California’s Billion-Dollar Medical Marijuana Market Offers Millions in Tax Revenues

2006 Report: California’s Billion-Dollar
Medical Marijuana Market Offers Millions in Tax Revenues

But Federal Policy Impedes Collection

Californians consume between $870 million and $2 billion worth of medical marijuana per year, according to a 2006 report to Oakland’s Measure Z marijuana policy oversight committee.

The report projects that the state could receive some $70 million to $120 million in sales tax revenues alone if medical marijuana was taxed legally like other herbal medicines.

At present only a portion of the state’s 200-plus medical cannabis dispensaries pay sales taxes. In principle, medical cannabis is subject to sales tax under current Board of Equalization rules, which exempt only drugs dispensed in licensed pharmacies by a physician’s prescription.

However, many patients’ groups contend that sales tax shouldn’t apply to non-profit cooperatives and collectives.

A substantial portion of medical cannabis sales remains off the books due to the continued illegality of marijuana under federal law, which discourages accurate reporting. Despite this, a growing number of communities, led by Oakland, have begun to legally regulate and license medical cannabis sales through dispensaries. Although federal officials have sought to portray dispensaries as criminal enterprises, most have lawfully complied with local regulations like other legal businesses.

According to the Oakland business tax office, the city’s medical cannabis dispensaries reported $26 million in revenues in fiscal year 2004. Revenues declined dramatically to just $5 million in FY 2006 after the city forced all but two of the city’s cannabis clubs to close. Revenue is expected to rebound this year, as two new clubs have opened. The report estimates that potential revenues from medical dispensaries in greater Oakland could range as high as $64 million. Oakland’s cannabis clubs pay the city an annual licensing fee of $20,000 plus a business tax of 0.1% on revenues. [In 2009, Oakland voters approved a measure to impose a 1.8% tax on the city’s medical cannabis businesses, an effort supported by Oakland’s cannabis collectives.]

In addition, many dispensaries pay substantial payroll taxes. A Modesto dispensary, California Healthcare Collective Inc., reported paying $93,000 per quarter in federal IRS taxes, $25,000 per quarter in state payroll taxes, and $50-60,000 per month in sales taxes before being raided by the DEA. Closure of the club has deprived the public of over $1 million in tax revenues per year.

It is estimated that between 150,000 and 350,000 Californians have a physician’s recommendation to use marijuana. Because California does not have a comprehensive patient registry, these numbers are based on projections from physician surveys and data from other
states. Medical users represent around 10% of the state’s total marijuana-using population. Average consumption is around one pound per patient annually.

The marijuana used by California patients is entirely locally grown. However, due to steep federal penalties against cultivation, growers operate underground completely unregulated and
untaxed. Prop 215 advocates have long sought to establish licensed production of medical cannabis to assure pharmaceutical purity and quality, but have been rebuffed by federal agencies intent on keeping marijuana illegal.

California NORML supports changing federal law so the state can legally regulate and tax
commercial production and distribution of medical cannabis. A bill to allow states to regulate medical marijuana has been proposed by Rep. Barney Frank in recent sessions of Congress.

Advocates argue that it makes better economic sense to legally regulate and tax marijuana
than to criminalize it. State taxpayers currently spend over $160 million per year to arrest, prosecute and imprison marijuana offenders. Altogether, Californians consume nearly $6 billion of marijuana per year. California NORML estimates that the state could net some $1.5 – $2.5 billion per year by legalizing marijuana for general adult use (see report).

California voters have shown growing interest in legalizing marijuana. In 2004, Oakland voters approved Measure Z, calling on the state to “tax and regulate” marijuana for
general adult use, by 65%-35%. In November 2006, similar measures were approved by the voters of Santa Cruz and the San Francisco Board of Supervisors.

See a copy of the Oakland Measure Z Oversight Committee report, “Revenue &
Taxes from Oakland’s Cannabis Economy,”

Release by California NORML Jan 3, 2007