Agency Report Item 27: Department of Revenue Recreational Marijuana Tax Cash Management Implementation

Transcription

1 Agency Report Item 27: Department of Revenue Recreational Marijuana Tax Cash Management Implementation Analyst: John Borden Request: Acknowledge receipt of a report on recreational marijuana tax cash management implementation. Recommendation: Acknowledge receipt of the report. Analysis: The Department of Revenue (DOR), at the agency s initiative, has submitted a report on the agency s marijuana program s cash management. A report addendum was also submitted and reflects updated information to the original report. Background The 2015 Legislature passed a series of measures to implement Ballot Measure 91 (November 2014) to provide for the sale of recreational marijuana, subject to the approval of local jurisdictions. 1 DOR was assigned responsibility to collect recreational marijuana tax receipts. HB 5047 (2015) provided the agency with Other Funds expenditure limitation and position authority to carry out this duty, with the exception of cash management activities, whose costs were indeterminate at that time. The legislatively adopted budget for DOR s marijuana program totals $1.9 million Other Funds and includes six permanent full-time positions (3.15 FTE): one Operations and Policy Analyst 2 (0.83 FTE) and one Operations and Policy Analyst 3 (0.83 FTE) for program development; one Economist 3 for data analysis (0.25 FTE); one Accountant 3 for revenue receipts and distributions (0.19 FTE); and one Administrative Specialist 2 for tax return processing (0.67 FTE). These six positions have yet to be hired, as of the date of this analysis. The adopted budget also includes $1.1 million for point-of-sale (POS) functionality to be added to the agency s Core Systems Replacement project (CSR), which is a multi-biennia information technology project to replace the state s tax collection and management systems. A revised estimate for the POS functionality now totals only $500,000. DOR will manually process all marijuana tax returns until the CSR POS functionality is implemented in the fall of DOR s expenses are funded from gross marijuana tax proceeds received by the agency with the remainder to be deposited into the Oregon Marijuana Account, as directed under HB There is no statutory cap on the level of administrative and enforcement expense that the Department may retain. 1 HB 3400; HB 2041; SB 460; SB 844; and HB Legislative Fiscal Office Interim Joint Committee on Ways and Means November 2015

2 The revenue impact statement for HB 2041 estimated $2.5 million in marijuana tax from early start medical dispensaries (25% tax rate) and $10.75 million of tax receipts from retailers (17% tax rate) for a total of $13.25 million for the biennium. Agency Report and Addendum While DOR is taking steps to establish the marijuana tax program, the agency s most immediate concern is the establishment of a marijuana cash management unit by January 1, DOR proposes a short-term and a long-term solution for marijuana tax cash processing. The shortterm solution requires temporary facility space be constructed and staffed on the fifth floor of the DOR s Salem headquarters building, until such time as a more permanent facility space is remodeled on the first floor of the Salem building. DOR assumes that all marijuana cash collection, statewide, will only occur at the agency s Salem headquarters building. DOR assumes that marijuana tax cash management differs significantly from current (non-marijuana) cash receipting for tax programs, which process approximately $110,000 in cash receipts per month. Also, integrating the marijuana cash management unit into DOR s existing Tax Services cash management unit may be difficult over the short-term, but is the agency s long-term goal. DOR assumes that 60% to 80% of marijuana tax receipts will be paid in cash with the remainder paid through the banking system by check, debit, or credit card. Previous estimates placed marijuana cash receipts at only 40% of total revenues. This percentage has been referred to as the cash fraction. The increased volume of cash receipts will necessitate additional public and employee security measures be put into place, including physical, financial, and environmental security measures. This could include a part-time security guard for high cash volume periods and/or an Oregon State Police trooper. The Oregon State Police is in the process of conducting a security review, but that review has yet to be completed. There will be an increase in the level of banking services and fees charged by the agency for processing large volumes of cash. The agency may need to separately identify for banks marijuana tax receipts from other agency cash tax receipts. Other estimated expenses include a safe, currency counters, security cameras, air purifiers, and private armored car services. Estimated Cost The agency anticipates a 2016 legislative session budget request for additional staff and other resources. General Fund appropriated to DOR for other purposes are being used as bridge funding, and may be restored, if Other Funds expenditure limitation is approved by the Legislature. DOR s preliminary budget estimate totals an additional $2.7 million Other Funds (marijuana tax proceeds) and ten positions (7.50 FTE) for the remainder of the biennium. After eliminating one-time costs, the biennial costs are estimated to be $1.8 million and ten positons (10.00 FTE). The ten permanent full-time employees are for: receiving cash payments (4); cash counting and reconciliation (4); analytical support (1); and unit management (1). All ten employees will be hired by Legislative Fiscal Office Interim Joint Committee on Ways and Means November 2015

