Medicinal marijuana puts tax collectors in tight spot

In a tight budget year, California wants every tax dollar it can lay its hands on. This year, those hands are reaching for marijuana.
More than a decade ago, California voters approved the use of marijuana for medical purposes, making it legal under state law. However, federal law enforcers say marijuana use of any kind is illegal – and they are raiding clinics to prove their point. The state tax appeals board, which wants the sales taxes, is stuck in the middle.

"We're caught between a rock and a hard place," said Betty Yee, a member of the state Board of Equalization, which collects and distributes sales taxes on more than $553 billion worth of transactions each year in California on everything from corkscrews to Cadillacs. "We do not want to serve as aiding or abetting the (federal Drug Enforcement Administration). But they (the dispensaries) are not exempt from the sales tax, so by law we have to enforce it," Yee said.

Yee's district encompasses all of coastal California from Santa Barbara to the Oregon state line and includes scores of marijuana dispensaries and thousands of medicinal users.

Estimates vary wildly on just how much taxable marijuana is out there. The state, facing $16 billion in red ink through the middle of next year, wants precise numbers. So far, it doesn't have them. State authorities are quick to point out that collecting marijuana taxes won't balance California's books – but every penny helps.

The Board of Equalization says it collected about $11.4 million in tax on some $142 million worth of medicinal marijuana sales in 2005-06, the most recent period for which numbers are available. That's likely a partial amount, because the board's taxation policy was adopted in October 2005, the final rule didn't go into effect until 15 months later, and it typically takes time to ramp up tax programs.

About 200,000 people across California are authorized by their doctors to use marijuana for medical reasons. The drug costs about $40 for an eighth of an ounce.

The sales of medicinal marijuana are tiny compared with other products, such as $20 billion in apparel sales and nearly $18 billion for office and school supplies. Even the smallest category – fuel and ice sales – among some four dozen listed by the tax board totals more than $414 million, nearly three times the level of the medicinal marijuana transactions. Marijuana vendors are listed as selling "general merchandise" – an attempt to give some anonymity to sellers who fear federal intervention.

Americans for Safe Access, a pro-medicinal marijuana group that favors similar programs nationwide, says the state's figures are deceptive. The group surveyed a representative sampling of California dispensaries and tallied their sales, then multiplied that amount by the number of dispensaries in the state. ASA estimated the paid sales tax at about $100 million, and the amount of taxable sales at about $800 million. "This is a significant amount of money in a tough budget year," said ASA spokesman Kris Hermes. "We'd rather have the Board of Equalization be the entity that gives out that number, but they say it goes directly into the General Fund and there is nothing that requires the dispensaries to indicate what they sell. I hope over time that they will consider it, so it's not just us saying that we represent $100 million annually in sales taxes," Hermes added.

A number of states have some form of medical marijuana law, including Washington, Oregon, Nevada, Alaska, Hawaii, Colorado, Main, Vermont, Rhode Island, Montana and California.

Federal drug enforcers note that the use of marijuana is illegal, and they point to a 2006 U.S. Food and Drug Administration study stating that marijuana has no medical value. "It is unequivocally illegal under federal law," said Casey McHenry, a spokeswoman for the Drug Enforcement Administration. "Our job is to enforce federal law, and the distribution or cultivation of marijuana is in clear violation."

California's position, determined by the 1996 passage of Proposition 215, is that the use of marijuana for medical purposes is legal. That, McHenry added, "doesn't affect what we do. We are still continuing to do our investigative work."

Tracking medicinal marijuana sales has been murky for years. Sellers, fearful of federal investigators, are hesitant to disclose information to state tax officials, whose records may be subject to review by federal authorities. State tax officials know that, but they say the transfer of information is limited.

"We do not have blanket information-sharing with different law enforcement entities, but in the event that there was a specific investigation going on, the Board of Equalization would be cooperative. But the board doesn't send information to the DEA as part of any kind of blanket agreement," said board spokeswoman Anita Gore.

Still, those who dispense the marijuana are nervous about the role of the federal government. "That is a danger, and it is a vulnerability in the system. We've raised incrimination and vulnerability as important issues," Hermes said.

Federal authorities, meanwhile, say income from marijuana sales is taxable and can lead to investigations of related criminal activities, such as money laundering. "With us, there is a potential for a criminal tax issue," said Arlette Lee, a spokeswoman for the IRS criminal investigations unit.

And the feds note that income from any source, legal or illegal, is taxable.

"Income, regardless of whether the source is legal or illegal, is taxable," Lee said.