State of California E-Mail Response

Board of Equalization

Information and Advisory Unit

Telephone 916-324-2883 · FAX 916-322-0187

Thank you for your electronic correspondence (e-mail) requesting our advice regarding the proper application of the California Sales and Use Tax Law.

As a preliminary matter, section 6596, “Excusable Delay–Reliance on Advice,” of the California Sales and Use Tax Law grants taxpayers relief from future liabilities if the underreported tax is based on incorrect written advice provided by a Board representative. The answer given is intended to provide general information regarding the application of tax based on the information provided and will not serve as a basis for relief of liability under Revenue and Taxation Code (RTC) section 6596.

For your general information, the RTC imposes a sales tax upon retailers for the privilege of selling tangible personal property at retail in the State of California and is measured by gross receipts from retail sales. The use tax is complementary (and mutually exclusive) to the sales tax and is imposed upon the storage, use, or other consumption in this state of tangible personal property, not subject to the sales tax. Either the sales or the use tax applies to all retail sales of tangible personal property to consumers in California, unless otherwise exempted by statute or type of transaction. The retailer (seller) is liable for sales tax. The obligation to pay the use tax is on the consumer.

In your e-mail you stated you would like to organize a lawful marijuana cooperative under California law. You would like to invite members to join via the internet, have a web page that allows members to communicate in discussion forums and allow growers to seek reimbursement from other members for supplying them with medical marijuana. You further stated that it is your understanding that a coop is required to report all transactions to the Board of Equalization (BOE). You presented several questions, which I will address.

RTC section 6006, in pertinent part, defines a ‘‘Sale’’ to mean and include:

“Gross recipts” are defined in RTC section 6012 to mean the total amount of the sale or lease or rental price, as the case may be, of the retail sales of retailers, valued in money, whether received in money or otherwise, without any deduction on account of any of the following:

Sales and Use Tax Regulation 1699, Permits, provides in pertinent part that every person engaged in the business of selling tangible personal property of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax, and only a person actively so engaged, is required to hold a seller’s permit for each place of business in this state at which transactions relating to sales are customarily negotiated with his or her customers.

RTC section 6005 defines a “person” as any individual, firm, partnership, joint venture, limited liability company, association, social club, fraternal organization, corporation, estate, trust, business trust, receiver, assignee for the benefit of creditors, trustee in bankruptcy, syndicate, the United States, this state, any county, city and county, municipality, district, or other political subdivision of the state, or any other group or combination acting as a unit. A cooperative association that is not incorporated is treated as a partnership with each member fully liable.

Sales and Use Tax Regulation 1654, Barter, Exchange, “Trade-Ins” And Foreign Currency Transactions, provides that the terms “sale” and “purchase” as defined in sections 6011 and 6012 respectively, include exchange and barter, and gross receipts and sales price constituting the measure of tax include the amount allowed by a retailer to his customer for property or services of any kind.

In regard to medical marijuana, BOE’s Legal Division has determined that marijuana furnished in compliance with the Compassionate Use Act of 1966 (Compassionate Act) and the Medical Marijuana Program, qualifies as “medicine” within the meaning of Sales and Use Tax Regulation 1591, Medicines and Medical Devices, subdivision (a)(9)(B). However, qualifying as a medicine is only one of the requirements for the sale to be exempt. To qualify for exemption from tax under Regulation 1591, the sale of the medical marijuana must also meet one of the following conditions:

§ prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a pharmacist in accordance with law, or

§ furnished by a licensed physician, dentist or podiatrist to his or her own patient for treatment of the patient, or

§ furnished by a health facility for treatment of any person pursuant to the order of a licensed physician, dentist or podiatrist, or

§ sold to a licensed physician, dentist, podiatrist or health facility for the treatment of a human being, or

§ sold to this state or any political subdivision or municipal corporation thereof, for use in the treatment of a human being; or furnished for the treatment of a human being by a medical facility or clinic maintained by this state or any political subdivision or municipal corporation thereof, or

§ effective January 1, 1995, furnished by a pharmaceutical manufacturer or distributor without charge to a licensed physician, surgeon, dentist, podiatrist, or health facility for the treatment of a human being, or to an institution of higher education for instruction or research. Such medicine must be of a type that can be dispensed only: (a) for the treatment of a human being, and (b) pursuant to prescriptions issued by persons authorized to prescribe medicines. The exemption provided by this subdivision applies to the constituent elements and ingredients used to produce the medicines and to the tangible personal property used to package such medicines.

