California Sales and Use Tax Law to transactions involving the growth and distribution of medical marijuana
The following is an email sent to the State of California Board of Equalization requesting advice regarding the proper application of the California Sales and Use Tax Law:
A group of people who are all authorized medical cannabis patients organize to cultivate cannabis collectively using multiple communal gardens throughout California. Though some actively participate in the actual gardening more then others, every member of the group agrees that the cannabis cultivated is owned by all members of the group collectively. At times some members of the group choose to contribute more labor or resources then others to ensure all members of the group have adequate medication to sufficiently fulfill each members medical needs. The group keeps records of all the expenses incurred in producing and providing cannabis to the members and each member contributes to the costs and expense incurred, and shares in the cannabis produced. Thus the group produces the cannabis together, and none of the cannabis will change ownership from the group to anyone outside the group.
In a scenario such as that described above, in the opinion of the California State Board of equalization, has a ‘sale’ taken place that would require the collection of sales tax?
Here is the reply from the State of California Board of Equalization:
Thank you for your electronic correspondence (e-mail) requesting our advice regarding the proper application of the California Sales and Use Tax Law.
As a preliminary matter, section 6596, “Excusable Delay–Reliance on Advice,” of the California Sales and Use Tax Law grants taxpayer’s relief from future liabilities if the underreported tax is based on incorrect written advice provided by a Board representative. The answer given is intended to provide general information regarding the application of tax based on the information provided and will not serve as a basis for relief of liability under Revenue and Taxation Code (RTC) section 6596.
For your general information, the RTC imposes a sales tax upon retailers for the privilege of selling tangible personal property at retail in the State ofCaliforniaand is measured by gross receipts from retail sales. The use tax is complementary (and mutually exclusive) to the sales tax and is imposed upon the storage, use, or other consumption in this state of tangible personal property, not subject to the sales tax. Either the sales or the use tax applies to all retail sales of tangible personal property to consumers inCalifornia, unless otherwise exempted by statute or type of transaction. The retailer (seller) is liable for sales tax. The obligation to pay the use tax is on the consumer.
In your e-mail you requested guidance on the proper application of California’s Sales and Use Tax Law to transactions involving the growth and distribution of “medical marijuana.” You explained that a group of people who are all authorized medical cannabis patients organize to cultivate cannabis collectively in multiple communal gardens throughoutCalifornia. Though some actively participate in the actual gardening more than others, every member agrees that the cannabis cultivated belongs to all of them collectively. The group keeps records of all the expenses incurred in producing and providing cannabis to the members, and each member contributes [his or her] equitable share of the costs and expense incurred, and shares in the cannabis produced. Thus the group produces the cannabis together, and none of the cannabis will change ownership from the group to anyone outside the group.
Specifically, you asked whether a “sale” has taken place. In order to provide you with a response, I have made several assumptions. Please be aware that if the factual scenarios and the assumptions upon which I base my response differ from your actual circumstances, my analysis would be different and the application of tax may be different.
RTC section 6006, in pertinent part, defines a “Sale” to mean and include:
- Any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. “Transfer of possession” includes only transactions found by the board to be in lieu of a transfer of title, exchange, or barter.
If a transaction does not involve any transfer of tangible personal property for consideration, then the transaction is not subject to sales or use tax inCalifornia. Your e-mail states and we assume that each member contributes an equitable share of the costs and expenses incurred. We assume this means that the contribution to costs and expenses is in proportion to the share of the cannabis that is received. Furthermore, we assume that all members participate in the cultivation, although you point out that some may participate more than others. We assume that no one pays any amount above and beyond his or her equitable share of the costs and expenses.
We further assume that any tools, consumables, or other supplies are not purchased for resale, by the collective or any individual, and that tax or tax reimbursement is paid at the time of purchase. Finally, you state that only those involved in sharing the expenses and cultivation will receive cannabis in a proportionate share, and no one outside the group will receive any cannabis.
You do not explain the ownership interest each member of the collective has to the cannabis while it is being cultivated. We assume that each member of the collective has an ownership interest in the cannabis, prior to its harvest, proportionate to his or her contribution. Consequently, we understand that the member has title to cannabis he or she harvests prior to harvest. As such, there is no transfer of title and no sale occurs.
Under the scenario described above, since there has been no “sale” of cannabis, there is no sales or use tax liability that occurs in connection with the growth and harvest of the cannabis by the medical cannabis collective. However, if the collective changes the way it operates, the application of tax may also change.
On the other hand, sales of medical marijuana in California are subject to tax. The BOE’s Legal Division determined that marijuana furnished in compliance with the Compassionate Use Act of 1966 and the Medical Marijuana Program, qualifies as “medicine” within the meaning of Sales and Use Tax Regulation 1591, Medicines and Medical Devices, subdivision (a)(9)(B). However, qualifying as a medicine is only one of the requirements for the sale to be exempt. To qualify for exemption from tax under Regulation 1591, the sale of the medical marijuana must also be sold or furnished in accordance with Regulation 1591(d)(1)–(6). Thus, even though medical marijuana qualifies as a medicine, sales by marijuana cooperatives, cannabis clubs, and other sellers of marijuana are subject to tax even if the marijuana is sold to qualified patients and caregivers unless the sale otherwise qualifies for exemption from tax. Therefore, if the cooperative makes any sales of medical marijuana separate from the scenario described above, those sales would be subject to tax.
I hope this information is helpful. If you have any further questions regarding this or any other issue, please write or call our Taxpayer Information Section at (800) 400-7115. You may also visit our website at www.boe.ca.gov.
To assist with sales and use tax return filing, the Board of Equalization offers a free, web-based, electronic filing service. It is easy to use and will provide an online record of all of your returns. To learn more and to register for BOE-file, please visit our Sales and Use Tax E-File Information Center.