California Marijuana Law Erroneously Allows Tax-Free Marijuana Through 2017

California’s new marijuana law could cost millions in taxpayer dollars before it actually raises billions, thanks to a technicality in the language of the law that was just passed. 

Prop. 64, which legalized recreational marijuana, was always intended to raise substantial tax revenue for the state. However, it was intended to do so with a 15 percent excise tax on both medicinal and recreational marijuana. The law also imposes a 7.5 percent sales tax on top of that for recreational marijuana, but repealed it for medical marijuana. Medical marijuana buyers have been paying that sales tax since the drug first became available as medicine. The idea was that medicinal users of the drug would get a tax break relative to recreational users once recreational sales start in January 2018. However, there was one problem: The 62-page initiative did not include the January 2018 target date relative to the repeal of the medical marijuana sales tax.

That means the repeal of medical marijuana sales tax in California became effective immediately. It also means that medical marijuana may be obtained tax-free in California until next January, when it will be under that 15 percent tax. 

Tax-free sales of medical marijuana are going to leave the state facing a much lower marijuana tax revenue benefit. Those who drafted the law have said publicly it was not their intention to effectively create a tax-free holiday for marijuana. The state’s Board of Equalization has disagreed with this.

If recreational users do become regular customers in the tax-free medical marijuana market, in which they would have an incentive to stay, tax revenues even for 2018 could end up falling far short of what those who wrote the law anticipated. The notion is that if someone has access to medical marijuana, there is no incentive to start instead obtaining it through the recreational market, where they would have to likely find a new dispensary and preferred types of marijuana, only to pay higher taxes.

This was a big part of the reason Washington state shut down its medical marijuana program after the drug became legal for recreational purposes. The medical marijuana market was so loosely regulated and lightly taxed that Washington had no choice but to shut it down if there was any hope of a sustainable recreational marijuana system.

However in California, that’s not an option – at least not right away. That’s because both the recreational and medical systems were both created by the very same ballot initiative.

Under the law, users of medical marijuana have to present a state-issued patient ID card in order to buy marijuana that is tax-free. State officials are looking at this requirement – which costs $100 plus time to weave through the administrative red tape – to stop the state from losing tens of millions of dollars in taxes. That could mean we’ll be cracking down on dispensaries to make sure medical customers have a state-issued ID.

So far, it’s not clear that will work. A recent Board of Equalization analysis found that two out of three dispensaries haven’t been totally compliant with sales tax requirements up to this point.

Dispensaries should consider consulting with an experienced marijuana lawyer in L.A. to ensure they are compliant with all state regulations.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, collectives, patients and those facing marijuana charges. Call us at 949-375-4734.

Additional Resources:

The marijuana-initiative blunder that could cost California millions of dollars, Nov. 16, 2016, By Keith Humphreys, The Washington Post

More Blog Entries:

California Cannabis Could Be What Autos Are to Detroit, Nov. 2, 2016, California Marijuana Lawyer Blog