California Legalization Creates Accidental Tax Holiday for Patients

California cannabis patients: Do you have a Department of Public Health-issued medical marijuana ID card? If so, you’ve just gotten out of paying state tax on cannabis until 2018. Thank the authors of Proposition 64—even though they didn’t mean it.

That’s right, the statewide tax break was a mistake, the result of an unforeseen hiccup in the 62 pages of legalese that make up the state’s recently passed adult-use legalization law. But no matter—the state Board of Equalization, which administers certain taxes, has already interpreted the measure. That means the tax holiday is legally binding.

Despite an outcry from critics, who worry the tax holiday could cost the state millions, the board last week even sent thousands of letters to dispensary operators, advising them not to collect taxes from patients with state ID cards after Nov. 9.

“It wouldn't make sense to reduce revenue when the whole point of the tax structure is to fund programs.”

“It’s very easy to get a detail wrong in a long, complex document,” cannabis tax expert Pat Oglesby, of the Center for New Revenue, told the Washington Post. He said he’s sympathetic to Prop. 64’s drafters, having found himself in a similar spot before: “I made a more expensive mistake as a staffer on the Joint Congressional Committee on Taxation.”

But how did it happen? Prop. 64 was widely heralded as the product of research, experiences of other legal states, and public policy expertise. How could such a carefully crafted bill end up leaving what could amount to millions of tax dollars on the table?

Here’s how:

Prop. 64 established a 15-percent excise tax on all cannabis purchases—medical and adult-use—to take effect Jan. 1, 2018. But the state already has in place a 7.5 percent sales tax on all goods, including cannabis, and advocates argued the two taxes together would be prohibitively expensive to many in the medical system. To blunt the impact, Prop. 64’s authors waived the sales tax for those medical patients who obtain a state-issued medical marijuana ID card.

Timing is where things went sideways. Like Prop. 64’s provisions for possession, consumption, and home cultivation, the law’s sales-tax exemption kicks in immediately, taking effect the day after the measure passed. The 15-percent excise tax, on the other hand, won’t apply until 2018.

The more-than-yearlong gap is a mistake, Prop. 64 author and Sacramento lawyer Richard Miadich told the San Francisco Chronicle after the tax question first came up. The measure’s clear intent, he said, was to exempt medical cannabis from the state sales tax only after the excise tax took effect. “It wouldn’t make sense to reduce revenue when the whole point of the tax structure is to fund programs,” he said. “It is inconsistent with the statutory language and the statutory intent, which is to create new revenues for the state.”

The tax holiday applies only to medical cannabis patients who’ve obtained state-issued ID cards, which cost $100 and require proof of a medical condition. Patients who have only a doctor’s recommendation still have to pay the tax. Local governments can impose additional taxes at the municipal level.

It’s not yet clear how much the flub might cost the state, as a relatively small number of California patients—about 6,000 to 8,000, according to estimates—have state-issued ID cards. Nevertheless, the Chronicle reports that “ganja aficionados have begun rushing out to obtain state medical marijuana cards at the urging of dispensaries.” Board of Equalization member Jerome Horton said earlier this month that the resulting revenue loss could be as much as 49.5 billion.

Gov. Jerry Brown’s office has not yet commented on the matter. Leaders in the state Assembly are monitoring the situation, the Associated Press reports. “Given the nature of how medical marijuana is typically purchased in California, it’s not clear whether the initiative’s language on sales tax will actually prove to be a significant impact on state revenue,” Kevin Liao, a spokesperson for Speaker Anthony Rendon, told the AP. Of the more than 700 estimated medical dispensaries in Los Angeles, for example, only 135 are allowed by the city. Many of the businesses operating illegally do not pay taxes. Statewide, only about two-thirds of dispensaries have fully complied with state sales tax requirements, Board of Equalization chair Fiona Ma said earlier this month.

Nate Bradley, executive director of the California Cannabis Industry Association, said in an email to the AP that policy experts disagree with the Board of Equalization’s interpretation, since the law was intended to generate tax revenue. Legal precedents do exist for ignoring provisions that are obvious clerical errors, but the board declined to invoke them in its Prop. 64 ruling.

The Associated Press contributed reporting from Los Angeles.