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Clearing the Smoke: How to Navigate Taxation on Your California Medical Marijuana Business

On Behalf of | Mar 7, 2016 | BOE |

Medical marijuana use was authorized in the state of California by the Compassionate Use Act of 1996 which provided guidelines for individuals and businesses to cultivate, use, and distribute cannabis within California. This Act did not “legalize” medical marijuana, but instead legislated the absence of punishment for specific marijuana-related offenses under state law. All activities related to marijuana of any kind continue to be an offense at the federal level.

California most recently refined its rules related to medical marijuana use in 2015 establishing a licensing and regulatory framework. Once in place, the California Bureau of Medical Marijuana is authorized to issue business licenses for distributors, dispensaries, and transporters of this substance, all of whom will be subject to the normal rules of taxation. Lawmakers anticipate the regulations surrounding this new bureau to be completed by January 2018.

Currently, medical marijuana businesses can legally operate as either a cooperative or a collective. The legal definition of a consumer cooperative is given by the California Board of Equalization (BOE) here. If you operate a business in California that relates in any way to medical marijuana, you must pay state and federal taxes on all of your income derived from those activities. Non-residents generating income from California sources must also pay California taxes. The California Franchise Tax Board (FTB) collects income tax for the state.

Individuals, sole proprietors, and other cannabis-related businesses operating under personal income tax law can legally deduct cost of goods sold (COGS) from their California state income taxes, but they are not allowed deductions for other business expenses such as rent or wages. Only entities operating under corporate tax law can deduct business expenses against their California income tax.

Medical marijuana businesses generally are eligible for California tax credits. However, since these businesses must operate as cooperatives or collectives, the credits will not flow through to members on their individual income tax returns.

Business owners must also register their medical marijuana businesses and obtain a California seller’s permit, whether in a set location or as a mobile dispensary. The seller’s permit sets the business up to pay appropriate sales and use tax to the BOE.

Since medical marijuana and related products are considered tangible goods, sales of such are generally subject to sales tax. Note in particular that dispensaries are not considered licensed pharmacies or health care facilities, therefore, they are not eligible for the sales tax exemption made for prescription medication orders filled by pharmacists.

For more information from the FTB on this topic, consult their website.

For more information from the BOE on this topic, consult their Tax Guide for Medical Cannabis Businesses: https://www.boe.ca.gov/industry/medical_cannabis.html

For more information from the California Department of Justice on this topic, read their Guidelines for the Security and Non-Diversion of Marijuana Grown for Medical Use here: https://oag.ca.gov/system/files/attachments/press_releases/n1601_medicalmarijuanaguidelines.pdf


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