WSR 16-15-036

PROPOSED RULES

[Filed July 13, 2016, 1:06 p.m.]

Preproposal statement of inquiry was filed as WSR 16-12-001 [16-09-120].

Title of Rule and Other Identifying Information: WAC 314-42-110 Brief adjudicative proceedings, and 314-55-089 What are the tax and reporting requirements for marijuana licensees?

Hearing Location(s): Washington State Liquor and Cannabis Board (WSLCB), Board Room, 3000 Pacific Avenue S.E., Olympia, WA 98504, on August 24, 2016, at 10:00 a.m.

Date of Intended Adoption: On or after September 7, 2016.

Submit Written Comments to: Joanna Eide, Policy and Rules Coordinator, P.O. Box 43080, Olympia, WA 98504, e-mail rules@lcb.wa.gov, fax (360) 664-9689, by August 24, 2016.

Assistance for Persons with Disabilities: Contact Joanna Eide by August 17, 2016, (360) 664-1622.

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: Amendments are proposed to WAC 314-55-089 to add provisions to require marijuana excise tax payments by electronic payment, check, cashier's check, or money order. The changes also provide provisions on when payments are deemed received. A waiver process is also established to allow those to apply for a waiver from the payment requirements based on good cause. If a licensee fails to apply for a waiver or is denied a waiver, they may be assessed a ten percent penalty should the licensee continue to tender marijuana excise tax payments in cash. If a licensee is denied a waiver, they have the right to appeal the decision under the Administrative Procedure Act, chapter 34.05 RCW. WAC 314-55-110 is amended to allow appeals of waiver denials to proceed as brief adjudicative proceedings as allowed under RCW 34.05.482 through 34.05.494.

Reasons Supporting Proposal: Rule changes are necessary to implement the budget proviso related electronic payment of the marijuana excise tax included by the legislature in the 2016 supplemental budget. Rules are needed to provide parameters for the electronic payments and other allowable methods of payment and to provide a process for obtaining a waiver for electronic payments. WSLCB also proposes amending rules to allow appeals of a waiver denial to proceed as brief adjudicative proceedings under the Administrative Procedure Act (chapter 34.05 RCW). These rule amendments and payment requirements will promote efficiency and public safety by decreasing the amount of cash payments transported to WSLCB for payment of marijuana excise taxes.

Statutory Authority for Adoption: RCW 69.50.342, 69.50.345, 69.50.535, and SL 2016 c 36 (2ESHB 2376).

Statute Being Implemented: RCW 69.50.342, 69.50.345, 69.50.535, and SL 2016 c 36 (2ESHB 2376).

Name of Proponent: WSLCB, governmental.

Name of Agency Personnel Responsible for Drafting: Joanna Eide, Policy and Rules Coordinator, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1622; Implementation and Enforcement: WSLCB Budget and Finance, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1622.

A small business economic impact statement (SBEIS) has been prepared under chapter 19.85 RCW for the proposed amendments to WAC 314-55-089. Because the amendments to WAC 314-42-110 Brief adjudicative proceedings, do not impose new requirements on marijuana businesses and instead address how an administrative proceeding will occur should a person appeal the denial or a waiver, this SBEIS does not address the proposed changes to that rule.

1. Description of Reporting, Recordkeeping and Other Compliance Requirements of the Proposed Rule: Licensed marijuana retailers (retailer) must pay monthly excise taxes to WSLCB pursuant to RCW 69.50.535. This rule making involves proposed new language in WAC 314-55-089 to require payments of the marijuana excise tax by electronic payment or electronic funds transfer (EFT), check, cashier's check, or money order unless a retailer applies for a waiver to continue paying excise taxes in cash. A waiver will be granted for good cause shown. "Good cause" means the inability of a licensee to comply with the payment requirements of this section because:

(a) The licensee demonstrates it does not have and cannot obtain a bank or credit union account or another means by which to comply with the electronic payment requirement and cannot obtain a cashier's check or money order; or

(b) Some other circumstance or condition exists that, in the WSLCB's judgment, prevents the licensee from complying with the payment mechanisms provided in the rule.

If a retailer does not apply for a waiver or is denied a waiver and continues to pay the monthly marijuana excise tax in cash, a ten percent penalty may be imposed.

The excise tax electronic payment requirements in the proposed rule, including the ten percent penalty, are similar to requirements in the Washington state department of revenue's (DOR) laws, rules, and procedures. DOR also collects tax payments from marijuana licensees under similar conditions.

2. Kinds of Professional Services That a Small Business is Likely to Need in Order to Comply with Such Requirements: The electronic payment and check requirements do carry with them a requirement that retailers hold a bank or credit union account. The cashier's check or money order payment options do not necessarily require the retailer to hold an account at a financial institution.

3. Costs of Compliance for Businesses, Including Costs of Equipment, Supplies, Labor and Increased Administrative Costs: The costs of compliance will depend on decisions made by retailers. If retailers choose to obtain an account at a financial institution due to the new requirements, costs may or may not be higher than those retailers who do not choose to obtain a bank account and pay excise taxes by other means. Payment of the excise tax may be made by electronic payment, check, cashier's check, or money order. While an account with a financial institution is likely required to pay excise taxes by electronic payment or check, an account is not necessarily required to make payment by a cashier's check or money order. Also, because each bank or credit union has differing fees and each business is different as far as size, volume of transactions, and business practices, costs will vary from retailer to retailer. These costs are mitigated by the option for a retailer to apply for a waiver to continue paying the marijuana excise tax in cash for good cause shown.

No additional equipment or supplies are required by the proposed new rule language. There may be increased administrative costs should a retailer choose to open an account at a financial institution if they had not done so previously, such as transportation costs for deposits, etc. However, this would be a decision up to the retailer as other payment options are available that do not necessarily require a bank account.