3 January 1, Temporary position authority will come from the double-filling of existing legislatively authorized positions. Recruitment for the positons will begin in December of 2015 with the goal that the program will be fully staffed by January 1, Personal services costs are estimated at $931,919, with associated services and supplies/capital outlay costs at $184,476. Other estimated short-term costs total $114,350 for temporary rental space; construction of a cash window(s); a safe; and security cameras and alarms; among other costs. For the permanent solution, the estimated costs total $1.3 million and includes: facility rental costs; construction of a cash window(s); furniture; security cameras and alarms; among other costs. Additional security will cost an estimated $170,000 in professional services. Report Analysis Uncertainty surrounds the establishment of any new program. The broader uncertainty of this particularly complex program includes federal legal and enforcement environment, potential changes to state law, and allowable banking activities, all of which may influence the structure and cost of the program. Operationally, as time progresses, DOR is able to make more informed decisions about the needs of the agency s cash management unit. With that said, there are some areas of potential concern: a) While DOR has made a good attempt to anticipate security requirements, a formal security assessment has yet-to-be completed by either the Oregon State Police or an independent security firm. Security is a critical cost determinate for how the facility should be remodeled, both in the short- and long-term, the level of ongoing security staffing, and who should be hired as security staff. b) DOR assumes that a separate cash management structure is needed to oversee the processing of marijuana tax receipts rather than enhancing, or building upon, the existing Processing Center staff who manage non-marijuana tax receipts. This could perhaps reduce the agency s preliminary request by one unit manager position. c) The need for one additional analytical support position appears to be duplicative given the resources provided in HB 5047 (2015). d) DOR s recommendation assumes full staffing is needed by January 1, 2016, rather than a more gradual phase-in according to forecasted revenue. Importantly, cash receipts may also include the payment of non-marijuana taxes, such as employer personal income tax withholdings and transit payroll and self-employment taxes. e) Proper resourcing of the marijuana tax program within DOR s Business Division is absolutely critical due to the Core Systems Replacement project s simultaneous roll-out of the point-of-sale functionality for the marijuana tax program and withholding tax, transit payroll tax, and Other Agency Accounts (i.e., collections) in the fall of In other words, there is the potential that the agency may require additional (non-cash management) resources beyond those mentioned in the agency s report. Recommendation The Legislative Fiscal Office recommends acknowledging receipt of the report. Legislative Fiscal Office Interim Joint Committee on Ways and Means November 2015

