Written By Guest Blogger S.M. Oliva 

Michigan: Medical Marijuana Sales Subject to Sales Tax

Many states have legalized the possession and sale of marijuana for both medical and recreational purposes. One benefit to legalization is that states can now tax these sales. For example, California takes in over $1 billion annually through excise taxes on marijuana retailers.

Other states impose both excise and retail sales taxes. In Michigan, for instance, there is a 10 percent excise tax on licensed medical marijuana distributors in addition to the state's regular 6 percent retail sales tax. The excise tax does not apply to distributors of medical marijuana. However, medical users must still pay the sales tax.

Dispensary Faced Audit After Relying on Earlier Guidance

A Michigan appeals court recently addressed the legality of requiring medical marijuana patients to pay sales tax. This case, Cannarbor, Inc. v. Department of Treasury, is one of many lawsuits arising from the legalization of medical marijuana in 2008. That year, a voter-backed initiative created the Michigan Medical Marijuana Act. (A separate initiative passed in 2018 legalized recreational marijuana use.)

The plaintiff in this case, Cannarbor, Inc., is what the Michigan law defines as a "provisioning center." This is a licensed commercial entity that purchases marijuana from a grower or processor and supplies it to patients qualified to receive medical marijuana, or to their "registered primary caregiver." A registered primary caregiver, in turn, is not considered a provisioning center if they distribute medical marijuana to the patient at a "noncommercial location."

As relevant here, Cannarbor sold medical marijuana at retail in 2017. Cannarbor believed at the time that they were not required to remit and collect Michigan sales tax. For this, Cannarbor relied on a 2011 letter from Michigan's then-deputy treasurer to Cannarbor's accountant, which said that while the sale of marijuana was usually taxable, Michigan's medical marijuana law specifically provided that the "transaction between a caregiver and patient" was not considered a "sale" for tax purposes. In effect, it was a non-taxable service.

In January 2018, however, the Michigan Department of Treasury (DOT) issued new guidance, which said the retail sale of marijuana (and marijuana-derived products) by a provisioning center was subject to sales tax. A registered primary caregiver's "costs associated with assisting" a patient in the use of medical marijuana, however, was a non-taxable service.

Based on this new guidance, Cannarbor started collecting sales tax on its medical marijuana sales from 2018 onward. But the DOT subsequently audited Cannarbor's books for 2017 and assessed uncollected sales tax for that year. This prompted Cannarbor to sue DOT in the Michigan Court of Claims, alleging it was not required to collect sales tax in the first place.

Provisioning Centers Not the Same as Primary Caregivers

It's important to understand that the voter-backed initiative legalizing medical marijuana in Michigan did not address the sales tax implications. The Michigan legislature adopted separate legislation regarding the licensing of provisioning centers and exempting a registered primary caregiver's costs associated with providing medical marijuana to their patients.

Cannarbor's position was that the legislature did not actually intend to create a sales tax exemption for caregivers. Rather, the law simply stated that any compensation received by a caregiver "does not constitute the sale of controlled substance." Cannarbor saw this as a "decriminalization" provision rather than a tax exemption. And since the medical marijuana law was otherwise silent on sales tax issues, Cannarbor argued, DOT had no basis for requiring it to collect and pay sales tax.

The Michigan Court of Claims, and later the Michigan Court of Appeals, rejected this argument. The Court of Appeals said DOT acted reasonably in its interpretation of the law--that is, the legislature declared the work of primary caregivers in association with providing medical marijuana to be a "nontaxable service." In contrast, Cannarbor made "retail sales" of medical marijuana, which were still subject to sales tax.

The Court of Appeals likewise rejected Cannarbor's claim that assuming the law did create a tax exemption for primary caregivers, such exemption should also apply to Cannarbor. Here, Cannarbor's point was that it provided the same services as that of a primary caregiver--assisting qualified patients in receiving medical marijuana--just on a larger scale. The court said the legislature was well within its rights to distinguish between primary caregivers and licensed provisioning centers for tax purposes.

Finally, the court said that Cannarbor could not rely on the 2011 letter from the deputy treasurer to avoid sales tax liability for 2017. The court noted that letter "was written before provisioning centers were defined by statute," and only addressed a "transaction between a caregiver and patient." Even before provisioning centers existed under Michigan law, the court said Cannarbor did not qualify as a "primary caregiver." In this context, a caregiver was an individual person providing care and "not a corporate entity." Furthermore, Michigan law limits a primary caregiver to caring for no more than five patients. And while a caregiver may recover their "costs" without paying sales tax, they cannot earn a profit, unlike a retail business such as Cannarbor.

S.M. Oliva is a writer living in Virginia. He authors the blog Computer Chronicles Revisited.