New challenge for marijuana providers: Tax audits
OLYMPIA, Wash. (AP) - Tax enforcers have started auditing medical marijuana dispensaries in Washington, escalating a dispute over whether the outlets should be collecting money for state government.
The state Department of Revenue has worked since 2010 to tell marijuana establishments that they must remit sales taxes on their transactions. Some 50 dispensaries have registered with the state, helping the state collect some $750,000 in taxes from the industry over the span of one year.
Officials believe that there are many other outlets that remain unregistered, and that some registered entities are improperly reporting that they had no taxable business.
"We've been doing the educational part and now we're doing the enforcement part," said Mike Gowrylow, a spokesman for the Department of Revenue. He emphasized that there was no particular focus or crackdown on medical marijuana entities, just that the state was continuing its normal efforts to identify noncompliant businesses. The agency is currently conducting audits on two marijuana dispensaries.
Some in the pot community have encouraged dispensaries to pay taxes as a means of achieving legitimacy. But Seattle medical marijuana lawyer Douglas Hiatt said he doesn't believe the state can tax medical marijuana sales, nor would he allow one of his clients to cooperate with an audit.
When the Department of Revenue recently tried to require one of his clients to pay taxes, Hiatt said he threatened to litigate, and the department backed down.
"There's no way they can do this," Hiatt said. "DOR doesn't have the power to tax marijuana. It's not only that you can't tax it because it's illegal, it's that you can't tax it because it's medicine. There's an exemption for prescription medicine under state law, and an authorization is the functional equivalent of a prescription."
Gowrylow said state law does not consider medical marijuana a prescription drug.
Hiatt and others have also argued that dispensaries are not selling the drug but exchanging items as part of a cooperative. None of that really matters from a tax standpoint, Gowrylow said, because there is an exchange of value taking place.
Steve Sarich, who runs a medical marijuana establishment in Seattle called Access 4 Washington, said any money exchanged at his facility is a donation to the collective effort of producing the marijuana. He noted that it is illegal to sell marijuana under both state and federal law, so it would be problematic for any medical marijuana provider to claim sales of the drug.
"If you pay sales tax, you're admitting to sales," Sarich said. "I wouldn't advise anyone to do that."
Sarich received a letter from the state regarding the tax issue but hasn't had any further discussions with revenue officials.
Washington's medical marijuana industry has been left in a constant state of flux, with federal authorities cracking down on some dispensaries. Gov. Chris Gregoire vetoed a measure that would have provided broader regulation of the sector, saying she was concerned that the federal government could prosecute some workers for overseeing it all.
Now marijuana advocates are pushing an initiative that would legalize pot and allow sales at state-licensed stores. If that system becomes fully functioning, state officials estimate that it could raise as much as nearly $2 billion over the next five years.
But those projections are extremely uncertain. Officials noted that the federal government could come in and dismantle the whole thing.
The state Department of Revenue has worked since 2010 to tell marijuana establishments that they must remit sales taxes on their transactions. Some 50 dispensaries have registered with the state, helping the state collect some $750,000 in taxes from the industry over the span of one year.
Officials believe that there are many other outlets that remain unregistered, and that some registered entities are improperly reporting that they had no taxable business.
"We've been doing the educational part and now we're doing the enforcement part," said Mike Gowrylow, a spokesman for the Department of Revenue. He emphasized that there was no particular focus or crackdown on medical marijuana entities, just that the state was continuing its normal efforts to identify noncompliant businesses. The agency is currently conducting audits on two marijuana dispensaries.
Some in the pot community have encouraged dispensaries to pay taxes as a means of achieving legitimacy. But Seattle medical marijuana lawyer Douglas Hiatt said he doesn't believe the state can tax medical marijuana sales, nor would he allow one of his clients to cooperate with an audit.
When the Department of Revenue recently tried to require one of his clients to pay taxes, Hiatt said he threatened to litigate, and the department backed down.
