SOME AREN'T STOKED ABOUT NEW TAX

Board Of Equalization Targets Medical Marijuana Sales; Some Retailers
Approve, Others Wary Of Federal Meddling

When it comes to the sale of medical marijuana, California is seeing
green.

For the first time since voters passed Proposition 215 more than a
decade ago, state tax assessors are reaching out to the state's
estimated 150 to 200 medical marijuana retailers to get them to pay
their state and local sales taxes.

In February, the state Board of Equalization sent out a special notice
to sellers of medical marijuana, urging them to obtain a seller's
permit like any other retailer.

"If you sell medical marijuana, your sales in California are generally
subject to tax and you are required to hold a seller's permit,"
according to the notice.

It goes on to warn sellers that "if you do not obtain a seller's
permit or fail to report and pay the taxes due, you will be subject to
interest and penalty charges."

Proponents of the move say the outreach effort could help legitimize
medical marijuana stores by giving them the same rights and
responsibilities as any other retailer. Yet it's causing a lot of
consternation among cannabis club owners and medical marijuana advocates.

While some cannabis club owners want to be "good neighbors" and pay
the sales tax, others prefer to stay underground for fear that any tax
information they report will be used against them by federal drug
enforcement officials.

"It's frustrating," said Chris Moscone, an attorney representing the
Hemp Center, a San Francisco dispensary currently negotiating with
state tax collectors on paying back taxes. "There are basically two
camps: Those that want to be treated like legitimate businesses, and
the other side, where they're still rebels and don't want to be taxed."

When Californians passed the Compassionate Use Act of 1996, or
Proposition 215, decriminalizing the use of marijuana at the
recommendation of a doctor, the law failed to address how the state
should deal with medical marijuana sales.

In early 2005, Board of Equalization Chairwoman Betty Yee said the
board took up the Hemp Center's case and soon realized an
inconsistency in the law. While the shop had been paying taxes on
T-shirts, hats, pipes and other consumption devices, it did not pay
taxes on medical marijuana.

The board ultimately determined that medical marijuana was subject to
the sales tax because it is not dispensed by a pharmacist or approved
by the Food and Drug Administration.

"For the Board of Equalization, any tangible personal property not
exempt from tax is subject to a sales tax," Yee said.

To bring medical marijuana retailers into compliance, the board
updated its guidelines to allow them to obtain a seller's permit.
Previously, the state banned people selling illegal items from getting
permits.

The board also changed the permit application so that retailers
wouldn't have to disclose what they were selling, making it difficult
to track sales. Instead, medical marijuana sellers would have to sign
a waiver.

State officials estimate there are about 150 clubs or centers selling
medical marijuana throughout the state. Advocates say there are likely
more than 200. Of those, the state found only 27 held seller's permits.

So far, state tax officials say there's a healthy level of interest,
but it's unclear whether compliance has improved.

Medical marijuana advocates say they remain wary of the changes
because federal drug enforcement officials can still pull state tax
records. The state law conflicts with federal law, which considers
marijuana an illicit drug.

"It's not black-or-white," said Ryan Landers, a spokesman for
Sacramento-area medical marijuana retailers and one of the original
proponents of Proposition 215. "It's a gray market."

Kris Hermes, legal campaign director of Americans for Safe Access, a
national medical marijuana advocacy group, said the compliance rate
might improve if the state started collecting taxes when a seller
signs up for a permit. Right now, the board has the authority to to
collect back taxes as far as eight years.

"If they started collecting taxes when they sign up for seller's
permits, that would reduce anxiety for many of these providers,"
Hermes said. "And it would probably increase the level of
participation in the state."

Yee, the board chairwoman, says that's not an option because the state
treats everybody the same.

Advocates also are frustrated with the state's case-by-case
enforcement approach, which tends to single out established stores.

"The Board of Equalization is way behind as far as knowing who's out
there," said Moscone. "There's not enough manpower to keep up with
these clubs, let alone any business."

It's unclear how much the state could generate from the sale of
medical marijuana.

According to tax collectors, the state could generate $700 million in
annual state and local sales tax revenue if Californians paid tax on
all illicit drugs.

Based on the Office of National Drug Control Policy, Californians
spent about $7.8 billion on illicit drugs in 2000. Of that, about $1
billion is spent on illicit marijuana.

The issue of permits remains spotty for cannabis clubs.

Hermes, of Safe Access, said some advocates have been willing to
absorb the tax while others are considering challenging the levy.

Representatives of cannabis clubs in the Sacramento area say they are
trying to gain legitimacy as retailers by paying for employee health
care and self-mandating the use of security guards at stores.

Nathan Sands, of the Sacramento chapter of the Compassionate
Coalition, said the region's eight or nine medical marijuana retailers
all pay sales tax. A sufferer of chronic nausea, Sands noted that the
sales tax is displayed on jars of medical marijuana he buys from a
local dispensary.

Landers agreed. "We've worked hard to make sure the clubs act like a
good neighbor," he said. "We think if you pay your taxes, you're going
to be looked upon a lot different."