4 27 Department of Revenue Heath Request: Report on the implementation of the Marijuana Tax by the Department of Revenue (DOR). Recommendation: Acknowledge receipt of the report. Discussion: DOR is responsible for administering the state s two marijuana taxes levied on the retail sale of marijuana: the Early Start Marijuana Tax and the Marijuana Tax. This report outlines the department s need for additional limitation related to handling cash associated with the new taxes. The table below compares the two taxes: Tax Name Early Start Marijuana Tax Marijuana Tax Marijuana Vendor Medical Dispensaries Licensed Retailers Date Sales Begin Tax Rate Effective Date of Tax End Date Revenue Estimate Oct. 1, % Jan. 4, 2016 Dec. 31, 2016 $2 3 million Oct. 1, 2016* 17% Oct. 1, 2016* -- $10.75 (After OLCC (After OLCC million licenses issued) licenses issued) *Tentative date OLCC anticipates licensing the first retailers. The Marijuana Tax is legally effective on OLCC-licensed retailers Jan. 4, 2016 but OLCC tentatively plans to start issuing licenses on Oct. 1, The department s administration of the Marijuana Tax is funded from the revenues received from the tax, with the remainder distributed by formula to the Common School Fund, mental health and substance abuse programs of the Oregon Health Authority, the Oregon State Police, and city and county law enforcement. Current Budget for Marijuana Tax: As part of House Bill 5047, the department received $1.86 million in Other Funds limitation and six positions to administer the program; $1.1 million of this funding will go to put the Marijuana Tax into Gentax as part of the Core Systems Replacement project, with the remainder of the funds going towards positions related to program administration, accounting, and reporting. The department did not receive limitation or positions related to the cash handling requirements associated with implementing the tax. This was due to the uncertainty around what would be needed to handle the cash. While the department currently handles payments in cash for its existing taxes, the quantity and frequency of cash payment will increase dramatically with the new tax. Information from Colorado and Washington state indicates 40.0 percent of the revenue will be received in cash. Assuming this experience holds true in Oregon and revenue forecasts for the taxes hold, the department would be handling approximately $5.3 million in cash during the biennium, increasing to $25.0 million in cash in the biennium. Need for Additional Resources: DOR has sought to implement best practices in cash handling learned from Colorado and Washington state where marijuana has been legal and taxed at the point of sale for several years. To handle the increased volume of cash in a secure and responsible manner, the department estimates it will cost an additional $1.8 to $2.7 million in Other Funds expenditure limitation. It should be emphasized the department s budget estimates are preliminary and further work is needed to refine them into the department s request for additional limitation. Department of Administrative Services 27-i November 18, 2015

5 The largest costs associated with this project are the capital related to the cash-handling facilities and the personnel needed to handle the cash. The cash handling facility is expected to cost more than a similar facility used for general purposes due to the security needs associated with handling large volumes of cash. The staffing plan was made assuming two employees will be present with the cash at every step of the cash handling process acceptance, reconciliation, moving, storage, and banking. This is a best practice and is necessary to maintain internal control over the cash. The department s need for both temporary and permanent facilities is a result of the timing of the Early Start Marijuana Tax implementation and the safety and security needs of the program. The department currently accepts cash payments at its reception area on the first floor of the Revenue building. This setup will not provide adequate security for the amount of cash the department anticipates handling. The temporary space will be a build-out on the fifth floor of the Revenue building and will be retrofitted to provide for the security of staff and taxpayers. This space must be ready by January 2016, in order to accept the first Early Start Marijuana Tax payments. Simultaneously, the permanent space will be built on the first floor which will allow for better security, better workflow, and easier taxpayer access to the space. In order to be ready to implement the Early Start Marijuana Tax on January 4, 2016, the department has been spending General Fund money on hiring and space build-out. These expenditures will be transferred to Other Funds should the department receive Legislative authorization for the expenditures in the February 2016 Session. Department of Administrative Services 27-ii November 18, 2015

6 Department of Revenue 955 Center St NE Salem, OR October 19, 2015 The Honorable Senator Richard Devlin, Co- Chair The Honorable Representative Peter Buckley, Co- Chair Interim Joint Committee on Ways and Means 900 Court Street NE H- 178 State Capitol Salem, OR Dear Co- Chairpersons: Nature of the Request The Department of Revenue is providing its preliminary cost estimates for the implementation of more robust cashiering processes and procedures to enable us to handle large cash payments. Agency Action Program planning Since the 2015 Legislative Session, we ve been working on building the program and: Determining how to handle payments. Planning the program s implementation into our new core system. Developing administrative rules. Reaching out to dispensaries. Evaluating enforcement activities. We re on track to begin administering the temporary dispensary program, authorized by Senate Bill 460, on January 4, The dispensary program authorizes medical marijuana dispensaries to sell marijuana seeds, dried leaves, flowers, and non- flowering plants for recreational use from October 2015 to December 2016, as a stopgap measure while the full retail program is established. Dispensary sales will be subject to a 25 percent tax from January 4, 2016 through December 31, Cost estimates During the 2015 Legislative Session, we indicated that we weren t prepared to provide cost estimates associated with its preparation to handle large cash payments. You asked

