HB 337-MARIJUANA TAXES;EXCESS POSSESSION;BONDS  4:23:05 PM CHAIR OLSON announced that the next order of business would be HOUSE BILL NO. 337, "An Act relating to taxes on marijuana." 4:23:28 PM REPRESENTATIVE LEDOUX, speaking as the sponsor, paraphrased from the sectional analysis for HB 337 as follows [original punctuation provided]: Section 1 amends AS 17.38.200 by adding the bond created in Section 3 to the marijuana establishment requirements. Section 2 amends AS 43.61.020(a) to require electronic filing of marijuana tax returns. Section 3 amends AS 43.61 adding two new sections: Sec. 43.61.040 grants the tax division authority to assess a tax on marijuana plants found in excess of the possession limit for adults not licensed under AS 17.38. Sec. 43.61.050 requires a marijuana cultivation facility to furnish a cash bond, to be forfeited if taxes are not paid. It also makes marijuana product manufacturing facilities and retail marijuana stores secondarily liable for taxes on their marijuana inventory and responsible for providing proof that their marijuana inventory is legitimate, upon request by the department. REPRESENTATIVE KITO directed attention to proposed Section 43.61.040 [text previously provided]. He expressed his understanding that plants found in excess of the legal amount for possession would engage a criminal statute, which would result in a criminal action, and asked if the state would tax them as well. 4:27:16 PM KALYSSA MAILE, Staff to Representative LeDoux, sponsor of HB 337, advised that the bill does not specify one action or the other, the option is open that one could be charged criminally, and also assessed penalties through the Tax Division, Department of Revenue (DOR). REPRESENTATIVE JOSEPHSON inquired as to whether the policy goal was to deter black market competition with a lawful market, or to raise revenue. MS. MAILE acknowledged that deterrence is "pretty fundamental" to support a legal industry, and DOR has been unable to determine what the expected revenue from the industry will be. REPRESENTATIVE JOSEPHSON referred to proposed Section 43.61.050 [text previously provided] and surmised "the primary responsibility is the grower, and that person may be different than the manufacturer and seller ...." MS. MAILE said correct. The cultivator is responsible for paying the tax, and the secondary liability goes to the retailer or the product manufacturer, who must be able to prove that their source of marijuana was from a legal cultivator. In further response to Representative Josephson, she said there is nothing in HB 337 inconsistent with [Alaska Marijuana Legalization Ballot Measure 2 approved 11/4/14]. REPRESENTATIVE HUGHES asked how many ounces a plant weighs, its value, and the annual value of "excess plants." 4:30:35 PM MS. MAILE said AS 11.71.080 establishes that the aggregate weight of a live marijuana plant is one-sixth of the plant weight after the roots have been removed. She said she was unsure how often excess plants are found. 4:31:47 PM KEN ALPER, Director, Tax Division, DOR, in response to Representative Hughes, based on information from a recent arrest, estimated a weight of 5 ounces per plant; therefore, a $50 per ounce excise tax would garner a $250,000 civil penalty to the grower. CHAIR OLSON suggested that taxes could be based on tetrahydracannabinol (THC) content rather than weight. MR. ALPER responded that illegal marijuana is not normally processed in a laboratory, and the division seeks to confiscate, destroy, and penalize by an efficient procedure. In further response to Co-Chair Olson, he said the division has not considered processing illegal marijuana for the purposes of the prosecution. In fact, the goals of the tax authorities are to provide the tax division with the ability to charge the penalty on illegal marijuana. He remarked: If the committee would prefer to somehow find a means of calculating THC we can do that. Let me be clear though, that the legal marijuana industry is silent on the robustness of the product. You know, it's a flat $50 an ounce regardless of the quality of THC content of what it is that's actually being grown. In some ways, our marijuana tax favors the high quality manufacturer because it's a, the more valuable your product, the $50 an ounce becomes less burdensome as a percentage of the value. CHAIR OLSON observed that other states measure, label, and check for herbicides. MR. ALPER said Alaska has testing requirements as part of the legal marijuana system; furthermore, the aforementioned states have sales taxes based on the percentage of the value as their primary revenue source, whereas Alaska chose a "by weight" tax mechanism. REPRESENTATIVE JOSEPHSON inquired whether a fine is consistent with proposed SB 91; he characterized SB 91 as "friendlier" and HB 337 as punitive for those who possess drugs illegally, including a jail term. 4:35:27 PM MR. ALPER advised that marijuana possession remains criminal in Alaska beyond the six plants for personal use. In a certain case a person was found possessing 1,000 plants with no evidence of illegal dealing. If the criminal justice system does not seek a felony indictment, there is no disincentive, but the bill is a means of deterrent to encourage Alaska marijuana growers into a legal system. MS. MAILE added that other proposed legislation related to marijuana deals primarily with the criminal code; HB 337 imposes a civil penalty. REPRESENTATIVE KITO directed attention to the bill on page 2, lines 24-29, which read: (c) A marijuana product manufacturing facility or retail marijuana store is secondarily liable for the taxes on marijuana that is sold by or to the marijuana product manufacturing facility or retail marijuana store. If requested by the department, the marijuana product manufacturing facility or retail marijuana store shall provide the department with proof that the taxes have been paid on the marijuana inventory in the possession of the marijuana product manufacturing facility or retail marijuana store. REPRESENTATIVE KITO recalled that the commerce of cigarettes is facilitated by tax stamps, and alcohol is also marked when taxes are paid. He surmised there is a regulatory process to inform consumers that taxes have been paid on a marijuana product. MS. MAILE said DCCED is in the process of setting up a seed-to- sale system. 