Berkeley cannabis collectives slapped with huge tax bills

The Berkeley Patients Group on San Pablo Avenue.

The state Board of Equalization is contending that the Berkeley Patients Group, one of the oldest and largest medical cannabis dispensaries in California, owes $6 million in back taxes, Berkeleyside has learned.

The board claims that the dispensary on San Pablo Avenue did not pay taxes on the medical marijuana it sold from July 2004 to June 2007 and now owes $4.4 million in taxes and about $1.6 million in interest.

The charges come on the heels of a September 2010 ruling in which the Board of Equalization determined that another Berkeley cannabis collective, Patients Care Collective, had to pay $639,000 for back taxes it owed from January 1, 2005 to September 8, 2008 on the sales of cannabis and marijuana cookies.

The Berkeley Patients Group, which has about 13,000 members and serves 800 to 1,000 patients each day, is contesting the charges, according to Elisabeth Jewel, whose firm Aroner, Jewel, & Ellis advises BPG on governmental regulations. Until February 2007, the laws regarding the collection of taxes for the sale of cannabis were murky, which is why the BPG did not pay, she said.

“There is no allegation of malfeasance in terms of collecting a tax and not paying it,” said Jewel. “The Berkeley Patients Group contends it was not clear to them that they had to pay sales taxes on what they consider medicine.”

The Board of Equalization will hold a hearing on the charges at its February 22-24 meeting in Sacramento. While the board would not officially confirm there is a claim pending against BPG, a spokesman did confirm the BPG hearing was on the agenda, which has not yet been made public. Berkeleyside learned about BPG’s late tax payments from a source close to the board, who asked not to be named.

While state law allows collectives and dispensaries to cultivate marijuana, rules governing its sales have evolved in recent years, according to Matt Kumin, a San Francisco attorney who specializes in small business transactions and has worked with numerous cannabis cooperatives. Prior to 2005, few cannabis collectives paid sales taxes because the Board of Equalization did not permit them to take out seller’s permits to report their proceeds. The Board of Equalization at that time did not want to be seen as promoting the sale of products that were illegal under federal law, said Kumin.

In February 2007, however, the board clarified its stance and said all dispensaries must take out seller’s permits, although they did not have to state what they were selling. The board also declared that collectives and dispensaries had to pay sales taxes.

Cannabis plants for sale at BPG

Since the clarification of the rules in 2007, the BPG has been paying tax on the medical cannabis sold out of the San Pablo Avenue facility, said Jewel. But the organization does not think it should be liable for any taxes prior to that clarification.

“During that time the Board of Equalization had very murky policies regarding dispensaries and the collection of sales tax,” said Jewel. “As soon as the board had clarified their policies, BPG began paying the tax.”

The former chair of the board, Betty T. Yee, acknowledged at the September hearing that the rules have been unclear.

“The application of tax on medical cannabis has had a little bit of a rough history on the board,” Yee told Erik Miller, a manager at the Patients Care Collective.

Berkeley Patients Group plans to argue that they should not have to pay back taxes because prior to the 2007 clarification, the group considered medical cannabis to be a medicine and California law exempts prescription medicine from being taxed, said Jewel.

But that argument probably won’t work. The Patients Care Collective tried to use that same argument in its September 2010 hearing, but the Board of Equalization dismissed the idea. Board members noted that in order to be considered a medicine, a substance had to be commonly regarded as a medicine or dispensed by a pharmacy. Medical cannabis does not meet that standard, they said.

The state is not exactly sure how many medical cannabis dispensaries there are in California. About 300 dispensaries currently pay taxes, with another 500 evading them, Alan Davenport, an analyst for the Board of Equalization told a group gathered at a recent convention for the California branch of NORML.

The board has audited about 40 of those dispensaries, said Davenport.

The state collects anywhere from $58 million to $105 million in taxes from medical marijuana each year, according to Anita Gore, the spokesperson for the Board of Equalization. There are approximately $700 million to $1.3 billion in sales of medical cannabis in the state each year, she said.

Berkeley expects to reap about $300,000 in sales tax from medical marijuana in fiscal 2011 and $460,000 in fiscal 2012 , according to Mary Kay Clunies-Ross, the city spokesperson.

The Board of Equalization audited the Berkeley Patients Group and informed it of its tax liability in 2007, said Jewel. It has taken more than three years for the case to work its way through the system.

If the BPG loses, it will not shut its doors and will try to continue its existing level of services, which include massage, acupuncture, arts and crafts and a hospice program, said Jewel.

The Board of Equalization has a program called Offer in Compromise in which businesses in arrears can work out a payment schedule. If the BPG is liable for the $6 million, it will probably go into that program, she said.

Erik Miller of the Patients Care Collective could not be reached for comment to see what his organization is doing to pay its $639,000  tax liability. At the September hearing he told the board repaying the money would be difficult.

“We are a small not-for-profit company and we don’t have the ability to pay hundreds of thousands in taxes which we perhaps erroneously did not collect,” said Miller. “We are going to have to find a way to mitigate this or it is going to put us out of business.”

To see a video of the September 2010 Board of Equalization hearing regarding the Berkeley Patients Care Collective, go here and use the pull down menu to find item C7.

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  • http://www.californiacannabisministry.bolgspot.com Paul von Hartmann

    Worst case scenario, each member of the collective needs to come up with $500 if they want to keep getting their medicine from their collective.

    This is the result of trying to play the game. Vulnerable prey is exposed to vicious predator.