7 Interim Joint Committee on Ways and Means October 19, 2015 Page 2 us to return with estimates during the 2016 Interim Session for the permanent retail and temporary dispensary programs. House Bill 5047 appropriated $618,909 for our Business Division to implement the new marijuana tax program. The bill also appropriated an additional $145,544 for administration expenses. HB 2041 authorized the department to pay expenses for the administration and enforcement out of moneys received from the tax. Also according to the bill, administrative expenses are continuously appropriated to the department from the suspense account. Until tax revenues start to accumulate, however, we re paying for marijuana program implementation expenses above the HB 5047 appropriations with General Fund money. For our initial estimates, we re assuming approximately 40 percent of businesses will pay in cash and planning our infrastructure construction costs based on that volume. In addition, we re anticipating some consolidation of marijuana businesses as the market matures. As a handful of businesses gradually increase market share, those businesses will have larger cash transactions. We re attempting to design space that can handle these potentialities. Some other assumptions informing this process are that: Compliance will be high, due to the strict licensing requirements and the authority of the Oregon Liquor Control Commission to revoke the licenses of noncompliant businesses. We won t be involved in the collection of local taxes. Approximately 400 dispensaries will be participating in the temporary dispensary tax program. These businesses will be paying once per month. There will be approximately 350 licensed retailers in , and approximately 550 licensed retailers in Over the past several months, we ve conducted substantial research into cash handling procedures, including tours of Colorado and Washington s facilities. We ve determined that cash handling is an area requiring special attention for effective implementation. While some state and local financial institutions may offer limited banking services, Oregon marijuana businesses are largely excluded from the conventional banking system because of the federal restrictions on marijuana. Most national banks appear to avoid providing services to marijuana businesses because of existing federal laws. This means that these businesses will deal primarily in cash, including when making their tax payments.

8 Interim Joint Committee on Ways and Means October 19, 2015 Page 3 We ve handled cash payments in the past, but these were always very small. Marijuana tax payments represent a difference, not in degree, but in kind. Records show that our largest cash payment for 2015 was less than $7,000. Any business that sells more than $28,000 per month in marijuana products would result in tax payments exceeding that number. We need to be prepared to receive, process, and secure large cash payments. Based on the information we ve gathered and the considerations discussed above, we estimate that our expected costs for the remainder of the biennium will be between $1.86 million and $2.7 million. The table below provides a summary of estimated costs. Low- End Estimate High- End Estimate Temporary cash handling facility $60,000 $100,000 Temporary facility rent $63,000 $63,000 Permanent cash handling facility $480,000 $1,072,000 Permanent facility rent $38,000 $51,000 One- time expenses $55,000 $75,000 Recurring expenses (new personnel) $1,131,000 $1,131,000 Recurring expenses (other) $35,000 $40,000 Additional security $0 $170,000 Total $1,857,000 $2,697,000 Temporary space We re estimating construction to outfit a location on the fifth floor of the Revenue building with the necessary cash- handling equipment for the temporary dispensary program and first quarters of the retail tax program will cost between $60,000 and $100,000. Rent for the temporary space will be approximately $63,000 for the remainder of the biennium. Long- term cash handling solution The long- term cash handling solution planning is still in the preliminary stages. At this time, we re planning on retrofitting the building s atrium with several payment windows. This will allow more taxpayers to pay at the same time and streamlines the cash- payment process. We estimate that the construction will be between $480,000 and $1.07 million. However, this may change significantly after construction plans are drawn and we receive actual bids for the project.

