Extras on Excise: California in the Midst of Medical Marijuana Tax Quandary

This Election Day, California voters approved Proposition 64, which legalizes recreational marijuana sales within the state beginning in 2018. The measure passed with overwhelming support, winning by over 1.5 million votes and roughly 13 percentage points (56.7 percent in favor of the proposition compared to 43.5 percent against it). In addition to legalizing marijuana, however, Proposition 64 has also unwittingly brought a tax break to certain marijuana users within the state.

The explanation for the break comes from Section 7 of Proposition 64, which adds provisions concerning the taxation of recreational and medical marijuana.  One notable provision within Section 7 is § 34011, which provides, “Effective Jan. 1, 2018, a marijuana excise tax shall be imposed upon purchasers of marijuana or marijuana products sold in [California] at the rate of 15 percent of the gross receipts of any retail sale by a dispensary or other person. … ”

In addition to this tax on all marijuana purchases, § 34012(a) includes “Effective Jan. 1, 2018, there is hereby imposed a cultivation tax on all harvested marijuana. … ” The cultivation tax rates are $9.25 per dry-weight ounce for marijuana flowers and $2.75 per dry-weight ounce for marijuana leaves.

In addition to these new excise taxes, Proposition 64 also made important changes to the pre-existing tax structure of medical marijuana in California.

Section 34011(g) provides that sales and use tax will not apply to retail sales of medical marijuana when a qualified patient or caregiver provides a valid, government-issued Medical Marijuana ID Card (MMIC). Notably, this exemption does not provide an effective date, in contrast with the provisions concerning excise taxes on marijuana sales. 

Likely anticipating passage of Proposition 64, the California State Board of Equalization—which administers California’s marijuana taxes—issued a special notice in October explaining that medical marijuana sales would be immediately exempt from California’s 7.5 percent sales tax upon Proposition 64’s passage, as long as the purchaser presents a valid MMIC. 

This notice has caused controversy inside California, with various parties disputing the Board of Equalization’s interpretation.  

The San Francisco Chronicle reports that Sacramento, Calif., attorney Richard Miadich, one of the authors of Proposition 64, stated, “‘It wouldn’t make any sense right out of the gate to reduce revenue when the whole point of the tax structure is to fund programs,’” and that the Board of Equalization’s interpretation is “‘inconsistent with the statutory language and the statutory intent, which is to create new revenues for the state.’”

Business Insider reports that Jason Kinney, a Proposition 64 campaign spokesperson, remarked, “Obviously, we strongly disagree with any interpretation of the measure that comes to the bizarre conclusion that medical [marijuana] patients are somehow immediately exempt from the state sales and use tax—before the excise tax takes effect.”

The Board of Equalization’s reasoning is not the only issue up for debate, however, as experts also disagree over California’s potential losses from tax revenue. 

Board of Equalization member Jerome Horton believes the loss could be as high as $49.5 million—the total tax revenue collected from dispensaries in 2014—while Alex Zavell, a regulatory expert working at a marijuana-focused law firm in Oakland, Calif., disputes Horton’s estimate. 

Zavell’s counterpoint focuses on one important fact: medical marijuana patients are not required to obtain a MMIC to participate in California’s medical marijuana program. Thus, not all medical marijuana sales will meet the requirements for exemption from the state’s sales tax.

The numbers support Zavell's argument: California issued fewer than 6,700 MMICs—including required annual renewals—in fiscal year 2015-2016.  The Marijuana Policy Project, conversely, provides a “low-end estimate” that there are over 720,000 medical marijuana patients in California as of September 2016.

Board of Equalization spokesperson Venus Stromberg explains that one of the main reasons for this disparity in numbers is that it is much easier to obtain general paper recommendations from a doctor—which are sufficient to purchase medical marijuana—than it is to go through the hurdles to obtain a MMIC.

Because of the extreme discrepancy between medical marijuana users with MMICs and medical marijuana users without MMICs, California’s actual loss in tax revenue will be dependent on how many individuals go through the hassle of obtaining an MMIC.

One big question remains: where does California go from here?

The Orange County Register reports that on Nov. 18, Fiona Ma—Chair of the Board of Equalization—stated, “We are looking at a legislative fix but also have a request in to the Attorney General to give a more definitive ruling.”

A reconsideration from the Board of Equalization or a ruling from Attorney General Kamala Harris would be a more immediate response to this conundrum, as the California State Legislature is not set to convene for the 2017 session until Dec. 5, 2016.

Given this issue is being updated on a daily—and frequently hourly—basis, be sure to remain apprised of all Prop. 64 developments through Bloomberg BNA’s various platforms. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should the Board of Equalization reconsider its stance on tax breaks for medical marijuana purchases with an MMIC? Is this issue being blown out of proportion due to the small number of medical marijuana patients with MMICs? 

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