CA Sales & Use Tax for Medical Marijuana Dispensaries

Rex Halverson

I noticed several ads in the local newspaper this weekend that advertised medical marijuana and offered “Free 1/8th with any $40 min. donation” or “Free ½ gram concentrate.” Additionally, there were offers for “3% back for Every Donation” and “20% off when you preload your Loyalty Member Rewards Card.”

Although these ads are probably effective to lure customers to medical marijuana dispensaries, they also attract the notice of various taxing authorities, like the California Board of Equalization (BOE) that collects sales and use tax revenue, and may set your dispensary up for a sales and use tax audit. Why? Because the BOE knows that the sales and use tax laws, regulations and rules are complex and difficult for a medical marijuana dispensary to apply to their particular way of doing business, e.g., charging memberships fees, offering discounts, selling tangible personal property, selling medical marijuana available only to patients with a physician’s recommendation, selling cookies, candy bars or other edibles and selling services (massage, yoga, counseling, medical advice, acupuncture, hospice services, fitness training, etc.).

What is and isn’t subject to Sales Tax for California Marijuana Dispensaries?


Services are not subject to sales or use tax as of this date; but, the Legislature has considered taxing services over the years. The latest bill, SB 8, was introduced by Senator Bob Hertzberg on December 1, 2014 but it never got out of committee and has since died. Senator Hertzberg intends to resurrect it in 2016 so you must be vigilant. If he does so, a copy can be found here.

Tangible Property

As for tangible personal property, i.e., anything that “may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses” (Rev. & Tax. Code Sec. 6016), these items are generally subject to sales or use tax unless explicitly exempt under the statutes. This would include papers, oils, rollers, lip balm, body lotions, glass or metal screens, vaporizers, lighters, T-shirts, key chains, pipes, etc. It also includes all marijuana.

In fact, the BOE has always considered medical marijuana taxable. But, prior to October 2005, the BOE did not issue seller’s permits to sellers of property that may be considered illegal; so, it has only been for the last ten or so years that a dispensary must secure a seller’s permit in order to lawfully operate. This seller’s permit requirement applies to growers and/or suppliers, as well.

Medical Marijuana

The argument that medical marijuana is exempt since it constitutes “prescription medicine” is a valid argument; and, in fact, the BOE Legal Division has determined that marijuana furnished in compliance with the Compassionate Use Act of 1996 and the Medical Marijuana Program, qualifies as “medicine” within the meaning of Regulation 1591, subdivision (a)(9)(B). However, qualifying as a medicine is only one of the requirements for the sale to be exempt.

To qualify under Regulation 1591, the sale of the marijuana must also meet one of the following conditions: (1) prescribed for treatment by a medical professional authorized to prescribe medicines AND dispensed by a pharmacy; (2) furnished by a physician to his or her own patients; or (3) furnished by a licensed health facility on a physician’s order.

The physician’s “recommendation” for the patient’s use of marijuana, which fulfills all of the requirements of Regulation 1591, subdivision (a)(7), listed below, will generally qualify as a prescription for purposes of the regulation according to the BOE.  Subdivision (a)(7) states what all of us already know. That is, a prescription must have: (1) the name and address of the patient; (2) the name and quantity of the drug prescribed and directions for use; (3) the date issued; (4) the name, address and telephone number of the prescriber, his license classification and his or her registry number, if a controlled substance is prescribed; (5) a legible and clear notice of conditions for which the drug is being prescribed, if requested by a patient; and (6) if in writing, signed by the prescriber.

The vast majority, if not all, medical marijuana dispensaries do not qualify as selling medicines because they are neither pharmacies nor licensed health facilities. The former must hold a license issued by the California State Board of Pharmacy and the latter is defined as a facility licensed under state law to provide 24-hour impatient care or a state-licensed clinic.

In at least one sales tax appeal case, i.e., Berkeley Patients’ Group, Inc., heard by the Board in 2011, the Board concluded that their medical marijuana dispensary was not licensed and did not meet the definition of a clinic or health facility as defined in Health and Safety Code section 1200 or, in turn, under Revenue and Taxation Code section 6369.

However, if a medical marijuana dispensary hired a licensed California pharmacist to dispense medical marijuana and obtained a license issued by the California State Board of Pharmacy, the sale of medical marijuana by that pharmacy would indeed be exempt from California sales tax.

Medical Marijuana Edibles

How about medical marijuana cookies, brownies, candy bars, or other edibles containing cannabis? All are taxable under California law despite the fact that food items are exempt.

Although I believed that Board staff would rely on the “true object test” to make its determination, that has not been the case.  Under the “true object test” you consider whether a patient is buying the cookie for its taste, smell, or because he or she is hungry, or because it contains THC or CDC. The BOE would determine that it is the latter that primarily motivates the buyer; thus, all sales of cookies, brownies and other edibles containing marijuana or cannabis by a medical marijuana dispensary would be taxable. But, in fact, in all BOE notices, the BOE simply states that a product may not be both a food and a medicine under the Sales and Use Tax Law.

Membership Fees

The next item to be discussed on my list of issues that apply to medical marijuana dispensaries are the membership fees being charged. The BOE adheres to Revenue and Taxation Code section 6011.1 and Regulation 1584.  Section 6011.1 provides that initial or periodic membership fees paid to a “consumer cooperative” shall not be included in the definition of “sales price” but this section shall not be interpreted to permit consumer cooperatives to exclude from sales price the cost of property sold.

Accordingly, membership fees in many circumstances would not be taxable for sales tax purposes.  However, if a medical marijuana dispensary only charged a membership fee and provided all medical marijuana free to its members, the BOE would no doubt make an audit assessment based on the cost of the marijuana.

The same is true if a medical marijuana dispensary gave out free samples to patients although you might have an argument that there was no consideration paid.  It is far safer to accrue use tax based on the cost or average selling price of the product given away.

Non-Profits, Not-For-Profits, and Collectives

Does it matter that the medical dispensary is a non-profit or not-for-profit or collective?  Absolutely, not, as not making a profit does not relieve the seller of his or her California sales or use tax liability. That is, in California the sales tax is imposed on retailers, engaged in business in California, for the privilege of selling tangible personal property at retail to persons using that property within California.

Furthermore, “sale” is defined in Rev. and Tax. Code section 6006 as any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.

Grow Facilities, Cultivators, Growers, and Suppliers

As for the grow facilities, the cultivators, growers or suppliers of marijuana plants, under California law, they are all required to register with the Board of Equalization and obtain a Seller’s Permit. In turn, when they sell to a dispensary, it is making a sale for resale usually and its sales are not subject to sales or use tax. However, that pre-supposes that the dispensary provided the supplier with its resale exemption certificate in the form required by Regulation 1668.

Preparation Now Can Make a World of Difference Later

Finally, one last comment about being prepared for a sales and use tax audit.  A dispensary or grow facility may be raided by the DEA or Feds on any day, and when that happens the DEA or Feds often confiscate computers, records and receipts. By such action, a dispensary owner or marijuana supplier could find himself or herself in the unenviable position of not being able to defend themselves in a sales and use tax audit or income tax audit down the road. Don’t let that happen to you! Consider storing copies of all records and receipts with your attorney or better yet, your trusted tax attorney.

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