Many medical marijuana patients were worried that a ballot measure legalizing cannabis for recreational use in California would make the price of their medicine go up.
Instead, for some of them, pot just got cheaper.
The Board of Equalization sent notice Thursday that anyone who has both a doctor’s recommendation for marijuana and a county-issued ID card identifying them as a patient no longer has to pay state sales tax thanks to Proposition 64.
The measure, which passed Nov. 8 with 56 percent of the vote, made it legal for Californians to consume weed for pleasure. It also created a new licensing and tax structure for all marijuana businesses in the state.
Most experts didn’t expect any of the bill’s tax provisions to kick in for another year, when a new 15 percent excise tax is slated to take effect.
So while medical marijuana patients are celebrating news of the Board of Equalization giving them an early tax break, some state leaders and Prop. 64 advocates are crying foul over the potential, unexpected loss of millions of dollars in tax revenue over the next year.
SOURCE OF THE CONFLICT
The dispute comes from differences in how Prop. 64 is interpreted.
The measure states that all marijuana sales – both recreational and medical – will include an excise tax of 15 percent starting Jan. 1, 2018. But the initiative exempts medical marijuana patients who have county ID cards from regular state sales tax, which runs between 7.5 and 10 percent in California cities.
The goal, an attorney for the Yes on 64 camp said, was to keep marijuana affordable for patients without making it so much cheaper that recreational consumers would be motivated to fake illnesses so they could get in on the tax breaks.
The independent Legislative Analyst’s Office predicted tax revenues from Prop. 64 will eventually mean an extra $1 billion for the state each year.
The problem is that Prop. 64 didn’t specify when the sales tax reduction for patients would kick in.
State Board of Equalization members – several of whom openly opposed Prop. 64 – ruled that, along with the personal rights granted by the measure, the tax exemption for medical marijuana patients became effective Nov. 9. That’s because per the state constitution, all ballot measure provisions take effect at midnight on Election Day unless the initiative specifically says otherwise.
Drafters of Prop. 64 called this interpretation of the tax plan “absurd.”
“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,” said Jason Kinney, spokesman for the Yes on 64 campaign.
If there’s any doubt over how a ballot measure should be implemented, Kinney said the courts are required to do so in a way that’s consistent with the voters’ intent. In this case, he said it’s clear that the intent of Prop. 64 was for both tax policies to take effect at the same time, with a clearly stated goal to generate “hundreds of millions in new state revenue annually.”
Kinney said Board of Equalization staff “reviewed Prop 64’s tax language in detail – and made substantial changes – during the drafting phase more than one year ago and never once flagged this particular issue as a possible area of confusion.”
He said they’re still holding out hope that the agency will change its interpretation. But they’re also reviewing their options for appealing or reversing that decision.
Depending on how this issue plays out, state and local governments could either make some extra money in 2017 or lose millions.
California collected $58 million in sales tax revenue in 2015 from some 974 registered medical marijuana dispensaries. That revenue is on track to nearly double this year.
Using that historic data, Board of Equalization Member Jerome Horton issued a statement a couple weeks before the election that estimates California could lose nearly $50 million in sales tax revenue over the coming year by exempting medical marijuana patients from state sales tax.
“This will be devastating to state and local governments, who will be on the hook for mitigating the negative criminal impacts of getting high in our communities,” Horton said.
However, only patients who voluntarily get a card from their county health department qualify for the sales tax exemption. Cards usually cost around $150. And previously, the only real benefit to getting one was that it may have offered extra security for any medical marijuana consumers who were stopped by law enforcement.
Counties only issued 6,667 cards for medical marijuana patients in the 2015 fiscal year, according to data collected by the California Department of Public Health. While there are no hard numbers on the total number of medical marijuana patients in California, most agencies estimate fewer than 2 percent of patients get county cards.
A 2 percent drop from last year’s marijuana sales tax revenue total means California could lose around $1.2 million in 2017.
That number could go up if more patients snag ID cards in hopes of saving at the register. But so far, multiple counties said Thursday that they haven’t noticed an increase in people applying for cards since Prop. 64 passed.
NO CHANGE AT SHOPS
Meanwhile, a dozen Southern California dispensaries reached by phone Thursday said nothing had changed in terms of their tax policies since Prop. 64 passed.
“We’re charging state sales tax, absolutely,” said Robert Taft, co-owner of 420 Central licensed dispensary in Santa Ana.
Most shop workers and even many owners seemed unaware of the sales tax dispute, insisting only that the 15 percent excise tax wouldn’t kick in until 2018.
Attorney Aaron Herzberg, co-owner of OC3 dispensary, is well versed on the conflict. But he said his shop doesn’t have a procedure in place that would allow them to immediately stop charging sales tax for patients with county IDs.
The problem, Herzberg explained, is that only an estimated 30 percent of dispensaries in California have even been paying state sales tax. So to be competitive, shops like his that do follow the law often don’t tax customers at the register. Instead, they build the tax rate into their prices.
“People are so accustomed to the illegal marketplace that they are offended if you charge sales tax,” he said. “People complain and they’ll just go to an illicit store that doesn’t charge tax.”
It’s a legacy leftover from California allowing its medical marijuana industry to go largely unchecked for the past 20 years, he said.
That’s why Horton and other Board of Equalization members have expressed doubt over how many dispensaries will follow the new laws and fully report their taxes, citing a historic 40 percent compliance rate.
But Herzberg is confident that Prop. 64 and new medical marijuana regulations approved in 2015 are already starting to change that.
At his new dispensary Bud & Bloom opening soon in Santa Ana, they’ll be ringing up sales tax at the register – with no charge for card-carrying medical marijuana patients.