"There's no way they can do this," Hiatt said. "DOR doesn't have the power to tax marijuana. It's not only that you can't tax it because it's illegal, it's that you can't tax it because it's medicine. There's an exemption for prescription medicine under state law, and an authorization is the functional equivalent of a prescription."
Gowrylow said state law does not consider medical marijuana a prescription drug.
Hiatt and others have also argued that dispensaries are not selling the drug but exchanging items as part of a cooperative. None of that really matters from a tax standpoint, Gowrylow said, because there is an exchange of value taking place.
Steve Sarich, who runs a medical marijuana establishment in Seattle called Access 4 Washington, said any money exchanged at his facility is a donation to the collective effort of producing the marijuana. He noted that it is illegal to sell marijuana under both state and federal law, so it would be problematic for any medical marijuana provider to claim sales of the drug.
"If you pay sales tax, you're admitting to sales," Sarich said. "I wouldn't advise anyone to do that."
Sarich received a letter from the state regarding the tax issue but hasn't had any further discussions with revenue officials.
Washington's medical marijuana industry has been left in a constant state of flux, with federal authorities cracking down on some dispensaries. Gov. Chris Gregoire vetoed a measure that would have provided broader regulation of the sector, saying she was concerned that the federal government could prosecute some workers for overseeing it all.
Now marijuana advocates are pushing an initiative that would legalize pot and allow sales at state-licensed stores. If that system becomes fully functioning, state officials estimate that it could raise as much as nearly $2 billion over the next five years.
But those projections are extremely uncertain. Officials noted that the federal government could come in and dismantle the whole thing.
I'm down with getting it legalized so the state government can get its grimy paws all into it and begin regulating its use and tax the heck out of it. Pot use runs rampant in my gene pool, it has helped no one in my family for three generations. Out of 13 Aunts and Uncle on my Moms side only 3 didn't smoke pot daily and they are the only 3 still alive today.So for medicinal purposes I call BS. My 20 year old nephew started smoking and growing pot at 12 years old. He graduated to Oxy which he sold in middle school, then onto meth. He now has a medical marijuanna card, hasn't worked a day in his life but receives $700 a month for disability because he was diagnosed w/ paranoid schizophrenia while in rehab which was part of his judgment after stealing guns. He's out now living on the streets of Seattle. Heck he's probably robbing someone at Hemp Fest as I type this.
First of all, to Ducky, I have this article in my hands that says that marijuana use decreases schizophrenia.
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Look up, Translational Psychiatry (2012) "Cannabidiol enhances anandamide signaling and alleviates psychotic symptoms of schizophrenia" by FM Leweke, D Piomelli, et. al.
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 Your nephew probably had the schizophrenia from somewhere else. Either that, or he was way too young to use marijuana in the first place, so using him and family members as an example to paint a broad brush across the effectiveness of marijuana as a legitimate medication is a fallacious argument, and you and I both know it. It's called a hasty generalization. I learned it in college...oh yes, I go to college and I am a patient. So, yeah, I could use the same fallacious argument against you, but I won't. People should not use marijuana when their brain and lungs haven't even fully developed.
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It's like an argument for racism. A certain number of people of a different skin color commit certain crimes, so that must mean that everyone of the same ethnicity is involved in crime. That's an example of what you just did.
@Ducky
If he's at hempfest he's having a lot more fun than you right now.......
@SandyBeach -  Most people don't need the crutch of inhaling a psychoactive drug with a bunch of other brain clouded losers to have fun.
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Have a great day at stonerfest trying to convince others your sick and dying and pot is the only thing in the world that helps you. :)
I am a medical Marijuana patient. I have Crohn's disease as well as degenerative disc disease. I chose medical marijuana over the cocktail of opiates/pain blockers/muscle relaxers and anti seizure medications I was on because it is safer and better at controlling my symptoms. Not all of us are just after a high. Some of us just do not want to use traditional treatments either because they do not work or they have side effects we do not like. Some are people who do not wish to become addicted to prescription pain killers.
