Marijuana Industry Taxation: Sales Tax and Marijuana Businesses
The fact that state-legal businesses are dispensing marijuana for the treatment of medical conditions, and that marijuana is otherwise illegal to possess or sell on the open market, has not deterred the California Board of Equalization (BOE) from assessing taxes on marijuana sales in the state—as well as interest and penalties on those who fail to comply.
Since October of 2005, the BOE has required seller’s permits even if the property being sold may be illegal and whether or not the applicant specifies what products they sell. Anyone who makes sales without a seller's permit may be subject to an eight-year look-back period for payment of taxes, penalties, and interest.
The Sale of Marijuana is NOT Exempt from Sales Tax in California
In February of 2011, following a case in which the Berkeley Patients Group, Inc. was assessed more than $6.4 million in back taxes and interest, the BOE confirmed that the sale of marijuana is not a medicine that is exempt from California sales tax. Under California Revenue and Taxation Code §6369, the sale of medicine is exempt from sales tax if it is:
- prescribed by a licensed physician and dispensed by a licensed pharmacist, or
- furnished by a health facility pursuant to the order of a licensed physician.
However, the BOE has held that sales tax applies to medical marijuana sales because the dispensaries are not licensed pharmacies. In Appeal of Berkeley Patients’ Group, Inc. the court agreed that although marijuana qualifies as a “medicine” and that a doctor’s recommendation is a “prescription” it ruled that marijuana dispensaries must not only qualify as health facilities under R&TC §6369(a)(3), they must also be licensed as clinics to qualify for the sales tax exemption, which they do not.
In the meantime, tensions are high. Following the establishment of fly-by-night storefronts in San Jose who, to the detriment of legitimate marijuana businesses , were making as much money as possible without paying sales tax, the City of San Jose issued a crackdown this past Fall by requiring operating permits, many of which were denied.
Attempts to strong-arm landlords to evict or close down medical dispensaries on their premises is another tactic being utilized; however, many claim that the San Francisco Shambhala Healing Center’s recently victory in a forfeiture claim has sent a clear message to the U.S. government that dispensaries are ready to do battle to preserve their businesses.
Experienced Tax Representation with California Board of Equalization Matters
California Board of Equalization sales tax issues are often complex and should not be taken lightly. In addition to taxes currently due, the BOE may assess up to eight years of back taxes, penalties and/or additional interest for failing to file, filing late, failing to remit sales taxes, and operating without proper permits or licenses, as well as accuracy-related penalties. Additional consequences include fines and prison time.