Legitimacy of Pot Tax Revenue Remains Hazy

April 02, 2008

Richard Gonzales, NPR

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All Things Considered,April 3, 2008 · California's potential $16 billion budget shortfall has led state officials to an unusual source for tax revenue — medical marijuana storefronts. In a state where it's legal to buy prescription pot, those shops generate millions of dollars each year. But there's just one problem — buying and selling marijuana is still a federal crime.

Richard Lee, owner of a coffee shop and marijuana dispensary in Oakland, says he's proud of the more than $200,000 a year he pays in sales tax. His store sells marijuana buds in one-eighth ounce bags.

"We have one medium grade on our menu, that's $30 an eighth plus tax," Lee says. "And three high grades, that's $40 an eighth plus tax, so it comes to $44 with tax, sales tax included."

Medical marijuana advocates estimate that the aggregate annual sales tax revenue that's paid by the approximately 400 dispensaries in California is $100 million. Kris Hermes, a spokesman for Americans for Safe Access, says the state actually makes it easy for pot venders to do business without revealing their product by issuing generic "sellers permits."

"This goes a few steps forward in legitimizing medical marijuana at the state level," he says. "And you would expect that the state would like to protect that revenue source."

California's Board of Equalization, the agency that collects sales taxes, wants to protect that revenue stream.

"We view medical marijuana dispensaries as law-abiding businesses," board member Betty Yee says. "Many of them have complied with state tax laws. And when there's aggressive federal action to shut these businesses down, it's awfully difficult for a state tax agency like the Board of Equalization to work to ensure compliance with state tax laws."

Yee says this could be a "make or break" year for medical marijuana dispensaries. The vendors are under constant pressure from the Drug Enforcement Administration either through raids or threats of taking action against their landlords. The Internal Revenue Service may get into the act as well.

"From a federal criminal tax standpoint, all income is reportable. Income is income, whether it's legal or illegal, it needs to be reported to the IRS," says Arlette Lee, a spokeswoman for the IRS' criminal investigations unit.

But Lee says right now the situation in California is murky. Medical marijuana dispensaries may be paying federal tax, but there's not always a paper trail to prove it. Medical marijuana vendors hope that their contribution to the state's tax coffers will bolster their legitimacy.

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