MEDICINAL MARIJUANA PUTS TAX COLLECTORS IN TIGHT SPOT

In a tight budget year, California wants every tax dollar it can lay
its hands on. This year, those hands are reaching for marijuana.

More than a decade ago, California voters approved the use of
marijuana for medical purposes, making it legal under state law.
However, federal law enforcers say marijuana use of any kind is
illegal - and they are raiding clinics to prove their point. The
state tax appeals board, which wants the sales taxes, is stuck in the middle.

"We're caught between a rock and a hard place," said Betty Yee, a
member of the state Board of Equalization, which collects and
distributes sales taxes on more than $553 billion worth of
transactions each year in California on everything from corkscrews
to Cadillacs. "We do not want to serve as aiding or abetting the
(federal Drug Enforcement Administration). But they (the
dispensaries) are not exempt from the sales tax, so by law we have
to enforce it," Yee said.

Yee's district encompasses all of coastal California from Santa
Barbara to the Oregon state line and includes scores of marijuana
dispensaries and thousands of medicinal users.

Estimates vary wildly on just how much taxable marijuana is out
there. The state, facing $16 billion in red ink through the middle
of next year, wants precise numbers. So far, it doesn't have them.
State authorities are quick to point out that collecting marijuana
taxes won't balance California's books - but every penny helps.

The Board of Equalization says it collected about $11.4 million in
tax on some $142 million worth of medicinal marijuana sales in
2005-06, the most recent period for which numbers are available.
That's likely a partial amount, because the board's taxation policy
was adopted in October 2005, the final rule didn't go into effect
until 15 months later, and it typically takes time to ramp up tax programs.

About 200,000 people across California are authorized by their
doctors to use marijuana for medical reasons. The drug costs about
$40 for an eighth of an ounce.

The sales of medicinal marijuana are tiny compared with other
products, such as $20 billion in apparel sales and nearly $18
billion for office and school supplies. Even the smallest category -
fuel and ice sales - among some four dozen listed by the tax board
totals more than $414 million, nearly three times the level of
the medicinal marijuana transactions. Marijuana vendors are listed
as selling "general merchandise" - an attempt to give some anonymity
to sellers who fear federal intervention.

Americans for Safe Access, a pro-medicinal marijuana group that
favors similar programs nationwide, says the state's figures are
deceptive. The group surveyed a representative sampling of
California dispensaries and tallied their sales, then multiplied
that amount by the number of dispensaries in the state. ASA
estimated the paid sales tax at about $100 million, and the amount
of taxable sales at about $800 million. "This is a significant
amount of money in a tough budget year," said ASA spokesman Kris
Hermes. "We'd rather have the Board of Equalization be the entity
that gives out that number, but they say it goes directly into the
General Fund and there is nothing that requires the dispensaries to
indicate what they sell. I hope over time that they will consider
it, so it's not just us saying that we represent $100 million
annually in sales taxes," Hermes added.

A number of states have some form of medical marijuana law,
including Washington, Oregon, Nevada, Alaska, Hawaii, Colorado,
Main, Vermont, Rhode Island, Montana and California.

Federal drug enforcers note that the use of marijuana is illegal,
and they point to a 2006 U.S. Food and Drug Administration study
stating that marijuana has no medical value. "It is unequivocally
illegal under federal law," said Casey McHenry, a spokeswoman for
the Drug Enforcement Administration. "Our job is to enforce federal
law, and the distribution or cultivation of marijuana is in clear violation."

California's position, determined by the 1996 passage of Proposition
215, is that the use of marijuana for medical purposes is legal.
That, McHenry added, "doesn't affect what we do. We are still
continuing to do our investigative work."

Tracking medicinal marijuana sales has been murky for years.
Sellers, fearful of federal investigators, are hesitant to disclose
information to state tax officials, whose records may be subject to
review by federal authorities. State tax officials know that, but
they say the transfer of information is limited.

"We do not have blanket information-sharing with different law
enforcement entities, but in the event that there was a specific
investigation going on, the Board of Equalization would be
cooperative. But the board doesn't send information to the DEA as
part of any kind of blanket agreement," said board spokeswoman Anita Gore.

Still, those who dispense the marijuana are nervous about the role
of the federal government. "That is a danger, and it is a
vulnerability in the system. We've raised incrimination and
vulnerability as important issues," Hermes said.

Federal authorities, meanwhile, say income from marijuana sales is
taxable and can lead to investigations of related criminal
activities, such as money laundering. "With us, there is a potential
for a criminal tax issue," said Arlette Lee, a spokeswoman for the
IRS criminal investigations unit.

And the feds note that income from any source, legal or illegal, is taxable.

"Income, regardless of whether the source is legal or illegal, is
taxable," Lee said.