The successful passage of California's Proposition 64 legalized recreational marijuana in the state. But for the next 14 months, medical marijuana patients will enjoy tax-free cannabis.

California voters, along with Nevada, Maine and Massachusetts voters, legalized recreational marijuana on election day. These states now join Colorado, Oregon, Washington and Alaska as the only states in the U.S. that have decided to tax and regulate marijuana similar to alcohol. But due to what the authors of the ballot measure refer to a typographical error in its language, California's medical marijuana patients will not have to pay sales tax on purchases until 2018. This negates, at least for a year, one of the major benefits of marijuana legalization -- hundreds of millions of dollars in tax revenue from adult use sales. (Colorado alone brought in $996 million last year.)

Before recreational marijuana was legalized, California medical marijuana customers paid 7.5 percent sales tax on their purchases. Under Proposition 64, which enacted the Adult Use of Marijuana Act, both medical marijuana and recreational marijuana will be subject to a 15 percent excise tax when the law goes into effect Jan. 1, 2018. Recreational marijuana will also be subject to a California state sales tax of 7.5 percent on top of the 15 percent excise. Keith Humphreys, in an article published in the Washington Post, explains that Proposition 64 was supposed to repeal the 7.5 percent sales tax on medical sales starting Jan. 1, 2018 (and replace it with the 15 percent excise tax), but because the target date of the switch over to the excise tax was not written into to the ballot initiative, the elimination of the medical marijuana sales tax was effective immediately. Since the 15 percent excise tax on medical doesn't go into effect until Jan. 2018, medical sales are tax-free from now until then.

California state tax analysts project that Proposition 64 could generate $1 billion a year. But with no taxes on medical for the next 14 months, this clerical error could put a big dent in taxes and future projections. Humphreys says when recreational marijuana goes into effect, many medical marijuana patients will not want to give up the price cut they have been enjoying, resulting in millions of dollars in lost revenue.

The State Board of Equalization, which is in charge of collecting taxes and regulating the industry in California, had a chance to change the interpretation of the tax holiday on the basis that it was an error, but the BOE did not take that opportunity and has interpreted the law as giving medical marijuana a tax holiday until 2018. To prepare for its passage, the BOE sent letters to dispensary owners before the vote to say to stop collecting taxes on medical sale if the measure passed.

Jerome Horton, a member of the BOE, told the San Francisco Chronicle before the vote that California could lose $49.5 million in tax revenue due to the 14-month tax holiday.

"Local cities who anticipate preserving their revenue from medical marijuana may get nothing since Proposition 64 provides for a complete exemption from medical marijuana," Horton told The Chronicle.

But the authors of the ballot initiative say the BOE interpreted the law incorrectly.

Richard Miadich, a lawyer in Sacramento who acts as counsel for the Yes on Prop 64 campaign and helped write the ballot measure, has disagreed with the BOE's interpretation of language and says there should not be a tax holiday. The measure was supposed to exempt medical patients from paying state sales taxes only after the 15 percent excise tax was put in place. He told The Chronicle that the BOE was consulted during the ballot drafting process and said it should be fixed. But as Prop 64 was a ballot initiative, it will have to go to a vote, which is unlikely.

"It wouldn't make any sense right out of the gate to reduce revenue when the whole point of the tax structure is to fund programs," Miadich told The Chronicle. "It is inconsistent with the statutory language and the statutory intent, which is to create new revenues for the state."

Medical marijuana patients will only be able to benefit from the tax exemption if they show their California Department of Public Health-issued medical marijuana cards. Currently, only 6,000 Californians have right now.

Published on: Nov 17, 2016