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California Legalization Creates Accidental Tax Holiday for Patients

November 17, 2016
US treasury department sign in Washington dc building facade
California cannabis patients: Do you have a Department of Public Health-issued medical marijuana ID card? If so, you’ve just gotten out of paying state tax on cannabis until 2018. Thank the authors of Proposition 64—even though they didn’t mean it.

That’s right, the statewide tax break was a mistake, the result of an unforeseen hiccup in the 62 pages of legalese that make up the state’s recently passed adult-use legalization law. But no matter—the state Board of Equalization, which administers certain taxes, has already interpreted the measure. That means the tax holiday is legally binding.

Despite an outcry from critics, who worry the tax holiday could cost the state millions, the board last week even sent thousands of letters to dispensary operators, advising them not to collect taxes from patients with state ID cards after Nov. 9.

“It wouldn't make sense to reduce revenue when the whole point of the tax structure is to fund programs.”
Richard Miadich, Prop. 64 author

“It’s very easy to get a detail wrong in a long, complex document,” cannabis tax expert Pat Oglesby, of the Center for New Revenue, told the Washington Post. He said he’s sympathetic to Prop. 64’s drafters, having found himself in a similar spot before: “I made a more expensive mistake as a staffer on the Joint Congressional Committee on Taxation.”

But how did it happen? Prop. 64 was widely heralded as the product of research, experiences of other legal states, and public policy expertise. How could such a carefully crafted bill end up leaving what could amount to millions of tax dollars on the table?

Here’s how:

Prop. 64 established a 15-percent excise tax on all cannabis purchases—medical and adult-use—to take effect Jan. 1, 2018. But the state already has in place a 7.5 percent sales tax on all goods, including cannabis, and advocates argued the two taxes together would be prohibitively expensive to many in the medical system. To blunt the impact, Prop. 64’s authors waived the sales tax for those medical patients who obtain a state-issued medical marijuana ID card.

Timing is where things went sideways. Like Prop. 64’s provisions for possession, consumption, and home cultivation, the law’s sales-tax exemption kicks in immediately, taking effect the day after the measure passed. The 15-percent excise tax, on the other hand, won’t apply until 2018.

The more-than-yearlong gap is a mistake, Prop. 64 author and Sacramento lawyer Richard Miadich told the San Francisco Chronicle after the tax question first came up. The measure’s clear intent, he said, was to exempt medical cannabis from the state sales tax only after the excise tax took effect. “It wouldn’t make sense to reduce revenue when the whole point of the tax structure is to fund programs,” he said. “It is inconsistent with the statutory language and the statutory intent, which is to create new revenues for the state.”

Related

13 Things You Might Not Know About California’s Prop. 64

The tax holiday applies only to medical cannabis patients who’ve obtained state-issued ID cards, which cost $100 and require proof of a medical condition. Patients who have only a doctor’s recommendation still have to pay the tax. Local governments can impose additional taxes at the municipal level.

It’s not yet clear how much the flub might cost the state, as a relatively small number of California patients—about 6,000 to 8,000, according to estimates—have state-issued ID cards. Nevertheless, the Chronicle reports that “ganja aficionados have begun rushing out to obtain state medical marijuana cards at the urging of dispensaries.” Board of Equalization member Jerome Horton said earlier this month that the resulting revenue loss could be as much as 49.5 billion.

Gov. Jerry Brown’s office has not yet commented on the matter. Leaders in the state Assembly are monitoring the situation, the Associated Press reports. “Given the nature of how medical marijuana is typically purchased in California, it’s not clear whether the initiative’s language on sales tax will actually prove to be a significant impact on state revenue,” Kevin Liao, a spokesperson for Speaker Anthony Rendon, told the AP. Of the more than 700 estimated medical dispensaries in Los Angeles, for example, only 135 are allowed by the city. Many of the businesses operating illegally do not pay taxes. Statewide, only about two-thirds of dispensaries have fully complied with state sales tax requirements, Board of Equalization chair Fiona Ma said earlier this month.

Nate Bradley, executive director of the California Cannabis Industry Association, said in an email to the AP that policy experts disagree with the Board of Equalization’s interpretation, since the law was intended to generate tax revenue. Legal precedents do exist for ignoring provisions that are obvious clerical errors, but the board declined to invoke them in its Prop. 64 ruling.

 

The Associated Press contributed reporting from Los Angeles. 

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Ben Adlin

Ben Adlin is a senior editor at Leafly who specializes in politics and the law. Follow him on Twitter: @badlin

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  • truckergirl702

    I personally feel that a patient that can show that they have been in treatment for an extended period of time for their given Medical condition should be charged a no tax or lower tax rate on their Medical MJ by having their actual Medical Records provided to the state for they choose to do so. I personally am a long term pain management patient that is in transition of getting off of opioids etc… transferring to CBD oils and natural pain relief. I’m very happy to do so, but I’m giving up medications that are covered by insurance.

    Let those who aren’t bringing in their actual Medical records, who are being diagnosed by the facility doctor’s as having some kind of “qualifying” Medical condition (they brag about a 96-99% approval rate) pay the higher taxes. I don’t see how a single 5 or 10 minute visit (or by phone..WTF?!!) can get a qualifying diagnosis for a card. I can provide my long term history from a treating physician that originally took me 5 YEARS to get a diagnosis of what was wrong with me! Pretty frustrating!

    People using recreationally, most definitely should be paying the highest tax rate! So, those TRULY ill, in pain, trying to do something better for our bodies than feeding them full of synthetic heroin that big pharma has been pushing on us for so long….and seeking to get well, give us a flippin break! I say have a lower tax for Medical patients…

    In my opinion – 3 tax brackets:

    Tier I With Medical Records Provided
    Tier II NO Records Provided
    Tier III Recreational

    Interesting story:

    I lived across from a brand new dispensary in Cali…it was an upstairs unit. No elevator. Every Friday you couldn’t get anywhere near the convenience store it was near. All day and half the night 20 somethings running up and down the stairs making their purchases. Bumping music constantly. Our apartment complex couldn’t keep the units facing that side of the road rented out any longer. They fought with the city and ultimately got it shut down. I can tell you, not one of those people looked in need of MMJ to me! Good luck getting up a full flight of stairs if you were really in need of the stuff.

    With all the DEA issues…and NOW personally my insurance company now is pulling some new stuff… they think they can tell me how much of my medication I can take, they have cut my medication coverage back. Told me I can’t take 3 of my particular pills a day unless I have cancer! BS! My 3 pills wouldnt touch a cancer patients pain… and by the way, insurance company, since when have you even spoke to me to evaluate my damn pain levels or even know what i go through on a daily basis? Dummies lol! GRRRR! I’ve had to file a complaint against them with the State for what they have done, because they are endangering my life. I’m SO OVER THEM! On to the natural options…

    Sorry if I got off subject much, but I was basically trying to focus on those of us who have a true and honest MEDICAL MJ need. Not a made up just because a doctor will clear me for a card reason…a way to cheat the system. Kind of like people who end up with handicap parking placards somehow who shouldn’t have them…

    Anyway, I hope everybody has a wonderful day… thanks for listening…my stupid insomnia was raging tonight. 😉 Can’t wait to get in to get my medical card! WOO HOO! BRING IT! I want off of these nasty meds!

  • Raymond Betts

    Whatever. But here’s something: why do vets with 100% disability have to pay for their weed but not their morphine? Hmmmm.