The Superior Court for Spokane County recently held that Washington’s sales tax does not apply to sales of medical marijuana. Late last month, the Washington Department of Revenue (“DOR”) appealed that decision to the Washington State Court of Appeals.
Background on the Case. Rhonda Duncan operated a medical marijuana dispensary called The Compassionate Kitchen. In 2009, Duncan did not collect sales tax from patients to whom she sold cannabis products. At some point, Duncan paid sales tax on all 2009 transactions involving medical marijuana. But after a 2011 raid by federal authorities, Duncan filed a refund claim with DOR for the sales taxes she previously paid. DOR denied the refund claim and Duncan lost all subsequent appeals in DOR’s Appeals Division. In July of 2014, Duncan filed an appeal with the Board of Tax Appeals (BTA). In October of 2014, the BTA also denied Duncan’s refund claim.
The Issues. The BTA examined whether sales of medical marijuana are exempt from sales tax under RCW 82.08.0281, which exempts from sales tax those “sales of drugs for human use dispensed … to patients pursuant to a prescription.” More specifically, the BTA examined the statute to determine whether a “statement signed by a … physician,” confirming that “the patient may benefit from the medical use of marijuana,” qualifies as a “prescription” as defined by the statute. The statute defines prescription as “an order, formula or recipe issued in any form … by a duly licensed practitioner authorized by the laws of this state to prescribe.”
Duncan presented a highly technical statutory argument to the BTA. Specifically, Duncan claimed that the statute is unambiguous and that the phrase, “authorized by the laws of the state to prescribe” refers not to the actual substance being prescribed (i.e., the cannabis), but instead to the “genus of the person prescribing” (i.e., the physician).
The BTA disagreed with Duncan’s arguments and held that, by its plain meaning, the statute defines a “prescription” as an order issued by a practitioner authorized to prescribe the specific drugs referenced in the order. The BTA determined that Duncan’s reading of the laws ignores the ordinary meaning of the term “prescribe.” The BTA held that “Practitioners do not ‘prescribe a prescription; they prescribe medications,’” and further held that any other reading of the statute is either “circular or vague.”
Even if the statute is ambiguous, the BTA references in its decision Senate Bill 6515’s Final Report from 2004, which modifies the definition of “prescription,” mandating that prescription drugs exempt from sales tax “must be prescribed by a person whose license authorized him or her to prescribe the item or drugs.” Where federal law renders cannabis a Schedule I illegal substance, no physician can lawfully prescribe it. They can only “recommend” it to qualifying patients. The BTA’s basic logic is that where physicians cannot lawfully prescribe cannabis to patients, any sale of cannabis for medical use cannot qualify for a sales tax exemption for prescription drugs under state law. On appeal from the BTA decision, the Spokane Superior Court ultimately disagreed with the DOR and sided with Duncan’s arguments.
What Happens Now?
As a result of the Spokane Superior Court decision, we’re likely to see many medical marijuana businesses try to demand sales tax refunds from DOR for amounts paid throughout the proceeding years. But this is easier said than done.
A seller is entitled only to a refund of tax directly paid to the state. A seller is not entitled to a refund of tax that it merely collected from its customers. In that case, the purchaser (not the seller) is entitled to a refund. Accordingly, the refund of sales tax collected from medical marijuana patients must be returned to those patients.
A refund claim for excise tax is limited only to amounts paid (for example, tax, interest, and penalty) four years from the beginning of the calendar year in which a refund claim is made, so these claims are also time sensitive. Any refund claim filed with the Washington State Department of Revenue must also be substantiated to the satisfaction of the Department. The DOR will deny unsubstantiated claims.
Finally, if you are a medical marijuana business planning to use the Duncan case as a defense to having to collect and pay sales tax to DOR in the future, it is critical that you realize there are going to be severe limitations on such a defense. Duncan paid sales tax to DOR and is seeking a refund of tax paid. Medical marijuana businesses that have failed to collect and pay sales tax will still have to answer to DOR unless and until the Duncan case is resolved through the appeal.