Venar Ayar
In November 2008, Michigan followed a number of states in legalizing medical marijuana. The Michigan Medical Marihuana Act permits any patient having a debilitating condition to possess, cultivate, manufacture, use, deliver, or transfer marihuana or paraphernalia to treat or improve the qualifying patient’s debilitating medical condition. Most states legalizing medical marijuana also enacted legislation strictly monitoring and taxing the industry.
On September 21, 2016, Governor Rick Snyder signed three medical marijuana regulatory bills into law: HB 4209, HB 4210 and HB 4827. Two aspects immediately raised a red flag: (1) A 3 percent tax levied on the gross receipts of “provisioning centers”; and (2) A seed-to-sale tracking system.
Although most agree that regulating and taxing the industry is in the best interest of the state, a closer examination of the new laws reveals the gross receipts tax is discriminatory, unfair, and inconsistent with other taxing jurisdictions. Further, although most medical marijuana states are adopting a seed-to-sale tracking system, this type of enforcement and monitoring is contrary to the public policy behind regulating the industry, and is unprecedented when compared to America’s long history of a voluntary reporting system of taxation.
State and local sales taxes
In general, marijuana sales are subject to sales tax unless exempted by law. Michigan offers various exemptions, one of them being a prescription drug exemption. This begs the question: is medical marijuana exempt from sales tax under the general prescription drug exemption?
In most states, the taxing authorities take the position that medical marijuana sales are subject to the general sales and use tax laws—since medical marijuana is a non-prescription drug lacking FDA approval, and is illegal under federal law, no doctor can legally “prescribe” it, but can “recommend” its use.
However, in Massachusetts the Department of Revenue has exempted medical marijuana from sales tax under the prescription drug exemption. A directive notes that “medicine” includes medical marijuana based on a common sense dictionary definition approach, and the department has applied the general medicine exemption to both prescription medicines, legally prescribed by a doctor, and over the counter medicines.
In addition to sales tax, medical marijuana is typically subject to an excise tax. Excise taxes on items such as liquor and tobacco are often referred to as “sin taxes” aimed at discouraging the consumption of harmful items. Even sin taxes that do not discourage consumption may be justified if they recover social costs incurred by consumption.
Gross receipts tax
House Bill 4209 – the Medical Marihuana Facilities Licensing Act – imposes a 3 percent tax on the gross receipts of provisioning centers, defined as “any commercial property where marihuana is sold at retail to registered qualifying patients or registered primary caregivers.” The tax is levied on all the center’s gross receipts, regardless of source and without taking deductions. Since marijuana dispensaries produce gross receipts from sales of various products other than marijuana, the tax discriminates against provisioning centers in favor of other businesses selling identical goods.
As an example, a dispensary customer purchases rolling paper, a lighter and a bud box, for medical marijuana. Applying House Bill 4209, the transaction involves a two-tier tax; a 3 percent gross receipts tax levied on the total sale, and Michigan’s 6 percent retail sales tax, resulting in a 9 percent tax. But if the patient purchases those items from a non-provisioning center, the transaction will only be taxed 6 percent – an unfair tax discrimination against provisioning centers. The statute should be amended to a tax levied specifically on marijuana sales rather than on all gross receipts.
Michigan’s gross receipts tax is inconsistent with all other jurisdictions that specifically levy a tax on medical marijuana. For example, Washington imposes an excise tax on the retail sale of marijuana at a rate of 37 percent of the selling price on each retail sale of marijuana concentrates, usable marijuana, and marijuana-infused products. Colorado imposes a 15 percent excise tax, Nevada imposes a 2 percent retail excise tax, and California’s attempt to revamp marijuana regulations worded its bill to impose an excise tax of 15 percent on the sales price of medical marijuana.
Michigan is one of the only states that have articulated its marijuana tax as a general gross receipts tax on all of the dispensary’s gross receipts. Pennsylvania imposes a gross receipts tax on marijuana, but correctly limits the tax to sales of marijuana.
An intrusive tracking act
Michigan’s Marijuana Tracking Act mandates use of a third party inventory control and tracking system that is capable of interfacing with the statewide monitoring system, that must be capable of numerous functions including:
• Tracking all marihuana plants, products, packages, patient and primary caregiver purchase totals, waste, transfers, conversions, sales, and returns that are linked to unique identification numbers;
• Tracking lot and batch through the entire chain of custody
• Tracking marihuana plant, batch, and product destruction; and
• Tracking transportation of product.
While Michigan’s seed-to-sale tracking law is consistent with the laws in Washington, Oregon, Colorado, Hawaii, and New Mexico, it is inconsistent with America’s long history of a self-reporting system of taxation. The act is so intrusive into the daily business operations of dispensaries that the state will possess information relating to the amount and cost of marijuana processed in inventory and the amount and sale price of the marijuana as it is sold to the patients at the final sale. What will stop Michigan from preparing tax returns on behalf of each dispensary?
Imagine if all retail stores were required to possess this type of government tracking system. It would serve as an extreme burden to businesses operating in good faith and would deter new businesses from forming. Why should marijuana businesses be treated differently?
Most agree regulation is necessary to avoid corruption and to keep marijuana out of the wrong hands. Michigan is moving in the right direction, but its regulatory laws need to be reformed. Michigan’s 3 percent tax on provisioning center’s gross receipts is discriminatory and should be levied specifically on marijuana sales (as it is in mostly all other jurisdictions), as opposed to a tax on all of the gross receipts regardless of their source. Also, the seed-to-sale tracking system is overly intrusive and serves as a deterrent to legitimate marijuana centers operating in the state of Michigan.
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Venar Ayar is the principal and founder of Ayar Law and focuses his legal practice on IRS and Michigan tax resolution for both businesses and individuals. Ayar Law attorney Cody Attisha also contributed to this article.