I believe marijuana should be legalized, regulated and taxed. Physicians should be able to write a prescription for medical marijuana the same as they do for any other medication without worrying that they may lose their license to practice. Medical marijuana patients should be able to get their prescription filled at a pharmacy just like any other medicine. Those using marijuana for strictly recreational purposes should pay taxes on it, just like cigarettes and alcohol are taxed. Legitimate patients should not pay taxes, just like the do not pay taxes on other medications. Maybe have different grades of marijuana, prescription grade to be sold only by prescription and commercial grade to be sold to responsible adults over the age of 21. Â Truth is marijuana prohibition has not worked despite decades of trying, thousands of people sent to prison and the billions of dollars spent by each and every city, county and state in the country. It is time to try a different approach.
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Only solution here is make it legal, so it can be taxed up there with cigarettes... problem would be solved as all those who want to smoke it for medicine still pay tax on it problem solved!
There are those here who say they are medical marijuana patients with prescriptions. I am confused. I thought doctors could only write a recommendation, not a prescription, for medical pot.
I think pot should be legal and taxed, but with that being said the state is just picking on an easy target right now.
As a patient, this is an ongoing discussion I have with some other patients I know. I frequent a dispensary that does not charge tax on the pot (or medibles, capsules, medicated dry goods, ect), however does charge tax for other items (like utensils). As a patient I feel this is the correct way to do it. In Washington state, there are 2 catagories that are exempt from sales tax. Food and prescription medications. My pot is a prescription.
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WITH HAVING SAID THAT, if/when pot is legalized then I believe then it should be taxed. It will no longer require a prescription so alas, it loses the protection from the almighty sales tax.
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The end. :)
Morals shmorals---Somebodys making money!!?? its all about the benjamins. Uncle Sam and his bottomless bucket want their unfair share. What else is new.Â
Now we have initiative 514 (I think) to sign the petition for, where police would need to show cause on video for pulling someone over and giving them a DUI for 5 ng of thc in their blood. If it gets too complicating, people will grow it and do it regardless. It's a weed.
This is the thing that will drive mom and dad crazy, though. The possession was one thing. DUI is another ballgame entirely. My opinion is that if less people used alcohol and more used pot, the roads would be safer. How many accidents are happening as I type this? I'm sure Hempfest is leaking red eyed zombies at this moment. I ask without too much concern because I really don't think there is many if any.
I'm starting to affirm my belief that pro-WA-liquor-privatization people were drunk when they said it was a good idea....and pro-legalize-pot people were high when they said the same thing.
@todaysnews With the way the bill is written for this legalization, quite a few (I dare say a majority) of "pro pot people" DON'T want this bill to pass. There are major adjustments that need to be made before legalizing it.
I'm a strong advocate for legal pot, and I say pay the tax. These idiots give us all a bad name. Legalize it, tax it. Period. non-compliance with a 10% sales tax seems contrary to the cause.
Have no problem with taxes. Pay the same taxes on cannabis that you pay on tomatoes. No reason for it to be any higher than that. This initiative taxes cannabis at 75%. A bit ridiculous. Hell we still even have prohibition on alcohol. You can't distill alcohol for personal use without some very expensive state and federal permits a long process. The government needs to just start getting out of things that  are none of its business. Tax the shit out of plastic diapers. They do far more damage.
They could fix the tax problem and still bring in more revenue if they just adjusted the bell curve of pricing the marijuana. Having it legal would mean more supply, therefore, the initial price should drop significantly. Otherwise, in my opinion, it would be highway robbery. 75% is ridiculous, unless an ounce would cost like, $50 at the most before taxes. @Blindman
Okay--now that we're sort of clearing the air about why the pro-pot crowd is pro-pot (for recreational use). Why not admit to part 2. No, we don't want to pay taxes, we're just "saying" that so you legalize it (see part 1)
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Besides--don't you know pot is illegal? Only suckers pay taxes on illegal goods, and we're not suckers. See how well part 1 and 2 are doing.
