SACRAMENTO, Calif SACRAMENTO, Calif. – As one of California’s pioneering marijuana dispensaries, the Berkeley Patients Group served thousands of medical marijuana users and handled tens of millions of dollars in pot transactions a year.

But until 2007, the dispensary didn’t charge customers sales taxes nor did it pay them to the state, contending that marijuana as medicine wasn’t taxable.

California tax officials, strapped for cash, disagreed and now the state Board of Equalization is ordering the Berkeley facility to pay $6.4 million in back taxes and interest on $51 million in pot sales between 2004 and 2007.

The case is illuminating efforts by the state – plus Sacramento and other cities – to collect revenues from California’s burgeoning medical cannabis industry.

Since last October, the state tax board has completed audits on 32 other marijuana dispensaries, demanding $4.5 million in sales taxes and interest.

In September, the board ordered another Berkeley medical marijuana outlet, Community Flavor, to pay $600,000 in taxes and interest on $4.9 million in marijuana and $670,000 in pot cookie sales the dispensary argued were exempt from taxes between 2005 and 2008.

“It is our intent to identify where there could be a problem and then aggressively go in and enforce the law,” said BOE Chairman Jerome Horton. “You will see a lot more investigations to assist them in complying with law.”

The BOE estimates it takes in $57 million to $105 million in sales taxes from dispensaries ringing up to $1.3 billion in annual pot transactions.

The industry’s ultimate tax value to the state or local communities is hard to calculate. The BOE, in a concession to dispensaries worried about federal prosecution, requires them to obtain state sales permits but doesn’t mandate they disclose what they sell.

BOE member Betty Yee said the growing California dispensary trade may someday generate $400 million in state sales taxes. George Mull, attorney for the California Cannabis Association, says dispensaries could produce $140 million if they all paid the standard 8.25 percent sales tax.

The Berkeley Patients Group and medical marijuana advocates complain tax authorities are targeting them after only belatedly explaining the rules.

In 2005, in the case of a San Francisco dispensary, the Hemp Center, the BOE declared that medical marijuana was “tangible personal property” subject to taxation.

But Kris Hermes, a spokesman for Americans for Safe Access, a marijuana patient advocacy group, said the state didn’t begin informing dispensaries of its sales tax rules until 2007 – and then went after them for back taxes.

“These facilities shouldn’t have to pay from before they were notified,” Hermes said. “But the BOE is saying they should pay a tax for as long as they existed. That is punishing them unnecessarily.”

California marijuana dispensaries must operate as nonprofits. And Elisabeth Jewel, a lobbyist for the Berkeley Patients Group, said it doesn’t have the money to pay its 2004 to 2007 tax bills.

She said the center, which employs 76 people, and offers free patient services, such as counseling and AIDS testing, paid $1.5 million in state sales taxes last year. It is seeking a reduced settlement for 2004-2007.

“We’re going to try to negotiate this down to an amount that the Berkeley Patients Group can afford while staying in business,” she said.

Yee said she urged the dispensary to try to settle its tax debt through a state “offer in compromise” program that may allow businesses to negotiate a smaller tax payment based on ability to pay. “We’re not interested in shutting them down,” she said.

But the BOE is searching for medical marijuana outlets that may owe taxes. Horton said the agency knows of only 300 dispensaries with proper state sales permits, while more than 800 are registered with cities and counties.

Mull, the cannabis association lawyer, said many dispensaries didn’t register with state tax authorities or pay taxes for years out of fear of triggering raids under federal laws against marijuana.

He said the state should consider “some type of amnesty” on back taxes to bring unregistered outlets onto California tax rolls.

California’s largest dispensary, Harborside Health Center in Oakland, which pays more than $2 million in yearly state sales taxes, recently confirmed it is being audited by the Internal Revenue Service.

Meanwhile, dispensaries are about to get new taxes – and scrutiny – on the local levels. Nearly a dozen California cities have approved local medical marijuana taxes.

Oakland is expecting to take in $1.4 million in pot taxes this year after boosting its local medical pot tax from 1.8 percent to 5 percent. Los Angeles voters Tuesday approved a 5 percent tax. And Sacramento is due to begin collecting July 1 on a voter-approved 4 percent tax on local medical marijuana sales.

“We’re making them a legitimate business,” said Sacramento City Council member Sandy Sheedy. “And by doing that, you pay taxes.”

