Medical marijuana use is currently one of the most controversial topics in politics. To date, 29 states and the District of Columbia have legalized the use of medical marijuana. Each states medical marijuana system looks different on all levels spanning from who can use it all the way to the tax treatment of the drug. Following trend, on November 8, 2016, citizens of the state of Arkansas successfully voted to legalize medical marijuana use. Since then, the Arkansas state legislature has been stuck with quickly trying to figure out how to tax the product. Likewise, every other state that has legalized marijuana use in some form has been challenged with the same issue. In Arkansas, the legislature passed Act 1098,which expands the tax applied to the sale of medical marijuana within the state on April 10, 2017.
To understand how Arkansas taxes marijuana it is important to first understand the tax treatment of all tangible personal property. “Tangible personal property” is defined as “personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses.” Across the board, all sales of tangible personal property are subject to sales tax on gross proceeds, unless the items are specifically exempted by law. Marijuana falls within the definition of tangible personal property, which means that it is subject to the sales tax on gross proceeds. For sales tax, an exemption from tax applies when the sale of the medical marijuana is for resale. Additionally, the sale of medical marijuana is subject to the Arkansas Medical Marijuana Special Privilege Tax Act of 2017, enacted under Act 1098. Under this law, a business shall collect and remit a special privilege tax of four percent from the gross proceeds derived from each sale of medical marijuana. The privilege tax is not subject to the same sale for resale exemption as sales tax is.
In effect, the way these taxes work in conjunction with each other goes something like this: First, a cultivation facility sells the medical marijuana to a dispensary. At this point, the sale of the medical marijuana is a sale for resale as the dispensary is not the end user, and instead the dispensary’s customers will be the end users, making the sale exempt from sales tax. However, this transaction between the cultivation facility and the dispensary is still subject to the privilege tax. Then, when the dispensary sells the medical marijuana to its customers this transaction is subject to both sales tax as well as the four percent privilege tax. This is because this transaction does not qualify for an exemption as the dispensary’s customer is the end user and consumer of the medical marijuana. Ultimately, this means that the sale of medical marijuana is subject to double taxation on all levels.
The scenario explained above is how Arkansas chooses to tax medical marijuana. Approximately half of the states that have legalized medical marijuana use, tax the sale of medical marijuana in one way or another. The medical marijuana needs vary from state to state, and the variety of ways in which states tax medical marijuana reflect that. The majority of states that tax medical marijuana either apply a sales or excise tax to the sale of the medicine. It is less common to see a state apply a privilege tax on the use of medical marijuana, as currently only Arkansas and Illinois have this type of tax set in place. However, the privilege tax may become more popular depending on how successful it is in the few states that do have this type of tax, as this is all a trial and error game at this point. To the end user the type of the tax doesn’t really matter because in either way it has to be paid. However, to the states the type of tax is very important as this determines where the revenue from the tax is funding.
The taxation of medical marijuana is an interesting world as many state laws relating to the prescription, sale, and use of the drug contradict each other. Using Arkansas as an example, the state law exempts from sales tax the gross proceeds derived from the sale, purchase, or use of prescription drugs by licensed pharmacists, hospitals, or physicians when sold, purchased, or administered for human use. A strong argument could be made that medical marijuana falls within this exemption as it is prescribed by a state licensed pharmacist, hospital, or physician and is administered for human use. However, the states have of course taken an opposite position, using federal law as the basis for their argument. The states position is that because marijuana is still a Schedule I substance, the federal law prohibits the prescription of it. As a result, the way medical marijuana is “prescribed” is through a written recommendation or referral by a state licensed physician, which is not a true prescription. In effect, this means that doctors can only recommend that their patients use marijuana, but not formally prescribe it, so the product being dispensed does not fall within the definition of a prescription medicine, and consequently, it does not qualify for the related exemption. However, this so called position the states take is not written anywhere in their law, which begs the question whether this position is an unadopted rule. Additionally, the state’s position is very contradictory as federal law also prohibits the use of and sale of marijuana as well. So, what states are really doing is cherry picking what federal laws to follow and not follow depending if they are consistent with their agenda. Almost all states have a similar exemption written within their tax laws, which means this is an issue across the country, not just in Arkansas. If you live in a state that taxes medical marijuana, contact us to discuss the possibilities of challenging the tax.
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In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496.