9 Interim Joint Committee on Ways and Means October 19, 2015 Page 4 We estimate that rental costs for the long- term space will be similar to the temporary space and would be between $38,000 and $51,000 for the remainder of the biennium. One- time expenses We re planning several substantial one- time purchases, including currency counters, air purifiers, and a safe, which would be used in both the temporary and permanent cash- handling spaces. These purchases would total between $55,000 and $75,000. Recurring expenses According to the best estimates from the Processing Center, we ll need the following additional permanent positions: Four Public Service Representative 4s ($2,873 per month) to staff the payment windows and receive cash payments. Four Administrative Specialist 1s ($2,636 per month) for cash counting and reconciliation process. One Operations and Policy Analyst 2 ($4,161 per month) to provide analytical support to the cash counting operation. One PEM B ($4,111 per month) to manage the unit. These employees will be hired by January 1, The total cost for the new positions for 18 months of the biennium is approximately $1.13 million. In addition to supplies like gloves and aprons, we re planning to hire a second armored car service, specifically for the cash from marijuana tax payments. Our current armored car vendor is unwilling to transport cash from the marijuana tax program for legal reasons. We re also budgeting for a processing fee for the bank to handle cash contaminated by strong odors. We don t have an estimate for this fee because the bank hasn t provided us details and we don t know what portion of cash will be considered contaminated. Our estimate for these additional costs is between $35,000 and $40,000 for the remainder of the biennium. Lastly, we ve considered hiring a part- time security guard for days where we expect a large volume of cash payments. Armed security guards are considered an industry- standard practice. As this is uncharted territory for us, we re working with the Oregon State Police to evaluate our options. The cost of a state trooper stationed at the department full- time from January 2016 until the end of the biennium is approximately $170,000.

10 Interim Joint Committee on Ways and Means October 19, 2015 Page 5 Action Requested No action is being requested at this time. At a future date, we ll formally request funding to cover the costs discussed in this letter. Legislation Affected We re evaluating the need for statutory changes as we implement the program, but at this time, no statutory changes are requested. Requests may be made at a later date. Respectfully submitted, James Bucholz, Director Oregon Department of Revenue

11 Department of Revenue 955 Center St NE Salem, OR November 6, 2015 Addendum to marijuana cost estimates provided to Interim Joint Committee on Ways and Means. The Department of Revenue is updating its preliminary cost estimates for the implementation of more robust cashiering processes and procedures to enable us to handle large cash payments. As you re aware, we re breaking new ground with the implementation of the new marijuana tax program. We learn more every day, thanks to Colorado and Washington sharing their experiences and our continued research into this new industry. As a result, we re slightly updating the information we provided in October. The narrative here is best seen as a summary of differences between our October 19, 2015 letter and the fiscal estimate being presented to the committee. These differences have been identified over the past few weeks as the department has continued to push forward with its rapid implementation of the marijuana tax. The following are differences between the updated fiscal estimate and the original letter notifying the Legislature of our preliminary cost estimates. Cash handling and volume estimates In our initial estimates, we assumed approximately 40 percent of businesses will pay in cash and we planned our infrastructure construction costs based on that volume. The 40 percent estimate was based on conversations with officials in Washington and Colorado about the actual volume of cash those states handle. However, we calculated the number of cash handling positions based on a higher assumed cash payment percentage because an examination of the specific circumstances in Oregon led us to believe that the 40 percent estimate might run low. These include the following factors: 1. While Washington has seen approximately 40 percent of its payments in cash, there are six credit unions in Washington that are accepting marijuana retailers as account holders. In Oregon, there s only one credit union currently preparing to accept marijuana customers. This credit union only has branches in the Willamette Valley area. It s possible that more financial institutions will choose to participate, but we currently have no information to validate this. Oregon businesses cannot bank with Washington banks because it potentially violates the federal guidance provided in the Cole Memorandum (see point 4). We assume very few marijuana businesses will be able to get a bank account in

12 Interim Joint Committee on Ways and Means addendum November 6, 2015 Page 2 Oregon at this time. Without a valid bank account, a marijuana retailer wouldn t have the capability to pay taxes by check or Automated Clearing House (ACH) debit or credit transactions. 2. We won t have ACH payments available to taxpayers at implementation due to issues with the contract with our bank. We re currently attempting to find a solution for accepting ACH payments for marijuana taxes from businesses that do happen to have a bank account. 3. Heightened national attention to recreational marijuana has led most financial institutions to formalize their positions against providing banking services to recreational marijuana retailers. 4. The credit unions that are providing services to marijuana retailers in Washington are refusing to do so in any county that borders another state or country, in an effort to reduce the risk of participating in what may be deemed illegal interstate commerce by the federal government. In Oregon, if participating banking institutions reach the same conclusion, we re assuming that businesses in Portland wouldn t have access to banking services, considering the shared border with Washington. We estimate that nearly half of the retailers that will participate will be located in the Portland area. Because Portland, unlike Seattle or Denver, is on a state border, a potentially higher percentage of businesses in Oregon won t have access to banking services, as compared to other states. Currently, it appears that banking services for the vast majority of participants in recreational marijuana sales won t be available any time soon. Those factors have led us to believe that the risks of dramatically underestimating the cash fraction are substantial. Accordingly, updated internal estimates have ranged from 60 to 80 percent. Based on the outlined circumstances and the high level of uncertainty surrounding revenue estimates, we want to be prepared for a higher volume of cash deposits than originally anticipated as a means of mitigating the potential risks of an underestimate. The initial letter didn t identify the specifics of how cash handling will be implemented. At this time, we believe that we will be setting pre- scheduled appointments with taxpayers, leaving 30 minutes for each appointment. The appointment time length is based on Washington s experience, and we believe that 30 minutes will allow for up to $100,000 cash to be counted, recorded, processed, and verified while maintaining dual control for the purposes of ensuring proper safety and security of all participants.