February 18, 2011 – An advertisement for Oaksterdam University reads “Cannabis Industry Now Hiring,” along with claims to a salary between $50,000 and $100,000 dollars. To the average American, such an ad would surely be deemed a joke — but in Oaksterdam, a district in downtown Oakland lined with medical marijuana dispensaries, training centers, head shops and the like, cannabis is serious business.

Marijuana has been used for thousands of years, and hemp itself was for centuries of great importance to the United States economy. But in the early to mid-20th century, many states began to ban the drug (the reasons for which are moot and worthy of their own article), and soon marijuana consumption became illegal under federal law.

The latter half of the 20th century saw a resurgence in cannabis usage and in 1996, California became the first of several states to allow the use of the drug for medicinal purposes. Since, “medical marijuana” has exploded with an estimated 2,100 cannabis dispensaries in California alone. Last year, California once again pioneered the push to legitimize marijuana with a proposition, Proposition 19, that would make it legal in a manner similar to alcohol; the act was ultimately defeated by a narrow margin.

Yet the question still stands — if countless studies (some more legitimate than others) claim the drug has a variety of medicinal benefits and is less harmful than tobacco, alcohol and other drugs, why is it still illegal under federal law?

One important facet of California’s proposition was an excise tax that proponents claimed would bring billions of tax dollars to a state in economic turmoil. From an economic perspective, it seems pretty rational — imposing a tax on a multi-billion dollar market and cuttting spending on law enforcement will yield more money.

Let’s think in terms of real dollars: a 2003 study by the Office of National Drug Control Policy estimated domestic spending on cannabis prosecution to be a whopping $29 billion each year. Furthermore, a study commissioned by the United Nations in 2006 estimated the North American cannabis market to be worth upwards of $60 billion per year, more than the combined value of corn and wheat. It seems obvious that the economic benefits would be outstanding, but there are other contributing factors.

Price points
First and foremost, it is a basic rule of economics that the easier it is to obtain a product, the less the product will cost. Taking marijuana off the black market and into a legitimate marketplace will make it easier to buy and consequently cause a considerable drop in price. In fact, a study by the international think tank Research and Development Corporation concluded that Proposition 19 could potentially lead to a decrease in the price of marijuana by as much as 80%.

If prices were to fall so drastically, it is unknown whether the economic tax benefits would outweigh the social costs.

Cannabis consumption
Secondly, the law of supply and demand tells us that as the price of a product decreases, consumption will increase. This is something that legalization opponents are quick to point out, and it is difficult to predict exactly how marijuana usage in the United States would change.

Enter the Netherlands, a country notorious for its lax (albeit somewhat complex) drug policies. Though marijuana isn’t exactly legal in the Netherlands, there exists a tolerance policy where possession of up to five grams is not prosecuted. The country distinguishes between “soft” and “hard” drugs — the idea being that tolerance of soft drugs will keep people away from the harder ones.

This legal distinction has faced much criticism, yet surprisingly young adults in the Netherlands have lower rates of “soft drug” use than those in most other Western European countries with less tolerant laws. Rates in Spain and Italy were twice as high as those in the Netherlands between 2002 and 2004, and cannabis use actually declined in the Netherlands in 2009 according to a study by the European Monitoring Centre for Drugs and Drug Addiction.

Weed prohibition
Many compare the illegality of marijuana to the Prohibition Era of the 1920s and 30s, and argue that legalization would have effects similar to those of the repeal of the Eighteenth Amendment. However, there are critical differences between the legality of alcohol and cannabis.

Socially, alcohol has widely been considered a part of American society, whereas marijuana carries a less acceptable reputation. Economically, the production of alcoholic spirits and beverages is difficult and costly on an individual level, and major alcohol companies have existed for centuries. Marijuana production is vastly different — there exist no major marijuana companies, and the thought of corporate cannabis sounds silly.

Nevertheless, the Prohibition Era was notorious for multi-million dollar crime rings involved in the underground trade of alcohol, and the same exists today for the marijuana industry.

The American marijuana trade is a large part of the ongoing drug war with and within Mexico, Canada and other countries. Pro-legalization activists argue that by legalizing marijuana, criminal activity would literally decrease and take the “shady” aspects out of the drug trade.

We may never know exactly what America would be like should marijuana be legalized, but the debate over doing so will surely never die until it happens. Source.

See Also:

How Big Is The Marijuana Market?

Legal Pot Means Big Savings on Law Enforcement