4. Will Compliance with the Rules Cause Businesses to Lose Sales or Revenue? The new requirements will not impact sales or revenue generated from those sales. Where the new requirements may impact revenue is by increased costs for holding a bank account should they choose to go that route, which would reduce retailer profit margins if changes are not made to absorb the costs. Again, payment of the excise tax may be done by electronic payment, check, cashier's check, or money order, and a bank account is not necessarily required to make payment by a cashier's check or money order.

Virtually all marijuana businesses are small businesses. However, these businesses vary in size, costs per employee, costs per hour of labor, and costs per one hundred dollars in sales for a multitude of reasons, including license type. Employee compensation and costs per hour of labor data is not collected by or available to WSLCB, though WSCLB does collect data on collection on the value of marijuana at retail and wholesale and sales information. The average price per gram as of April 30, 2016, was $8.73/gram at retail and $3.14/gram at wholesale. Sales and excise tax payments data can assist with estimating profits, however, each business is different and costs are not known so there is not enough information for WSLCB to determine profit margins. The total amount of sales by retailers from July 1, 2014, through June 30, 2015, (fiscal year 2015) including excise taxes was $44.9 million. The total amount of sales by retailers from July 1, 2015, to June 30, 2016, (fiscal year 2016) including excise taxes was $972.7 million, with excise taxes making up $185.7 million of that amount. As of July 5, 2016, two hundred sixty-seven retail stores are reporting sales. While WSLCB appreciates that each retailer is unique and varies in size, the costs of maintaining an account and making electronic payments compared to the sales figures, coupled with the alternative payment options, waiver opportunity, and risks to retailer and public safety, suggests that the costs are reasonable.

WSLCB has received information from retailers that aids in giving examples of costs associated with electronic payment, which is most associated with option c above, "Cost per one hundred dollars of sales." Some have responded that it would cost approximately $200 per month to maintain an account, and another retailer stated that it would cost over $500 in fees to make an approximately $175,000 excise tax payment in electronic funds transfer.

Each financial institution varies as far as application costs for obtaining a bank account and there is little data openly available for these figures. This is especially true since marijuana businesses are unique. While banking resources are not as available to marijuana businesses on the same level as other small businesses, there are resources available and WSCLB continues to work for more options. Many financial institutions charge monthly fees, and may also charge fees for large transfers of funds. Examples of financial institution fees for banking services are included below (fees may be higher for marijuana licensees).

Numerica Credit Union https://www.numericacu.com/

Salal Credit Union https://www.salalcu.org/

Timberland Bank https://www.timberlandbank.com/

Twin City Bank http://www.twincitybank.com/*

*High Volume Checking for Business: If your business requires a particularly high volume of account activity or has other unusual requirements such as handling large amounts of coin or currency, Twin City Bank offers individual account analysis. Account activity is measured, valued and compared to the value of the collected funds on deposit. A service fee is generated only if collected funds value does not offset account activity costs. **

O Bee Credit Union https://www.obee.com/Home**

**These fees are specific to Marijuana Licensees.

WSLCB is also looking into other electronic payment options, including what is already available for licensees and companies such as PayQwick LLC http://www.payqwick.com/, and will continue to assess fees associated with maintining [maintaining] accounts and electronic payments as the rule-making process continues.

6. Steps Taken by the Agency to Reduce the Costs of the Rule on Small Businesses, or Reasonable Justification for Not Doing So: WSLCB sought to reduce costs on licensees through proactive communication with retailers and relationship building with financial institutions. WSLCB continues to work with financial institutions to increase the availability of banking options for marijuana licensees in general. Understanding the challenges associated with obtaining banking services for some retailers, WSLCB established a waiver process similar to DOR's that can be applied for to continue making payments in cash for good cause shown.

The additional costs associated with complying with the new requirements are also minimized on the group of retailers as a whole as many of them are already making excise tax payments through means other than cash. Additionally, WSLCB has been conducting outreach efforts to encourage noncash payments. The number of cash payments have decreased 22.4% from January 2016 to June 2016. In January, WSLCB had seventy-one retailers pay excise taxes in cash compared to fifty-eight in June. WSLCB has also seen an increase in electronic payments, receiving one hundred forty electronic excise tax payments in June 2016 as compared to eighty-two in January 2016.

Requiring the payment of excise taxes through means other than cash payment is directly aimed at reducing safety risks to marijuana retailers. Discouraging retailers from keeping large amounts of cash on-sire [on-site], rather than in a bank account, is a security risk and carries public safety risks as well. Increased costs on businesses to reduce these risks are necessary and comparatively reasonable to the risks involved.

7. A Description of How the Agency Will Involve Small Businesses in the Development of the Rule: Most marijuana businesses are small businesses. They are invited to provide feedback to the rules during the rule-making process. Since WSLCB already imposed the requirement through emergency rules that became effective July 1, 2016, marijuana businesses are already aware of the requirements and have commented on the proposed changes.

8. A List of Industries That Will Be Required to Comply with the Rule: All licensed marijuana retailers will be required to comply with these rules.

9. An Estimate of the Number of Jobs That Will Be Created or Lost as a Result of Compliance with the Proposed Rule: It is unlikely that the changes in this proposal will result in the loss of jobs, but this is dependent on many factors, including internal decisions made by businesses which cannot be foreseen by WSLCB.

A copy of the statement may be obtained by contacting Joanna Eide, Policy and Rules Coordinator, 3000 Pacific Avenue S.E., Olympia, WA 98504, (360) 664-1622, fax (360) 664-9689, e-mail Joanna.Eide@lcb.wa.gov.

A cost-benefit analysis is not required under RCW 34.05.328. A cost-benefit analysis was not required under RCW 34.05.328.

July 13, 2016

Jane Rushford

Chair