Marijuana

2/13/2020

Hashing Out the SALT Issues of Pennsylvania's Medical Marijuana

Hashing Out the SALT Issues of Pennsylvania's Medical

Marijuana

POSTED ON NOV. 13, 2017

By

JENNIFER WEIDLER

KARPCHUK

Jennifer Weidler Karpchuk is senior counsel with Chamberlain,

Hrdlicka, White, Williams & Aughtry.

In this edition of Pennsylvania¡¯s SALT Shaker, Karpchuk discusses

Pennsylvania¡¯s new medical marijuana law, its tax rami cations, and

how medical marijuana ts into the historical treatment of the drug.

JENNIFER WEIDLER

KARPCHUK

Pennsylvania recently joined 29 other states and D.C. that have legalized medical marijuana. With

the growing acceptance of the use of marijuana for medicinal ¡ª and in some states, recreational ¡ª

purposes, a new industry booms. With that boom comes revenue to the states in the form of new

taxes.

As with any tax and policy, it is important to understand the history of how we got to where we are

today. But it is particularly important to see what has framed our cultural views of marijuana.

Medicinal marijuana has a long history, dating back to ancient cultures that used it as an herbal

medicine, starting in Asia around 500 B.C.1 During the 17th century, the government encouraged

production of hemp2 for rope, sails, and clothing.3 Virginia went so far as to pass legislation

requiring every farmer to grow hemp. Further, hemp was accepted as legal tender in Maryland,

Pennsylvania, and Virginia. Hemp production ourished through the late 19th century, until other

materials started to replace it.4



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During the 1830s, Sir William Brooke O¡¯Shaughnessy found that marijuana helped to lessen

stomach pain and vomiting in people with cholera.5 By the late 19th century it became a popular

ingredient in many medicinal products and was sold in pharmacies.6 Under the Food and Drug Act

of 1906, over-the-counter marijuana products were required to be labeled.7

Although legal, recreational use of marijuana did not begin in the United States until around 1900.8

During the Mexican Revolution, Mexicans began immigrating to the United States and introduced

into American culture the recreational use of marijuana.9 Fear and prejudice followed the Spanishspeaking immigrants, and marijuana became associated with the newcomers. Crimes began to be

attributed to marijuana and the Mexicans who used it.10 The Great Depression further spurred

resentment of the Mexican immigrants and public fear of their ¡°evil weed,¡± which ¡ª combined with

the Prohibition era¡¯s view of all intoxicants ¡ª led 29 states to outlaw marijuana by 1931.11

The federal Marijuana Tax Act, enacted during 1937, essentially criminalized marijuana use by

restricting possession to individuals who paid an excise tax. This was the rst time federal law

criminalized marijuana.12 The act, which tried to change behavior through taxation and regulation,

was seen as less susceptible to legal challenge than outright prohibition.13 The arguments

supporting the act were not grounded in any scienti c research or evidence. Instead, they were

grounded in racism, hearsay, and stereotypes, namely that it caused black men to become violent

and seduce white women and that it led Mexicans to murder their white neighbors.14 This is also

the time when the nomenclature changed from ¡°cannabis¡± to ¡°marijuana¡± in an attempt to link

Mexicans to the drug and garner prohibition support from anti-immigrant sentiment.15

In response to the Marijuana Tax Act, New York Mayor Fiorello Henry LaGuardia commissioned a

report to study the e ects of marijuana. After ve years of extensive research, in 1944 the New

York Academy of Medicine issued the La Guardia Report, which declared that the use of marijuana

did not induce violence, insanity, or sex crimes, or lead to addiction or other drug use. Despite the

research, a culture of fear followed marijuana, spurred in large part by Harry Anslinger, thencommissioner of the Federal Bureau of Narcotics. Anslinger campaigned against marijuana for

years and condemned the La Guardia Report as unscienti c, while using fear and racism coupled

with the mass media to propel his anti-marijuana views.16

From 1937 through the 1960s, states began outlawing marijuana, culminating in the federal

Controlled Substances Act of 1970. The act was part of the ¡°War on Drugs¡± and it repealed the

Marijuana Tax Act and listed marijuana as a Schedule I drug ¡ª in the company of heroin, LSD, and

ecstasy.17 Schedule I drugs are those with no medical use and a high potential for abuse.



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The Shafer Committee, an investigative body appointed by President Nixon, issued a report in 1972

that admitted that Anslinger¡¯s attacks on marijuana had been baseless, recommended the removal

of marijuana from the list of Schedule I drugs, and even questioned its designation as an illicit

substance.18 However, Nixon and other government o cials vehemently rejected the report¡¯s

ndings.19 Marijuana¡¯s designation as a Schedule I drug was, ¡°more due to Nixon¡¯s animus towards

the counterculture with which he associated marijuana than scienti c, medical, or legal opinion.¡±20

At the same time, state interest in medical marijuana was emerging. During the 1970s, Oregon,

Alaska, and Maine decriminalized marijuana, and New Mexico commissioned a short-lived medical

marijuana research program.21 In 1996 California voters approved Proposition 215 (Compassionate

Use Act), the rst state legalization of marijuana for medicinal purposes. The use of medicinal

marijuana was limited to those with severe or chronic illnesses. Other states followed suit and as of

October, 29 states allow the use of marijuana for speci ed medical purposes,22 while eight states

and Washington, D.C., have legalized marijuana for recreational use.23

Research from states that have legalized medical marijuana shows that the average doctor in

medical marijuana states prescribes 1,826 fewer doses of painkillers and 265 fewer doses of

antidepressants annually.24 Additionally, states with medical marijuana have a 25 percent lower

rate of opioid-related deaths than states that do not.25

The Medical Marijuana Act (MMA) of 2016 legalized the use of some forms of medical marijuana in

Pennsylvania by patients with speci ed serious medical conditions. The MMA was championed,

through a bipartisan e ort, speci cally for children with extreme seizure disorders and other

medical conditions.

