A measure to tax the gross receipts of licensed medical marijuana dispensaries in Oakland passed overwhelmingly on Tuesday. The vote makes Oakland the first city in the US to tax marijuana.

The tax was put on the ballot after a considerable push from the medical community. City Council jumped on the bandwagon, too, when it became clear that Oakland would not meet its budget for the year. Rebecca Kaplan, a local councilwoman said, “Given that the medical cannabis dispensaries are something that was legalized in California, why not have revenue from it?”

So that kind of makes sense. In theory, I get the idea of taxing legal substances, like tobacco, to raise revenue. What’s odd, though, is that this is medical marijuana. That is a significant distinction. In California, it would be otherwise exempt under the state sales tax laws which specifically exclude “[s]ales of prescription medicine and certain medical devices.” However, according to the Wall Street Journal, sales tax is collected on the purchase. This, according to the State Board of Equalization, is because marijuana cannot be exempted as a prescription drug since it is classed as a Schedule I drug by the federal government and it cannot be “prescribed.” To actually obtain medical marijuana, your doctor must write a note, not a prescription (insert rolling of the eyes here).

The new tax in Oakland is a gross receipts tax imposed on the dispensaries which are licensed to sell medical marijuana. Currently, four dispensaries inside the city fit the bill. Those dispensaries not only supported the effort to tax medical marijuana, but they also pushed the City Council to put the tax to a vote. Why? While the tax is relatively small (1.8%), it, in effect, legitimizes their product. You may recall a similar effort in Nevada to tax prostitution; though legal, it was not taxed and the sex industry led the failed effort to have it taxed. For better or worse, taxing a product is perceived as the government’s tacit approval of the sale of the product.

The latter is exactly what has riled those who are fighting to keep drugs out of California. Paul Chabot of the Coalition for a Drug-Free California, in addressing those concerns, has said, “With the state in dire straits in finances and the country looking for ways to pay down debt, looking at illegal drugs is the absolute wrong thing to do.”

Only Mr. Chabot doesn’t have it quite right. California is one of 13 states that has passed a law legalizing the sale of medical marijuana; it is not illegal in that regard. Alaska, Colorado, Hawaii, Maine, Michigan, Montana, Nevada, New Mexico, Oregon, Rhode Island, Vermont, and Washington have also legalized the sale of medical marijuana. Other states, like North Carolina and Iowa, are considering measures that would legalize the use of marijuana for medical purposes.

But Chabot does have many supporters who believe that the taxation of medical marijuana puts the state of California one step closer to legalizing the distribution of marijuana altogether. Those supporters argue that marijuana is a gateway drug to harder drugs and that legitimizing marijuana will pave the way towards legitimizing other drugs.

That argument isn’t convincing many government officials. Taxing the distribution of medical marijuana is expected to raise an additional $300,000 for the City of Oakland, though some supporters claim that the number will be as high (no pun intended) as $1 million. Not surprisingly, then, Los Angeles, Berkeley, and San Francisco are reportedly considering a similar scheme.

Even more dramatic, as blogged earlier, the state of California is debating a bill that would legalize and tax the sale of marijuana without regard for medical use. That bill includes a measure, ironically, which would exempt the sale of medical marijuana from sales tax.

Interestingly, it was the taxation of marijuana in the 1930s which lead to the criminalization of the drug. Really. The 1937 Marihuana Tax Act imposed a two-part tax on the sale of marijuana; one which functioned like a sales tax and an occupational tax for licensed dealers. Violations of the Act resulted in serious consequences.

In 1969, Timothy Leary challenged his arrest for possession of marijuana under the Act; the case of Leary v. United States made it to the Supreme Court. The Court invalidated part of the Act as a violation of the Fifth Amendment (against self-incrimination). The result was a new law, the Controlled Substances Act, passed in 1970, which criminalized the possession or sale of marijuana.

Forty years later, we may end up at the same place again.

What do you think? Should we tax the sale of marijuana? Did Oakland get it right?

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Kelly Erb is a tax attorney, tax writer and podcaster.


  1. I haven’t even smelled marijauna for about 30 years. But as a fiscal conservative, I think that it’s quite clear that the war on drugs isn’t working.

    A tax on pot has potential, but it would be helpful if they would use that proceeds to fund substance abuse efforts instead of putting it in the general pool.

    With those caveats, to answer your question, yes. Oakland got it right.

  2. Great way to keep the population sedated while California goes to hell in a handbasket.

  3. question authority Reply

    (Raises eyebrows) Now who’s the addict?

    I would prefer the bill that legalizes and taxes pot with an exemption and a prescription from the doctor.

    The number of lives wrecked by the ‘war on drugs’ far exceeds anything we will see from the legalization of pot.

  4. This is a very good thing, hopefully the rest of the country opens its eyes and we approve this nationwide. The revenue this country could gain from taxing cannabis would definitely put a dent in the deficit Mr. B got us into. Please Vote!

  5. tax marijane when it becomes legal but not medical mary ’cause that only makes it more expensive for patients who sincerely need it for migraines, pain, etc.. It is a wonder drug and relieves patients from having to take pills that can destroy their livers.

  6. Tax girl,

    To the best of my knowledge, Montana has NOT legalized the SALE of medical marijuana. It only allows caregivers to receive reasonable compensation for the service of growing or helping grow the patients’ maijuana. Perhaps it is different in other states? If you know of any official legislature stating otherwise, I’d love to know about it.

    Just didn’t want your readers to be confused.

  7. Legalize it and tax it, but no taxes for medical uses. I consider myself a libertarian and I have a feeling government will screw this one up also, but what we have now isn’t working. By the way, I feel the same way about gun control

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