13 Interim Joint Committee on Ways and Means addendum November 6, 2015 Page 3 Estimating the number of dispensaries There have also been some changes in the estimated number of taxpayers for both the dispensary tax and the retailer tax. Our initial letter assumed that there would be 400 dispensaries participating in temporary recreational sales. We had assumed that all of the medical dispensaries would be selling recreationally. However, only 89 percent of dispensaries have decided to participate in recreational sales. Of the 315 dispensaries listed on the Oregon Health Authority (OHA) website, 280 are listed as selling marijuana recreationally. We don t make a distinction between dispensaries of different sizes and markets; all dispensaries are being treated equally. Our best information indicates that OHA is working through a significant volume of new dispensary applications. We re assuming that most of those will be selling recreationally as well, considering that most of the current dispensaries are selling recreationally. The 350 dispensaries we originally listed in the fiscal impact statement assumes that approximately 70 more dispensaries will come online during the temporary tax period. That number is an estimate and is difficult to validate at this stage. Estimating the number of retailers We anticipate 340 retailers will participate in selling recreational marijuana in the fiscal estimate, though OLCC s estimates on the number of licensed retailers have ranged from 225 to 1,095. Our letter indicated 350 retailers for the biennium and 550 retailers for the biennium. Those were rounded figures from documents examining HB 2041 in June. Program needs Program is requesting additional funds for travel and training for program staff. The costs outlined in the fiscal estimate allow staff to attend conferences and training for the purposes of staying up- to- date on both emerging challenges and best practices in marijuana taxation. Cash handling needs DAS classification review has been completed and they determined that the eight positions discussed in the initial letter should be Accounting Technician 2s, rather than Public Service Representative 4s and Administrative Specialist 1s. The costs associated with these new positions are only minimally different.

14 Interim Joint Committee on Ways and Means addendum November 6, 2015 Page 4 Our letter allowed for a cost on cash that was contaminated with strong odors. This hasn t been included in the fiscal estimate because we still have no basis for a solid estimate. Additionally, Washington informed us that they haven t been charged for contaminated cash. We continue to negotiate with our contracted bank on this issue. The new fiscal estimate reflects wage information updated with the pay increases given to state employees through the recent contract negotiation. The new fiscal estimate has started to get a better handle on the specifics of the temporary cash handling facility and the required equipment. The fiscal estimate lays out the costs of specific equipment, including currency counters and the security camera and alarm system. In the letter, those were absorbed in two overall categories: Temporary cash handling facility, and One- time expenses. As we have examined some of the specifics, there have been some cost changes. For example, additional investigation into security cameras has indicated that most of the costs associated with putting cameras in the temporary facility are associated with installation and wiring, rather than the cameras and monitors themselves. This resulted in an increase in estimated costs of approximately $22,000. Conclusion The department requests acknowledgement of receipt of this addendum, and asks that legislators consider it when evaluating the full fiscal estimate in comparison to the initial preliminary numbers. We re continuing to evaluate the need for statutory changes as we implement the new program, but at this time, no statutory changes are requested. However, we ll continue to work with Legislative Counsel to identify concerns. Requests may be made at a later date. Respectfully submitted, James Bucholz, Director Oregon Department of Revenue