Can the Department of Revenue Really Tax Medical Marijuana Dispensaries?

I read in the Spokesman-Review last week that the Washington State Department of Revenue sent notices to medical marijuana dispensaries demanding collection of retail sales tax on marijuana sold. This letter took the position that the sale of medical marijuana does not fall within the sales tax exception for prescription drugs. But is this interpretation of the law really correct? Many dispensaries have begun collecting and paying sales tax to the Department of Revenue as a way of seeking legitimacy. However, isn’t paying the tax conceding that “medical marijuana” is somehow of lesser medical value than other prescription drugs?

Medical marijuana cannot be “prescribed” under federal law, but it is important to remember that the definition of “prescription drug” for purposes of Department of Revenue (DOR) regulations is different. Let’s take a look at the DOR code on this subject. Section 1 of RCW 82.08.0281 clearly states retail sales tax “shall not apply to sales of drugs for human use dispensed or to be dispensed to patients, pursuant to a prescription.” Section 4 of RCW 82.08.0281 clearly states: “‘Prescription’ means an order, formula, or recipe issued in any form of oral, written, electronic, or other means of transmission by a duly licensed practitioner authorized by the laws of this state to prescribe.” How exactly does a doctor’s medical authorization for marijuana not fall under this definition? (See sample of authorization form.) Courts have ruled that the DOR is not to use a hyper-technical definition of “prescribed.” In the case Deaconess Medical Center v. DOR, 58 Wn. App. 783 (1990) the Washington Court of Appeals used the common dictionary definition of “prescribed” from Webster’s Third New International Dictionary 1792 (1966). The Webster’s dictionary definition of “prescribed” means “to designate or order the use of as a remedy.” Webster’s uses the term broadly, and provides the term in the following example sentence: “The doctor prescribed three months of physical therapy for my leg injury.” Simply put these dispensaries are the victim of a Department of Revenue shake down.

Let’s remember that medical marijuana dispensaries operate in a gray area of the law. The Washington voters legalized medical marijuana possession, but never provided for a clear legal mechanism for sick patients to obtain the drug. Not every sick cancer patient is able to tend to their own marijuana garden. Consequently patient cooperatives have sprung up, often acting in concert with activists. Most police agencies have held off raiding these dispensaries, but we only have to read yesterday’s Inlander article to see that the police are merely biding their time before further raids continue in Spokane. The truth is that the dispensaries are scared, and no dispensary is likely willing to refuse pay these bogus sales taxes to the Department of Revenue. The attorneys general that work with DOR can simply make a call to the criminal division of the Attorney General’s office to push for prosecution of dispensaries unwilling to pay these “taxes.” No dispensary wants to be the one to stand out and risk criminal charges. To put it another way, the uncertainty in the law makes these dispensaries susceptible to a form of blackmail. Revenue projections calculated by the The Inlander amounted to millions of dollars Olympia is getting from these patient cooperatives. This “sales tax” in turn will be passed on sick patients who can scarcely afford to pay more for their medicine.

You have to wonder also about the legality of collecting sales tax for an activity that is still in violation of federal law. Generally speaking, just because an activity is illegal does not mean that it is tax exempt. However, in the case of Marchetti v. United States (1968), the U.S. Supreme Court held that certain regulations that required the reporting and tracking of the activity for revenue purposes amounted to a violation of the right against self-incrimination.

Why is Washington trying to impose a sales tax on medical marijuana dispensaries when the State of California does not? The dispensaries in California seems to be a little more confident that they will not be raided, and enjoy more protection under their State law. They would be more willing to fight such a state action in my opinion. In Washington, Mike Gowrylow, a spokesperson for the Department of Revenue, explained “right now, every buck counts”. Quite simply the State is hungry for revenue from all sources. In my experience as an attorney who has defended clients from the Department of Revenue, the State often seems to come up with “creative” ways to apply taxes during economic downturns. One time I represented a client who received an assessment for taxes under questionable circumstances. We indicated out intention to fight it and appealed. About 6 months through the process, the Department just dropped the issue, apparently moving on to easier targets.

What do you think about this subject? Should these dispensaries have to pay sales tax? Do you think that all the dispensaries in Spokane will comply? Will these tax payments help legitimize these co-ops? Will more dispensaries be raided as the Spokane police have threatened?

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ABOUT THE AUTHOR….
Steve Graham is a criminal defense lawyer, and he splits his time between Spokane and Seattle, Washington. Visit his website by clicking: www.grahamdefense.com
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