It seems as though you can’t turn on your television these days without hearing something about the legalization of marijuana. It’s a hot button issue that has proponents on both sides of the political spectrum, with each side claiming to have scientific evidence in support of their position. While the political issues surrounding marijuana have been discussed ad nauseam, this blog post will focus on a less publicized and seldom discussed sub-topic: whether medicinal marijuana is exempt from sales and use tax.
To provide some context, medicinal marijuana, also known as medical marijuana, is defined as cannabis that is used to treat or relieve a symptom, ailment or condition. Medicinal marijuana is generally only available through a written recommendation from a state board licensed physician/specialist (also referred to as a marijuana card).
I consistently address questions from taxpayers regarding the taxability of medicinal marijuana. As discussed in my prior blog post, Which States Tax Prescription Medicine, the vast majority of states (48) exempt prescription medicine from tax. This is the root of the confusion surrounding the issue for many taxpayers: since medicinal marijuana generally must be dispensed under a written recommendation from a licensed physician/specialist (similar in form and substance to a prescription) most taxpayers believe that it qualifies for the prescription medicine exemption in every applicable state. However, because the written recommendation is not a prescription (because marijuana is not monitored/approved by the FDA) the product being dispensed does not fall within the definition of a prescription medicine, and consequently, it does not qualify for the related exemption where applicable.
There are currently 18 states with active sales, use, or excise tax schemes that have legalized marijuana use for medicinal purposes: Arizona, California, Colorado, Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan*, Nevada, New Jersey, New Mexico, New York, Rhode Island, Vermont and Washington.
As states wrestle with the idea of legalizing marijuana for medicinal purposes, most interested parties realize that it can be a significant tax revenue boon. Consequently, the vast majority of jurisdictions that have legalized medicinal marijuana, tax the product even if it’s dispensed under a written recommendation from a licensed physician/specialist. The following 13 states subject medicinal marijuana to sales and use tax: Arizona, California, Colorado*, Connecticut, District of Columbia*, Hawaii*, Illinois*, Maine, Nevada, New Jersey, New Mexico, Rhode Island, Washington*. Here are further details pertaining to 5 of these states:
- Colorado: sales of medicinal marijuana are taxed at the general sales tax rate. Marijuana sold for recreational use is taxed at the general sales tax rate and a 10% special sales tax rate.
- District of Columbia: sales of medicinal marijuana are subject to a 6% sales tax rate.
- Hawaii: sales of medicinal marijuana are generally subject to Hawaii’s excise tax. However, amounts received by a hospital, infirmary, medical clinic, health care facility, pharmacy, or a practitioner licensed to administer the drug to an individual are exempt.
- Illinois: as of January 1, 2014, "prescription and nonprescription drugs" includes medicinal marijuana purchased from a registered dispensing organization under the Compassionate Use of Medical Cannabis Pilot Program Act for purposes of the sales, use, retailers’ occupation and service occupation taxes. This revision subjects medicinal marijuana to a lower rate of tax.
- Washington: starting July 1, 2016, medicinal marijuana will be exempt from tax under the following conditions:
- marijuana concentrates, usable marijuana, or marijuana-infused products identified by the Department of Health as having beneficial medical use, and products containing a THC concentration of 0.3% or less, sold to qualifying patients or designated providers with recognition cards by marijuana retailers with medical marijuana endorsements;
- marijuana concentrates, usable marijuana, or marijuana-infused products identified by the Department of Health as having a low THC, high CBD ratio, sold by marijuana retailers with medical marijuana endorsements to any person;
- topical, products containing a THC concentration of 0.3% or less sold by health care professionals; and
- marijuana, marijuana concentrates, usable marijuana, marijuana-infused products, or products containing a THC concentration of 0.3% or less produced by a cooperative and provided to its members.
The following 4 states exempt medicinal marijuana from tax: Maryland, Massachusetts, New York, and Vermont.
- Michigan: Michigan has a unique legal quandary on its hands. While a proposal to legalize medicinal marijuana was passed by voters in 2008, the Michigan Supreme Court ruled in 2013 that marijuana dispensaries are illegal in the state (State of Michigan v. McQueen). As a result, medicinal marijuana patients in Michigan must grow their own marijuana or get it from a designated caregiver.
There are other pertinent questions surrounding this issue that were not addressed in this post, including whether a taxpayer needs to register for a permit/license in their state if they are only making exempt sales of medicinal marijuana. Please feel free to leave a comment if you would like me to address this question or any others related to this post.
Other recent “Medical Industry Tax” posts by James R. Dumler:
- Taxability of Orthotic Devices in California
- New Medical Equipment Tax Refund Opportunities in Missouri
- California Medical Marijuana Retailers: Tax Update & Exemption Rules
- Sales & Use Tax Refund Opportunities: Durable Medical Equipment
- Medical Equipment Tax Change Opens Door: CA Regulation 1591