The California legislature is looking to the state's billion-dollar medical marijuana market as an attractive source of sales tax revenues.

Last February, the State Board of Equalization (BOE) sent a letter to medical cannabis dispensaries advising them that they were obligated to pay sales taxes on marijuana. In order to protect sellers from embarrassing revelations, the Board also adopted new regulations permitting them to withhold information about the nature of the products sold.

In order to encourage compliance, State Senator Carole Migden (D-SF) is planning to introduce a bill that would relieve dispensaries of obligations for back taxes if they file promptly.    Those that did not would be subject to heightened penalties.  Exact details of the bill to be announced. 

California law requires sales taxes to be paid on all drugs that are not sold by prescription in pharmacies. Since marijuana is neither available by prescription nor sold in pharmacies, it is subject to sales taxes.  Other taxable drugs include over-the-counter drugs, herbal remedies and Chinese medicines.

California NORML estimates that the total retail value of medical marijuana sold in California is between $870 million to $2 billion per year.  The total potential sales tax revenues from this market can be estimated at $70 - $160 million.

Medical marijuana advocates,  including NORML, ASA, and MPP, are encouraging dispensaries to pay sales taxes so as to bolster political support from local officials. Law enforcement officials have been pressing for the payment of sales taxes by licensed dispensaries in San Francisco and Alameda County, according to the BOE.   "All legitimate businesses pay taxes," observes California NORML coordinator Dale Gieringer, "Taxation is a stepping-stone to legalization."

Medical marijuana advocates agree that private,  non-profit cultivation collectives that do not indulge in monetary sales should be exempt from taxation.   

While some dispensaries have expressed concern that payment of sales taxes would expose them to federal prosecution, the evidence suggests these fears are unfounded.  Although it is true that the BOE, like other state agencies, routinely cooperates with federal investigations, it has no essential information that is not otherwise available to the DEA, IRS and other federal agencies.

The DEA does not use or need state tax records to prove that dispensaries are selling marijuana.   Instead, they locate them from police complaints, news reports, advertisements and public listings on the internet and elsewhere.  Then they conduct surveillance and send in agents with patient IDs to conduct undercover buys.  BOE officials say they have never  received a request from the feds for a list of dispensaries, and that they wouldn't have the data to supply one if asked.