CALIFORNIA GOES AFTER POT SHOPS FOR BACK TAXES

As one of California's pioneering marijuana dispensaries, the
Berkeley Patients Group served thousands of medical marijuana users
and handled tens of millions of dollars in pot transactions a year.

But until 2007, the dispensary didn't charge customers sales taxes
nor did it pay them to the state, contending that marijuana as
medicine wasn't taxable.

California tax officials, strapped for cash, disagreed and now the
State Board of Equalization is ordering the Berkeley facility to pay
$6.4 million in back taxes and interest on $51 million in pot sales
between 2004 and 2007.

The case is illuminating efforts by the state plus Sacramento and
other cities to collect revenue from California's burgeoning medical
cannabis industry.

Since last October, the state tax board has completed audits on 32
other marijuana dispensaries, demanding $4.5 million in sales taxes
and interest.

In September, the board ordered another Berkeley medical marijuana
outlet, Community Flavor, to pay $600,000 in taxes and interest on
$4.9 million in marijuana and $670,000 in pot cookie sales the
dispensary argued were exempt from taxes between 2005 and 2008.

"It is our intent to identify where there could be a problem and then
aggressively go in and enforce the law," said BOE Chairman Jerome
Horton. "You will see a lot more investigations to assist them in
complying with law."

The BOE estimates it takes in $57 million to $105 million in sales
taxes as dispensaries ring up as much as $1.3 billion in annual pot
transactions.

The industry's ultimate tax value to the state and local communities
is hard to calculate. The BOE, in a concession to dispensaries
worried about federal prosecution, requires them to obtain state
sales permits but doesn't mandate they disclose what they sell.

BOE member Betty Yee said the growing California dispensary trade may
someday generate $400 million in state sales taxes. George Mull,
attorney for the California Cannabis Association, says dispensaries
could produce $140 million if they all paid the standard 8.25 percent
sales tax.

The Berkeley Patients Group and medical marijuana advocates complain
tax authorities are targeting them after only belatedly explaining the rules.

In 2005, in the case of a San Francisco dispensary, the Hemp Center,
the BOE declared that medical marijuana was "tangible personal
property" subject to taxation.

But Kris Hermes, a spokesman for Americans for Safe Access, a
marijuana patients advocacy group, said the state didn't begin
informing dispensaries of its sales tax rules until 2007 and then
went after them for back taxes.

"These facilities shouldn't have to pay from before they were
notified," Hermes said. "But the BOE is saying they should pay a tax
for as long as they existed. That is punishing them unnecessarily."

California marijuana dispensaries are supposed to operate as
nonprofits. And Elisabeth Jewel, a lobbyist for the Berkeley Patients
Group, said it doesn't have the money to pay its 2004 to 2007 tax bills.

She said the center, which employs 76 people and offers free patient
services, such as counseling and AIDS testing, paid $1.5 million in
state sales taxes last year. It is seeking a reduced settlement for 2004-2007.

"We're going to try to negotiate this down to an amount that the
Berkeley Patients Group can afford while staying in business," she said.

Yee said she urged the dispensary to try to settle its tax debt
through a state "offer in compromise" program that may allow
businesses to negotiate a smaller tax payment based on ability to
pay. "We're not interested in shutting them down," she said.

But the BOE is searching for medical marijuana outlets that may owe
taxes. Horton said the agency knows of only 300 dispensaries with
proper state sales permits, while more than 800 are registered with
cities and counties.

Mull, the cannabis association lawyer, said many dispensaries didn't
register with state tax authorities or pay taxes for years out of
fear of triggering raids under federal laws against marijuana.

He said the state should consider "some type of amnesty" on back
taxes to bring unregistered outlets onto California tax rolls.

California's largest dispensary, Harborside Health Center in Oakland,
which pays more than $2 million in yearly state sales taxes, recently
confirmed it is being audited by the Internal Revenue Service.

Meanwhile, dispensaries are about to get new taxes and scrutiny on
the local level. Nearly a dozen California cities have approved local
medical marijuana taxes.

Oakland is expecting to take in $1.4 million in pot taxes this year
after boosting its local medical pot tax from 1.8 percent to 5
percent. Los Angeles voters Tuesday approved a 5 percent tax. And
Sacramento is due to begin collecting July 1 on a voter- approved 4
percent tax on medical marijuana sales.

"We're making them a legitimate business," said Sacramento City
Councilmember Sandy Sheedy. "And by doing that, you pay taxes."