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California Medical Marijuana Retailers: Tax Update & Exemption Rules

author photo of James R. Dumler

It’s been a bit crazy around the California Department of Tax and Fee Administration, one of two new successor agencies to the State Board of Equalization. The state’s politicians and bureaucrats have been scrambling to reconstruct and redistribute most of the functions of an agency that’s been around for over 100 years. With all of that going on, some key changes to various laws and regulations have slipped through the cracks for many of the taxpayers we come in contact with on a consistent basis. With that in mind, I wanted to share an update on how medicinal cannabis is currently being treated in California for sales and use tax purposes.

Voters on November 9, 2016, passed Proposition 64 which paved the way for the legalization of recreational cannabis in California. While the recreational use of cannabis grabbed the headlines, there was a significant change to how the medicinal use of cannabis is taxed in the state, which went largely unnoticed by many in the industry.

As virtually everyone in the industry knew, medicinal cannabis was not exempt from sales tax in California prior to the passage of Proposition 64. While the issuance of a Public Health ID card permitted one to obtain and use restricted quantities for medicinal purposes, it did not exempt the drug from state sales tax. The passage of Proposition 64 changed that.

As of November 9, 2016, retailers can make exempt sales of medicinal cannabis, medicinal cannabis concentrate, edible medical cannabis products, or medicinal topical cannabis products to qualified purchasers (patients). To exempt the product from sales tax, the patient must furnish the retailer with a valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health (CDPH) along with a valid government issued identification card (ID). The retailer should make copies of these documents at the time of sale and retain them along with a copy of the applicable sales invoice in order to support the claimed exemption.

The following wording and information should be included on the MMIC:

  1. Issued by ‘State of California’ with the state seal
  2. A notation of ‘patient’ or ‘caregiver’
  3. Patient’s or caregiver’s photo
  4. 9-digit ID number
  5. CDPH website
  6. Expiration date
  7. County that issued the card

In addition to retaining copies of the patient’s MMIC and government-issued ID along with the sales invoice, it’s advisable to visit the CDPH’s website to confirm the information on the MMIC- especially if it’s the patient’s first time visiting your establishment. Many of my clients create a binder to hold these photocopies which can be referenced each time a patient comes in to make a purchase. I recommend training your staff to reference the binder each time a repeat patient attempts to make a purchase, since the MMIC and ID card must both be valid at the time of purchase. If you don’t retain this documentation, or if either of the cards have expired at the time of purchase, you as the retailer will be responsible for the tax on that sale. The unfortunate part of that scenario is that the tax will come out of your bottom line because you didn’t collect it from your customer.

Auditors love finding ways to disallow claimed exemptions, so please heed the forgoing advice and retain copies of the two ID cards and sales invoice for each transaction/patient. If you own or operate a retail marijuana dispensary - please feel free to contact me directly (see below) if you have any questions or concerns.

About the Author: James R. Dumler is a Certified Public Accountant (CPA) and an Equity Partner at McClellan Davis LLC, a professional firm specializing in a full spectrum of multistate sales and use tax services. James’ primary focus is multi-state sales and use tax audit, compliance and appeals matters, as well as cigarette & tobacco tax and sales and use tax return preparation. In addition, James has assisted numerous medical distributors and health facilities with compliance, refund and audit related matters in jurisdictions nation-wide.

Contact the Author: James can be easily reached using the "Request a Consultation" link on his associated FIRM PROFILE page. Post-related comments or questions are also welcome and may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page.

Other recent “Medical Industry Tax” posts by James R. Dumler:

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