4:38:07 PM CYNTHIA FRANKLIN, Director, Alcohol & Marijuana Control Office, DCCED, informed the committee that a seed-to-sale tracking system will involve radio-frequency identification (RFID) tags attached to marijuana plants over eight inches; the tracking number will stay with the plant as it is harvested, dried, manufactured into a product, and sold by the retail store. The tracking software is capable of generating the reports required of licensees by DOR, thus by this system, cultivation facilities will be tracking and filing monthly reports with DOR. Ms. Franklin concluded that the seed-to-sale software will provide back-up documentation for tax reporting to DOR, to ensure that taxes have been paid. Labels and marijuana products will indicate to consumers the tracking system. In response to Chair Olson, she said the system is the same as used in Colorado and Oregon, and information can be read with a handheld device within ten feet of the tag on each plant. REPRESENTATIVE KITO questioned the validity of tracking a RFID tag that becomes part of a process which combines plants, or separates plants into various components such as an extract, a leaf, or a bud. MS. FRANKLIN stated that the tags are robust and as the plant evolves, the tag may change, but the tracking number stays. She assured the committee the system works. MR. ALPER returned attention to the concept of secondary liability, which is a power currently held by the tax division for alcohol and tobacco taxes. For example, if a retailer is found in possession of alcohol or cigarettes that did not come from a licensed distributor, the tax division can charge the taxes to the retailer. The division seeks to extend this power to the marijuana industry to create a deterrent against a black market. The difference is that the marijuana will be grown and sold in Alaska, and the software tracking system will ensure that the marijuana came from a licensed grower. REPRESENTATIVE JOSEPHSON asked whether the amount of the cash bond is comparable to what is assessed to alcohol vendors. MS. MAILE said the alcohol industry must post a surety bond to ensure that alcohol taxes are paid. She characterized the $5,000 cash bond as "significantly lower than that you would see with alcohol." In further response to Representative Josephson, she said the marijuana cash bond may be more burdensome than that of a new liquor business; however, a surety bond requires a premium to be paid, and over the long term a cash bond could cost less. REPRESENTATIVE LEDOUX advised that the bill sponsors set the cash bond for marijuana lower than a $25,000 surety bond because the marijuana industry won't be able to get a surety bond. This amount will cover the tax liability, but is not overly onerous. MR. ALPER stated that the bill offers the division similar authorities as are established for alcohol, as directed by the initiative. 4:48:14 PM CHAIR OLSON opened public testimony on HB 337. 4:48:21 PM BRIAN OLSON, Owner/Operator, Alaska Berries Winery, stated that the $5,000 cash bond for a cultivation license is onerous to an applicant. Previously the "MTF board" discussed the use of surety bonds, which he used to obtain his federal license for a winery business. However, a $5,000 cash bond for a limited cultivation license, in addition to a nonrefundable $1,000 application fee and $1,000 license fee, would hamper a beginning industry. He opined that those who are establishing a legitimate business have a lot invested already, and although he supports the proposed regulations, he said the cash bond should be a surety bond which can be collected by the state from those who renege on their taxes. REPRESENTATIVE LEDOUX asked how marijuana growers or cultivators would be able to obtain a surety bond and if not, for his opinion on the amount of a more reasonable cash bond. MR. OLSON said he got two surety bonds to satisfy state and federal requirements for a winery and a liquor license. On the state level, any insurance company will issue a bond based on the individual's ability to pay. Even without a surety bond, any legitimate business must submit its taxes, and a $5,000 surety bond would cost about $150 annually. REPRESENTATIVE LEDOUX related that if the sponsors of the bill thought marijuana growers could obtain a surety bond, they would have made that choice. She restated her previous question. MR. OLSON said there is recourse for the state to recoup lost revenue due to nonpayment of taxes, and it is not necessary to have a bond for taxes on any business. 4:55:45 PM DOLOYNDA PHELPS stated her concern was related to proposed Section 43.61.050 [text provided previously]. She said the $5,000 cash bond is problematic, and asked for understanding that potential business owners are aware of financial commitments and have a lot at stake. The cash bond and compounded fees are difficult for business owners who want to pay their taxes so the industry ends up with a legal market. Ms. Phelps said proposed Section 43.61.050 does not favor the legal taxpayer, or encourage a transition into a "good, healthy, regulated industry here in the state." 4:58:10 PM JAMES BARRETT said he was applying for cultivation, processing, and retail marijuana licenses. He brought up several points related to the bill: tax based on weight includes the flower, and "doesn't really line up"; if a person pays a tax after they are found guilty, the cannabis would have to be preserved because it can change in weight over time; whether cash would be accepted for the bond; the importance of the effective date on those who are presently starting a business; the tax should really be called a fine, and he questioned the legality of the tax. 5:00:10 PM CHAIR OLSON, after ascertaining that no one further wished to testify, held public testimony open. MR. ALPER advised that DOR would accept a surety bond if that option is in the legislation; however, many taxpayers will not be able to open a bank account, and thus will not be able to secure a bonding agent either. CHAIR OLSON recalled at one time the state accepted certificates of deposit (CDs) in lieu of cash. [HB 337 was held over.]