Pot is brought into the tax fold

April 07, 2007

Judy Lin, Fresno Bee

When it comes to the sale of medical marijuana, California is seeing green.

For the first time since voters passed Proposition 215 more than a decade ago, state tax assessors are reaching out to the state's 150 to 200 estimated medical marijuana retailers to get them to pay their state and local sales tax.

In February, the state Board of Equalization sent out a special notice to sellers of medical marijuana, urging them to obtain a seller's permit like any other retailer.

"If you sell medical marijuana, your sales in California are generally subject to tax and you are required to hold a seller's permit," according to the notice.

It goes on to warn sellers that "if you do not obtain a seller's permit or fail to report and pay the taxes due, you will be subject to interest and penalty charges."

Proponents of the move say the outreach effort could help legitimize medical marijuana stores by giving them the same rights and responsibilities as any other retailer. Yet it's causing a lot of consternation among cannabis club owners and medical marijuana advocates.

While some cannabis club owners want to be "good neighbors" and pay the sales tax, others prefer to stay underground for fear that any tax information they report will be used against them by federal drug enforcement officials.

"It's frustrating," said Chris Moscone, an attorney representing the Hemp Center, a San Francisco dispensary currently negotiating with state tax collectors on paying back taxes. "There are basically two camps: Those that want to be treated like legitimate businesses, and the other side, where they're still rebels and don't want to be taxed."

When Californians passed the Compassionate Use Act of 1996, or Proposition 215, decriminalizing the use of marijuana at the recommendation of a doctor, the law failed to address how the state should deal with medical marijuana sales.

In early 2005, Board of Equalization Chairwoman Betty Yee said the board took up the Hemp Center's case and soon realized an inconsistency in the law. While the shop had been paying taxes on T-shirts, hats, pipes and other consumption devices, it did not pay taxes on medical marijuana.

The board ultimately determined that medical marijuana was subject to the sales tax because it is not dispensed by a pharmacist or approved by the Food and Drug Administration.

State officials estimate there are about 150 clubs or centers selling medical marijuana throughout the state. Advocates say there are likely more than 200. Of those, the state found only 27 held seller's permits.

So far, state tax officials say there is a healthy level of interest, but it's unclear whether compliance has improved.

Medical marijuana advocates say they remain wary of the changes because federal drug enforcement officials can still pull state tax records. The state law conflicts with federal law, which considers marijuana an illicit drug.

"It's not black or white," said Ryan Landers, a spokesman for Sacramento-area medical marijuana retailers and one of the original proponents of Proposition 215. "It's a gray market."

Advocates also are frustrated with the state's case-by-case enforcement approach, which tends to single out established stores.

"The Board of Equalization is way behind as far as knowing who's out there," Moscone said. "There's not enough manpower to keep up with these clubs, let alone any business."

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