  • http://www.davosnewbies.com Lance Knobel

    Is it possible to calculate what kind of turnover would generate taxes of that scale?

  • Bruce Love

    Lance, funny you should ask. I have been doing just that. I’m not too terribly satisfied with the quality of my numbers because I didn’t look at the historic tax rates and only barely at the historic costs of pot, number of clients, etc.

    Crudely, though (I’m not even going to be all that careful with significant digits given how many of the inputs here are total guesstimates):

    $4.4M over three years, call it? Average around $1.47M per year in taxes.

    Rate was probably lower then, no? But at today’s 9.75% rate that amounts to about $15.1M annual revenue from sales of marijuana. I think they sell other stuff (like vaporizers). So, they are smartly over the $1M / month revenue line, at least.

    Reducing that to quantities of pot is damn near impossible to do with any kind of precision. But, hoping for an order of magnitude picture, let’s divide that $15.1M up into $300 ounces. Note that we are failing to account for sales of plants, sales of food containing marijuana, price differences for smaller and larger quantities, etc. Very crude estimate here.

    Let’s guess that they sold an average of 50,300 ounces per year, in that period.

    Call that 4200 ounces per month, aka about 263 pounds.

    I got a fleeting glimpse of a report that somewhere around that time they had 5000 members rather than today’s 13000.

    Evenly divided among the members (not realistic, but…): 263 pounds per month total comes out to about 1/20th of a pound per member.

    In ounces, if you prefer: 263 pounds is again 4200 ounces. Divided among 5000 members, I get .84 of an ounce (which is about 1/20th of a pound).

    Two ways to look at that. I happen to know (hey, I’ve been around) that that’d be a pretty generous stash for most lightweight recreational users and a bit light for some heavy recreational users. If you were buying that much at the rate of $300 / ounce and trying too sell it on “the street” in smaller quantities, I believe that you could easily turn a handsome two figure profit.

    Looking at 260-some-odd pounds per month (estimate) and that .84 ounce per patient per month — it is hard to believe that the impact on recreational black market trade is all that large. In absolute terms, 260-some-odd pounds is a drop in the bucket (and if some kids are getting it from there well, that’s bad, but it’s worse if they get it from the mob so be careful what you wish for). And at .84 per patient per month average, not too many big players could be using the dispensary as a supply to the street.

    (It also makes sense that any substantial street trade would want wholesale, not retail prices.)

  • Name Withheld

    Good to see the government going after money it’s owed.

    I can’t help but wonder if they’ll start going after larger corporations as well, or if they’re just picking on medical marijuana dispensaries.

  • Douglas Edwards

    “We are a small not-for-profit company and we don’t have the ability to pay hundreds of thousands in taxes which we perhaps erroneously did not collect,” said Miller. “We are going to have to find a way to mitigate this or it is going to put us out of business.”

    I believe it is clear, that the goal of all Federal agencies is to drive medical cannabis underground and out of business as much as they can, until they have a big drug company provided alternative. Then they will go back to enforcing federal laws, with a hammer.

  • JeromeFisher

    Interesting how our DA and Sheriff in Los Angeles County have made a huge deal about dispensaries not being allowed to sell marijuana. Yet, the BOE wants taxes on sales. Major disconnect here. No wonder dispensaries arent paying sales taxes, dispensaries have been conditioned not to pay because they are not allowed to sell. The only way the BOE is going to get money from dispensaries now, is if they gain the trust of the dispensaries by allowing them to start paying taxes from a given point in the future——-example: ok dispensaries, you can start paying $50 every $1000 starting March 2011——–you are not mandated to pay for backtaxes. Make it known to all city officials that sales are now permitted (eliminate the confusion). It is far more cost effective and will create more in tax revenue when the above is implemented.

  • Daniel M.

    “I believe it is clear, that the goal of all Federal agencies is to drive medical cannabis underground and out of business as much as they can…” – Douglas Edwards

    First of all, this is a STATE agency, not a federal one.
    Secondly, they just want to discourage tax evasion no matter what business is involved. Any business that “forgot” to pay $4.4 million in taxes would receive the same treatment.

    If anything this legitimizes pot clubs, because they are being held to the same standard as any other business.

  • Bruce Love

    @Daniel M.,

    They didn’t “forget” to pay $4.4M. See the article. In those years the BOE would not issue a seller’s permit for selling marijuanna. Council for the dispensaries interpreted that, and California’s general exemption of medicine from taxation, to imply that sales tax was not due on sale of marijuanna. In 2007 BOE reversed its position, sort of, and started issuing some form of seller’s permit and expecting sales tax.

    Berkeley Patient Group, at that time, began to attempt to comply (going forward). That is, they had the legal opinion that no back taxes were due but would pay sales taxes from then on.

    One of the first snags they ran into was the seizure of some bank accounts by the feds! See:

    http://www.thegreencross.org/phpBB3/viewtopic.php?f=2&t=213

  • Name Withheld

    If BPG would be willing to give out a list of their clients during that time, another solution would be to go after the individual patients for the share of tax they owe.

    That’s what the government does with internet purchases where sales tax isn’t collected (supposedly) so assuming that BPG kept decent records during that time it should be easy to see who bought what, and how much they should have paid in taxes.

    If they’d take away the stupid interest charge (doesn’t make sense since they weren’t legally required to collect tax at the time and couldn’t have known) then it should just be a couple hundred bucks per patient, which is much more manageable than the $6,000,000.00 bill that BPG has been slapped with.

  • Yourmom

    They accepted cash, and not everyone had a frequent buyer card, so no, they could not know that.