What’s Behind Washington’s Attempt To Tax Medical Marijuana?

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Cannabis Defense Coalition

​Records Released In Cannabis Tax Flap

What inspired Washington state’s recent efforts to collect sales tax on medical marijuana sales at dispensaries — despite the fact that such sales are illegal, according to the state and federal governments? A marijuana activist group has received documents which may provide the answer.
The Washington State Department of Revenue mailed letters to 90 dispensaries two weeks ago, insisting that medical marijuana is not exempt from state sales tax — as are other medicines — and telling dispensaries they must collect that money and turn it over to the state.
But as noted by the Department of Revenue itself, “Current Washington State statutes (and Federal law) do not allow a prescription for marijuana because it is a Schedule I controlled substance. Even though Washington has a specific ‘medical’ marijuana chapter in statute, the prescription statutes and case law do not acknowledge that any valid medical purpose exists for marijuana.”
“Marijuana is a Schedule I controlled substance which cannot be prescribed under either federal or state law in Washington,” the document notes. “Since marijuana cannot be prescribed, retail sales tax applies to purchases of marijuana and must be collected/remitted by the seller.”

Activist Group Asks For, Gets Records From Department of Revenue

Graphic: CDC

​The Cannabis Defense Coalition, a marijuana activist group based in Seattle, has received the first installment of records from the Washington State Department of Revenue in CDC’s efforts to shed light on what led to the department’s recent attempt to tax medical cannabis.
“We have scanned the documents in searchable PDF format,” CDC spokesman Ben Livingston told Toke of the Town. “There are some interesting (and some WTF?) quotes in there.”
“In July of 2010, DOR received a call from the Spokesman Review,” reads the “Background” section of the document release. “The paper was doing an article on medical marijuana and asked if such sales were subject to retail sales tax. The Department’s Research Division received a similar question from a consumer at the same time. The consumer paid retail sales tax on their purchase of marijuana and wondered if the seller was applying the tax correctly.”
“These inquiries came after of [sic]several other inquiries about medical marijuana taking place in DOR field offices,” the document notes.
“The questions were asked by consumers and persons in the business of selling marijuana,” the document reads. “There appeared to be a need to educate the industry and consumers regarding sales of medical marijuana.”
In one of the most priceless passages of the document, a frustrated Gary Davis of the Washington Department of Revenue notes in an email to three other DOR personnel that his own employees have been unable to carry out their online dispensary research due to website blocking put in place by the state itself.
“Wanted to let you know that I’ve asked Aaron and Scott to do some digging around on the Internet to try to find dispensaries and/or association that we could use to notify the industry regarding the taxation of medical marijuana,” Davis wrote.
“Some sites are blocked and you may get an alert saying staff has been trying to access these sites,” Davis wrote somewhat plaintively. “All in trying to support what Exec wants done to notify the industry. Don’t know if we should let IS know and if we can get around the blocks?”
Selected Department of Revenue Quotes
All the following quotes were taken from Washington State Department of Revenue records released to the Cannabis Defense Coalition as part of a Freedom of Information request.
“Is there anything that is prohibiting us from taxing clubs that sell medicinal marijuana? There is an individual who is meeting with the governor at 10:00 on the 22nd and then coming to Revenue (I passed this on to Mike who sent it to Nicole) to discuss five very affluant [sic]clubs in King County that he thinks we should start taxing. Not because he doesn’t like them, but because he would like to see them legitimized through our acceptance and taxation. I was told, years ago, we could not tax illegal income. Is that correct?”
~ Steve Bren, Department of Revenue, December 13, 2006 (page 3)
“We have two fellas in our NBO today who are growing and selling medical marijuana. Do we have any guidance on this?”
~ Kurt Sedlacek, Department of Revenue Spokane Field Audit Manager, June 17, 2009 (page 6-7)
“I really need to get a legit decision on this at some point as too many of these guys are popping up. Don Morley just sent me a referal for yet another medical marijuana distributor in my area this week too. It’s an entire industry at this point. Sales of product in the form of the weed itself, tea, lozenges, spaghetti sauces, tincture, house favorite brownies of course, and a whole variety of items. Some farm it. Some purchase out of other states and the Sheriff’s department brings the weed to the person’s business and they sell it from there. I could go on for hours, but I’m getting the munchies.”
~ Kurt Sedlacek, Department of Revenue Spokane Field Audit Manager, September 1, 2009 (page 8)
“My only comment about marijuana cannot be prescribed. It is illegal to sell marijuana in the state according to references you provided and DOH. I’m just baffled that these dispensaries are so openly operating. I feel I’m missing something. These dispensaries are going to all the state agencies in my area and trying to play by the rules, so they say. They have CPA’s advising them, attorneys, etc. But, when DOH is saying adamantly these dispensaries are not legal, and the law clearly states it, I’m not sure why local enforcement isn’t doing anything to stop them from selling the marijuana. Still, I realize it’s a sidenote to our discussion, as I understand even though it is illegal, it is a transaction creating a potential tax liability. DOH is adamant it cannot be legally sold, whether through a pharmacy (where it doesn’t exist anyhow) or any other way.”
~ Kurt Sedlacek, Department of Revenue Spokane Field Audit Manager, September 3, 2009 (page 9)
“I decided to call WSDOH for further clarification, because if these rules are true, then dispensaries are illegal. In fact, WSDOH agrees. They don’t know how these dispensaries are allowed to exist and they have recently been getting tips/complaints about illegal dispensaries popping up. One in Spokane was mentioned to me by the employee at WSDOH.”
~ Kurt Sedlacek, Department of Revenue Spokane Field Audit Manager, September 3, 2009 (page 10)
“I just wish the Sheriff’s Dept would run these guys out of business so we wouldn’t have this issue in the first place.”
~ Kurt Sedlacek, Department of Revenue Spokane Field Audit Manager, October 6, 2009 (page 26)
“I just got off the phone with Bert Caldwell, the reporter from the Spokesman Review. I explained our position regarding the taxability of medical marijuana, He is now interested in knowing the following: Is there any way we can identify revenue from these sales? Are we aware of any businesses reporting tax from sales of medical marijuana?”
~ Janet Shimabukuroh, Department of Revenue Program Manager, July 27, 2010 (page 72)
“Here is the first outfit (The Herbal Coop) that has identified itself as actually selling medical marijuana. We included a more detailed analysis gotten from Pat since they are likely not to know our position. Just wanted to let you know before we sent this out.”
~ Gary Davis, Department of Revenue, September 20, 2010 (page 73)
“Wanted to let you know that I’ve asked Aaron and Scott to do some digging around on the internet to try to find dispensaries and/or association that we could
use to notify the industry regarding the taxation of medical marijuana. Some sites are blocked and you may get an alert saying staff has been trying to access these sites. All in trying to support what Exec wants done to notify the industry. Don’t know if we should let IS know and if we can get around the blocks?”
~ Gary Davis, Department of Revenue, November 30, 2010 (page 82)
“A letter was mailed last Friday to approximately 90 dispensaries and interested organizations and associations regarding sales of medical marijuana. The letter explains that retail sales tax must be collected on sales of medical marijuana to consumers, and the dispensaries must pay business and occupation (B&O) tax under the retailing classification on the income derived from the sales. Sales of medical marijuana do not qualify for the sales tax exemption for prescription drugs. A Tax Topics article regarding this issue is available on the Department’s website.”
~ John Wack, Department of Revenue, December 13, 2010 (page 84)
The complete PDF file, which contains 84 pages and is eight megabytes in size, is available by clicking here.
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