California tax officials put the squeeze on medical marijuana industry
March 08, 2011
Peter Hecht, Sacramento BeeAs one of California's pioneering marijuana dispensaries, the Berkeley Patients Group served thousands of medical marijuana users and handled tens of millions of dollars in pot transactions a year. But until 2007, the dispensary didn't charge customers sales taxes nor did it pay them to the state, contending that marijuana as medicine wasn't taxable.
California tax officials, strapped for cash, disagreed and now the state Board of Equalization is ordering the Berkeley facility to pay $6.4 million in back taxes and interest on $51 million in pot sales between 2004 and 2007.
The case is illuminating efforts by the state - plus Sacramento and other cities - to collect revenues from California's burgeoning medical cannabis industry.
Since last October, the state tax board has completed audits on 32 other marijuana dispensaries, demanding $4.5 million in sales taxes and interest.
In September, the board ordered another Berkeley medical marijuana outlet, Community Flavor, to pay $600,000 in taxes and interest on $4.9 million in marijuana and $670,000 in pot cookie sales the dispensary argued were exempt from taxes between 2005 and 2008.
"It is our intent to identify where there could be a problem and then aggressively go in and enforce the law," said BOE Chairman Jerome Horton. "You will see a lot more investigations to assist them in complying with law."
The BOE estimates it takes in $57 million to $105 million in sales taxes from dispensaries ringing up to $1.3 billion in annual pot transactions.
The industry's ultimate tax value to the state or local communities is hard to calculate. The BOE, in a concession to dispensaries worried about federal prosecution, requires them to obtain state sales permits but doesn't mandate they disclose what they sell.
BOE member Betty Yee said the growing California dispensary trade may someday generate $400 million in state sales taxes. George Mull, attorney for the California Cannabis Association, says dispensaries could produce $140 million if they all paid the standard 8.25 percent sales tax.
The Berkeley Patients Group and medical marijuana advocates complain tax authorities are targeting them after only belatedly explaining the rules.
In 2005, in the case of a San Francisco dispensary, the Hemp Center, the BOE declared that medical marijuana was "tangible personal property" subject to taxation.
But Kris Hermes, a spokesman for Americans for Safe Access, a marijuana patient advocacy group, said the state didn't begin informing dispensaries of its sales tax rules until 2007 - and then went after them for back taxes.
"These facilities shouldn't have to pay from before they were notified," Hermes said. "But the BOE is saying they should pay a tax for as long as they existed. That is punishing them unnecessarily."
California marijuana dispensaries must operate as nonprofits. And Elisabeth Jewel, a lobbyist for the Berkeley Patients Group, said it doesn't have the money to pay its 2004 to 2007 tax bills.
She said the center, which employs 76 people, and offers free patient services, such as counseling and AIDS testing, paid $1.5 million in state sales taxes last year. It is seeking a reduced settlement for 2004-2007.
"We're going to try to negotiate this down to an amount that the Berkeley Patients Group can afford while staying in business," she said.
Yee said she urged the dispensary to try to settle its tax debt through a state "offer in compromise" program that may allow businesses to negotiate a smaller tax payment based on ability to pay. "We're not interested in shutting them down," she said.
But the BOE is searching for medical marijuana outlets that may owe taxes. Horton said the agency knows of only 300 dispensaries with proper state sales permits, while more than 800 are registered with cities and counties.
Mull, the cannabis association lawyer, said many dispensaries didn't register with state tax authorities or pay taxes for years out of fear of triggering raids under federal laws against marijuana.
He said the state should consider "some type of amnesty" on back taxes to bring unregistered outlets onto California tax rolls.
California's largest dispensary, Harborside Health Center in Oakland, which pays more than $2 million in yearly state sales taxes, recently confirmed it is being audited by the Internal Revenue Service.
Meanwhile, dispensaries are about to get new taxes - and scrutiny - on the local levels. Nearly a dozen California cities have approved local medical marijuana taxes.
Oakland is expecting to take in $1.4 million in pot taxes this year after boosting its local medical pot tax from 1.8 percent to 5 percent. Los Angeles voters Tuesday approved a 5 percent tax. And Sacramento is due to begin collecting July 1 on a voter-approved 4 percent tax on local medical marijuana sales.
"We're making them a legitimate business," said Sacramento City Council member Sandy Sheedy. "And by doing that, you pay taxes."