Thus, even though medical marijuana qualifies as a medicine, sales by marijuana cooperatives, cannabis clubs, and other sellers of marijuana are subject to tax even if the marijuana is sold to qualified patients and caregivers unless the sale otherwise qualifies for exemption from tax.

Unfortunately, you have not provided enough information for me to provide you with a definitive response. However, as explained in Regulation 1699, every person that sells tangible personal property in California, the sale of which would be subject to sales tax if sold at retail, is required to hold a seller’s permit and report and pay sales tax on their taxable sales. Sales of medical marijuana are subject to tax, thus any person selling medical marijuana is required to hold a seller’s permit. Please note, for sales and use tax purposes there is no requirement that a cooperative be formed to report taxable sales of marijuana. Medical marijuana sellers are treated the same as other sellers whether they are an individual, corporation, LLC, cooperative, etc.

Based on the information provided, it appears the individual members of the cooperative are making sales of their own marijuana. Thus, each member would be required to register with the BOE, report their sales and pay sales tax on their taxable sales of marijuana. However, if the sales are made by the cooperative, the cooperative would be required to register with the BOE and report and pay sales tax on the taxable sales made by the cooperative. I assume in this situation, the member/growers would sell the marijuana to the cooperative for resale and the cooperative would make the sale. Both the member/growers and the cooperatiave would be required to hold a seller’s permit. However, the member/grower’s sales would be sales for resale when sold to another marijuana seller who holds a seller’s permit, i.e. the cooperative. Sales and Use Tax Regulation 1668, Sales for Resale, provides additional information on accepting and issuing resale certificates.

In regard to record keeping, Sales and Use Tax Regulation 1698, Records, provides that a taxpayer shall maintain and make available for examination on request by the Board or its authorized representative, all records necessary to determine the correct tax liability under the Sales and Use Tax Law and all records necessary for the proper completion of the sales and use tax return. Such records include but are not limited to:

§ Normal books of account ordinarily maintained by the average prudent businessperson engaged in the activity in question.

§ Bills, receipts, invoices, cash register tapes, or other documents of original entry supporting the entries in the books of account.

§ Schedules or working papers used in connection with the preparation of tax returns. (2) Machine-sensible records are considered records under Revenue and Taxation Code sections 7053 and 7054.

For your additional information and as explained above, sales of medical marijuana in California are generally subject to tax and sellers of medical marijuana are required to hold a seller’s permit. However, having a seller’s permit brings you into compliance with the Sales and Use Tax Law, but does not allow sales that are otherwise unlawful by state or federal law. The permit states, “NOTICE TO PERMITTEE: You are required to obey all federal and state laws that regulate or control your business. This permit does not allow you to do otherwise.”

As part of the BOE’s education and outreach efforts, special notices were made available in February 2007, June 2007 and January 2010, clarifying the application of tax to sales of medical marijuana in California. Additionally, information about registering for a seller’s permit is available on our website at http://www.boe.ca.gov/info/reg.htm.

I hope this information is helpful. If you have any further questions regarding this or any other issue, please write or call our Taxpayer Information Section at (800) 400-7115. You may also visit our website at www.boe.ca.gov.

To assist with sales and use tax return filing, the Board of Equalization offers a free, web-based, electronic filing service. It is easy to use and will provide an online record of all of your returns. To learn more and to register for BOE-file, please visit our Sales and Use Tax E-File Information Center.

Comments: I would like to organize a lawful marijuana cooperative under California Law. I would like to invite members to join through the internet. I would like to have a web page that would allow members to communicate in discussion forums and allow growers to seek reimbursement from other members for supplying them with medical marijuana. My understanding of California is that a coop is required to report all transactions to the BOE.

My questions are as follows: Is there a specific form for this purpose? What are the coop officers required to do in order to obtain information regarding all transactions? Would it be sufficient for the coop to require its growers to fill out a form each month itemizing what they have sold? What kind of detail do you require? Is the coop responsible for collecting sales taxes from each grower who seeks reimbursement or can the coop require each grower to pay their sales taxes directly to the BOE? What if a grower fails to pay sales taxes, is the coop liable? What steps do you expect the coop to take to ensure all sales taxes are being reported and paid? What liability would the coop have if it was not realistically able to monitor all transactions, and thus not able to obtain an accurate or reliable record of each transaction?

To :	Mr. Bob X	Date :	January 31, 2011
From :	Lori J. Mayoya
	Business Taxes Specialist (MIC:44)
Subject :	Marijuana Cooperative