California State Board of Equalization (BOE) Continues Offensive Against Medical Marijuana Dispensaries
The California State Board of Equalization (BOE or SBE) announced almost one year ago that medical marijuana dispensaries are not exempt from collecting and paying California sales tax. The announcement resulted from a hearing before the BOE involving Berkeley Patients Group. In that case the BOE decided that medical marijuana was not exempt from sales tax as a medicine. The decision was not surprising in light of a previous notice issued by the BOE that medical marijuana dispensaries were not exempt from collecting and paying sales tax.
Fast forward one year later. Our tax attorneys are fielding inquiries from a number of medical marijuana dispensaries who are undergoing sales tax audits by the BOE. The M.O. of the BOE seems to be to stand at a discrete location outside of the clinic, and count the number of people coming in the door per hour. The Board then compares that to the clinic's records of the number of patients, and if there is any discrepancy it calculates the value of an average "sale," multiplies that by the number of alleged unrecorded patients per day, and projects that amount over a (generally) three year audit period.
Of course this projection by the SBE is rarely accurate, and fails to take into account a number of reasons that the dispensary's records don't match. For example, discrepancies can exist because:
1. Not everyone who comes into the clinic is a member, or actually fills his prescription
2. The number of patients entering the clinic on the particular day that the BOE is counting may be higher than average because the clinic was having a good day
3. The BOE may be using an inaccurate sale price which results in an overstatement of receipts.
There are many other reasons why the BOE estimates can be inaccurate. Luckily there are many avenues for appeal of a BOE determination. However, an ounce of prevention is worth a pound of cure, and proper tax representation during the initial sales tax audit may prevent problems from arising. Information on sales tax audits and sales tax appeals in general is available on our website, click here to view. Managers of medical marijuana cooperatives and collectives should also be aware that if the BOE determines that sales tax is due and the dispensary fails to pay they could be personally liable pursuant to California Revenue and Taxation Code Section 6829.