on regulations, who don’t.

City councils are already face historic levels of public comment on the issue as they decide on whether to ban or to regulate and tax local medical pot commerce. They generally lack the expertise to do so, Ma says.

“It’s going to be a really rocky road that we’re going to have to navigate very carefully,” says Nate Bradley, director of the California Cannabis Industry Association. “A lot of these local governments are scared. Some of them want to do it, and some of them are freaked out.”

Tim Cromartie, legislative representative for the League of California Cities, a powerful lobby, agrees. “The reaction of cities runs the gamut. This includes everything from allowing and robustly regulating such businesses, to banning them outright. Some jurisdictions have recently moved to ban outdoor commercial cultivation, due to public safety and nuisance concerns. Others are preparing ordinances to regulate and to tax commercial recreational marijuana businesses of various kinds.”

The simplest option will be to simply adopt bans. Even before Prop 64, cities and counties have been preemptively banning adult-use commercial pot activity. More than 80 percent of California jurisdictions already have bans on medical activity.

But at the same time, other cities and counties will be rushing to permit and tax recreational activity. Cities have to permit pot businesses to receive a share of the tax reve-nue. You might place a ban, but your neighbor who doesn’t, profits.

“Some of the smaller cities that want to ban or discourage any sort of development or commerce — they’re going to have a hard time,” Ma sas.

San Francisco already has about 30 well-controlled retail medical pot shops. The city is one of the few places with a State Legalization Task Force, which will issue recommendations to the Board Dec. 12. Those recommendations may become a state model, Ma says. Humboldt County, Santa Rosa and Oakland are among the few others licensing medical cannabis, and thus have been through trial-and-error licensing recreational businesses.

“For the rest of the other counties, I think this is going to be a frenzy. Everybody's going to be calling them, wanting information about how do they do it,” she says.

And while local cities and counties struggle to ban or regulate, multiple state agencies already at work on medical rules will have to add adult-use rules. The three departments tasked with regulating legal cannabis have until Jan. 1, 2018 to begin to issue licenses.

That means rapidly taking public comment, issuing draft regulations, more public comment, and chaptering laws to issue permits in a little over 13 months. There will be much copying and pasting of medical regulations, Bradley said.

“They are prepared for the medical world. There’s going to be very minimal changes that need to be made for the recreational one,” he said. “I’ve been impressed with how they’ve handled it so far.”

Ma says she plans to be up all night watching the election night returns. Wednesday morning, though, there will be no sleeping in.

“First off, everybody is going to be very busy — local and state government is going to be busy as well as the private sector,” she says.

The first retail cannabis sales tax payments will be due April 1, 2018.