Where does the stuff come from? Probably a lot of it comes illegally from Mexico where people die eveyday to get the stuff to US consumers, many of whom are children and high school teens who develop family problems, get low grades or become dropouts, get pregnant and try harder stuff. All because these festivals make pot a "cool" thing.Â
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Well, it isn't a cool thing and each user (casual or hard user) is guilty of the killing fields in Latin America. There is nothing about pot use that is good. If you need it, grow it at home for your own use, anything else makes you part of the muders in Mexico and the US.
@Socialjusticeforall Ewww, who gets pot from Mexico anymore?
California is cracking down on the so-called medical use shops as only a front for legal marijuana sales, its got all the pot growers nerves in a razzle dazzle in the south left coast..
So drug dealers are now being called, unregistered dispensaries?
 @Rockberry Why not? They call other types of drug dealers "Pharmacies."
DOR has long been sidestepping policies to collect revenue. They are a rogue agency that issues tax assessments with little regard for laws or policies. If you have the means to fight them in court, you can win, of course you have to put up significant resources which they know most don't have. Auditors are graded based on how much money they can find, right or wrong. They are supposed to educate businesses to make sure they are compliant, they are not supposed to squeeze businesses because they want their money. If anyone knows how to fight these crooks, please respond.
Its caused by creeping socialism, much like creeping capitalism. Its been decades since any new laws have really been needed but politicians write them anyway just to make it look like they're pulling their weight. Legislatures and congress needs to be made a part time job. There's really nothing for them to do except to fix all the archaic laws they've already written. And all this creates a more oppressive government until such time as blowback happens which is the phase we are beginning to enter now. @Alert Eagle
Life remains tough for pot heads. Try to find another invented fantasy to argue for legalization. I know its about a small number of people who want to make a shed load of money without going to jail. That will be what history writes about the "medical marijuana" story in the USA.Â
There's a difference between medical users and "potheads", as you so kindly describe them. Montel Williams is a good example of a legitimate patient that we've all heard of. He isn't the exception to the rule, there are people who abuse the system but I would say they are in the minority from what I've seen, heard, etc.
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Besides, what would go wrong if it were legalized? Why should someone who lights up a marijuana cigarette go to jail? If it were regulated, taxed, and controlled, then people under 21 would not be able to have it, and I see people as young as 10-12 years old smoking it under our current laws, because regular drug dealers don't check ID. They just want money.
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Dispensaries are different from people that just want to make lots of money off marijuana. The ones who follow the law will need proof of a legitimate illness and a recommendation from a doctor, and I doubt doctors are just going to risk their entire practice and career by giving recommendations out to middle school kids.
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Regulate it and keep it out of young people's hands. I'm willing to bet money you know of someone (directly or indirectly) who is a professional/has a legitimate career, that goes home after work to smoke, and you don't even know they do it.
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 Coffee, alcohol, cannabis, prozac. They're all the same. They're all drugs.
@Citizen#3457899654
Yep this is why it should just be legalized with no government controls other than illegal to be sold to someone under the age of 18. If you have a state tax number it means your going to have to have a federal tax number. But yet you can't pay federal yaxes because they consider it an illegal narcotic. That good old catch 22. Doug Hiatt had the right initiative last year. He removed every notation of cannabis from the state law books. I said it before, capitalism will destroy the movement as it destroys every thing else. Treat cannabis just like tomatoes and we'll be fine.
Vote no I502
 @Blindman "But yet you can't pay federal yaxes because they consider it an illegal narcotic."
I doubt that any taxes you send to the IRS for pot sales would be refused...
So much for the 'Make it legal and tax it' arguement.
 @Magic 8 Ball Was thinking the exact same thing...."Legalize, tax it and make money, tax it and make money..." "...people running around and getting high will make the state millions of dollars and billions of dollars"....blah, blah, blah....