The MMA did not legalize recreational marijuana, only medical marijuana. And it is not even a

broad grant of legalization for all forms of medical marijuana for all persons. Instead, Pennsylvania

limits the forms of medical marijuana that can be used and limits the types of eligible patients. The

leaf and plant forms of marijuana are prohibited, with approved forms limited to pill, oil, and

topical forms, vaporization or nebulization, tincture, and liquid.26 Further, only 17 medical

conditions qualify for medical marijuana.27 Patients with any of these maladies must be certi ed by

a practitioner registered to recommend medical marijuana. Patients must submit that certi cation

to the Department of Health to receive a medical marijuana identi cation card. Practitioners who

wish to certify patients must apply with the Department of Health and complete a four-hour

training session.28



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There is a 5 percent tax on gross receipts from the sale of medical marijuana by a

grower/processor to a dispensary. Receipts from the tax will be deposited into a fund that is used

to pay for operating costs, nancial assistance for those with demonstrated nancial hardship,

drug and alcohol treatment services, enforcement funding for police departments, and research

into how medical marijuana can treat other conditions.

The sale of medical marijuana is not subject to Pennsylvania sales tax. The Department of Health,

along with the Department of Revenue, may regulate the price of medical marijuana; if they deem

the per-dose price excessive, they may impose a price cap.

Apart from the medical marijuana tax, businesses involved in the sale or disbursement of

marijuana, like any other business, may be subject to various Pennsylvania taxes, including gross

receipts, personal income, and corporate net income. Further, the new jobs the medicinal

marijuana industry create will be a source of revenue from wage and employment taxes.

Applicants must also pay $5,000 per dispensary application and $10,000 per grower/processor

application. Business licensees pay registration fees of $30,000 for each dispensary location and

$200,000 for growers/processors.

While medical marijuana may be legal in Pennsylvania, from a federal perspective it is still an illegal,

Schedule I, drug. The Rohrabacher-Blumenauer Amendment prohibits the U.S. Department of

Justice from using federal funds to interfere with state medical marijuana programs or from

prosecuting medical marijuana businesses that comply with state laws.29 However, because

marijuana is still illegal under federal law, there are tax consequences. IRC section 280E prohibits

any business that is ¡°tra cking in controlled substances¡± from taking any business expense

deductions that would otherwise be available. Because Pennsylvania follows federal taxable

income, a business is likewise unable to use those deductions for purposes of its state tax liability.

Despite the inability to take business expense deductions, a marijuana business must meet its

federal, state, and local tax obligations.

There are important caveats to the lack of business expense deductibility. First, under IRC section

164, taxes paid relating to the disposition of property are a reduction in the amount realized on the

disposition. Therefore, medical marijuana tax imposed on producers should allow for a reduction

in gross receipts. This is not prohibited by IRC section 280E because the tax is not a deduction or

credit. Second, those taxpayers who choose or are required to use the accrual method of

accounting may skirt some of the e ect of section 280E. Under the accrual method, cost of goods

(COG) is an o set to gross revenue, not a deduction. Therefore, it is not prohibited by the language



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of section 280E. However, the IRS has taken the position that the COG deduction applies only to

inventory costs allowable under section 471, which was in e ect when section 280E became

e ective.30 Again, since Pennsylvania follows federal taxable income, corporate taxpayers in the

marijuana industry should be able to bene t from the COG deduction allowed under the accrual

method of accounting for Pennsylvania purposes as well.

Individuals and passthrough entities not subject to the corporate net income tax (that is, those

taxpayers that do not start with federal taxable income) are permitted to deduct ordinary,

reasonable, and necessary business expenses associated with the business activity.31 However,

because no case law exists on the issue, it is unclear what will be viewed as ¡°ordinary, reasonable,

and necessary¡± for the medical marijuana industry for purposes of the deduction.

Third, to the extent a business is doing more than selling or producing medical marijuana, it should

be able to deduct that portion of business expenses that are not attributable to the ¡°tra cking of

marijuana.¡±32 In Californians Helping to Alleviate Medical Problems, a medical marijuana facility

bifurcated its business: one in which the facility bought and sold marijuana, and the other in which

it provided counseling to customers as to which type of marijuana worked best for their ailments.

The tax court allowed the facility deductions attributable to the counseling segment of the

business.33

Of the states that have legalized and are taxing medical marijuana, Pennsylvania¡¯s 5 percent excise

tax, as seen in the chart, is not out of line with other states.

State

Medical Marijuana Tax

Recreational Marijuana Tax

Wholesale ¡ª $50 per ounce on

Alaska

No tax*

ower; $15 per ounce for

stems/leaves

Arizona

Arkansas

6.6% state tax + 2-3% optional local

tax

4% state tax

N/A

N/A



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