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Look at the hempfest photos...welcome to the future....
@Magic 8 Ball Really? Let me give ya a little lesson in mmj since you don't clearly understand what you are trying to comment on.
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Washington Law states that only 2 things are exempt from sales tax. Food and prescription medications. Right now pot = prescription medication. Legalize pot and it no longer gets to fall under that catagory so THEN it can be taxed. Make sense?
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And yup, I'm high right now. Not all us pot smokers are stupid when we're high. However I know quite a few sober people who could pass for uh duh statis.
Okay, an authorization is NOT the functional equivalent of a prescription, because I can't take it to the pharmacy counter and get the medicine it allows me to use, and because if I am caught with Vicodin in my purse (in a non DWI situation) and I have a prescription for it, I face no penalties whatsoever, but if I am caught with cannabis in my purse and I have an authorization (which I do), I can still be arrested and the medicine destroyed, if the cops want to do so. All an authorization or recommendation does is give you a medical defense should you be asked to go to court for a marijuana-related offense.
Actually, you can get in trouble for DWI with a prescription medication if you are driving and putting the safety of others in danger. What, you think a prescription is a "get out of jail free" card? Nah, if you took vicodin, drove, accidentally killed someone, you can't just go to court and say that you are innocent because you were prescribed the medication by your doctor. @spacegoddess
I think we (society) needs to have a serious discussion about what gets taxed and what doesn't.
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If I buy basil at Safeway, I believe that qualifies as food. Â If a person buys a special brownie, does that qualify as food also? Â I think this could (and should) also qualify as medicine - also exempt under the law.Â
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 @JoeKing The tricky part is, technically it's being sold as for medicinal purposes, but let's face it, a lot (not all, mind you) of these people getting MMJ recommendations are using it recreationally. So the problem then becomes, how do you determine who's using it for genuine medicinal benefit versus just plain getting high?
You raise a valid point, and I think this is the problem when it comes to all-out legalization.
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Caffeine and alcohol, for instance:
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Many people self-medicate with alcohol after the age of 21. I'm not saying it's a good choice, but they do it anyway.
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People with chronic fatigue disorder and other similar conditions try and solve their problem with five or six cups of coffee per day.
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It's their choice or prerogative. I can't stop someone from seeing a doctor for chronic fatigue if they're perfectly content with overloading on coffee. I also can't stop someone from drinking coffee just for the sake of getting a good wide-eyed rush on to start their day.
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I don't know why marijuana would be any different.
@Mikeftm
Hiatt and others have also argued that dispensaries are not selling the drug but exchanging items as part of a cooperative.- So with that I am assuming he is making no money and thus has a zero income.
Proof once again that the pro-MJ lobby is irresponsible and lives in a dream world. Where's the enforcement? We don't even know how many unregistered dispensaries there are. And now they're claiming even if they have to pay taxes they are exempt. So how did the pro-MJ crowd come up with the $2 billion in revenues?! It's fiction.Â
I believe the revenue numbers. That would pay for the new basketball team and stadium that I could care less about.
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If I'm not mistaken, the reserve budget for 2013 after expenditures is only $28,000. Costs will change for construction and other needs, and will likely increase.
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So, I really don't see the problem with legalizing and taxing marijuana. Is it not better than shutting down libraries, schools, and laying off police and firefighters?
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The only gripe I have about I-502, is the 5ng/mL DUI level, in which case, someone who has been exposed to second-hand pot smoke will test positive for impairment within a day. Anyone who's walked around Seattle sober, for just an hour of being exposed to air, would fail this test.
@GeorgeG.
@GeorgeG. Under Washington law only 2 things are exempt from sales tax. Food and prescription medications. Right now pot is considered a prescription medication. It is not taxable. Once it is legalized it will no longer fall under that catagory, therefore making it a taxable item.
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Do you know how many people smoke pot? Or how many would if it were legal? You'd be surprised. Personally, I think $2 billion is conservative.