January 31, 2020

Ruling means state may owe millions in tax refunds to cannabis producers

The state of New Mexico’s Taxation and Revenue Department could be on the hook for millions of dollars in tax refunds to medical cannabis producers after a state Court of Appeals ruling made earlier this week. 

In her opinion filed on Tuesday, Court of Appeals Judge Monica Zamora wrote that medical cannabis producers should be able deduct gross receipts taxes just as pharmacies do for sales of prescription drugs. Under the Lynn and Erin Compassionate Use Act, the state’s medical cannabis law, medical cannabis is not prescribed to patients. Instead, qualified medical professionals issue a recommendation to the state Department of Health for each patient. 

Zamora cited the federal Food, Drug and Cosmetics Act, which says that restricted drugs “shall be dispensed only . . . upon a written prescription of a practitioner licensed by law to administer such drug[s.]”

Zamora said medical cannabis is restricted in a way that would qualify it as a prescription drug. 

She also pointed to a portion of the Lynn and Erin Compassionate Use Act that states medical cannabis should be viewed the same as prescription drugs.   

Further, Zamora wrote that a fiscal impact report for the bill that became the medical cannabis law did not account for tax revenue from medical cannabis sales and therefore, “suggests that the Legislature intended receipts from the sale of medical marijuana to be deductible from gross receipts.”

“It is reasonably self-evident that the deduction from gross receipts for prescription drugs was similarly intended to make medical treatment more accessible, by lessening the expense to those who require it,” she wrote.

Chief Court of Appeals Judge Miles Hanisee and Judge Julie Vargas both concurred with Zamora’s opinion.

The court’s opinion came in response to an administrative appeal filed by medical cannabis producer Sacred Garden in 2018. That appeal came after Sacred Garden applied for gross receipts tax deductions and was denied by the state’s Taxation and Revenue Department. Representatives from Sacred Garden did not return a phone call from NM Political Report.  

What it means going forward

Besides reiterating that medical cannabis should be treated like a prescription drug, which could have implications for things like Medicaid and Medicare reimbursements, the court’s decision also could open the door for producers to retroactively apply for gross receipts tax deductions. State law allows for gross receipts tax deductions for those who sell prescription drugs.  

The gross receipts taxes in New Mexico are sometimes erroneously referred to as a sales tax, but New Mexico doesn’t actually have a sales tax. Instead, those who sell goods or services in the state are required to pay about a seven percent tax—depending on the county—to the state. 

Specific data regarding how much medical cannabis producers paid in gross receipts taxes are not readily available on either the Department of Health or the Taxation and Revenue’s websites. But, based on data from the Department of Health, the average price per gram of cannabis during the third quarter of 2019 was $10 and roughly 2.8 million grams of cannabis were sold during that period. At a seven percent rate, producers likely paid about $1.9 million in gross receipt taxes. The first two quarterly reports from DOH show that producers sold 2.3 and 2.4 million grams, respectively. That means cannabis producers are collectively set to pay at least $5.1 million in gross receipts taxes for 2019. And producers can claim gross receipts taxes going back about three years, according to Taxation and Revenue Department spokesman Charlie Moore. 

“Taxpayers may file refund requests for tax periods within a statute of limitations,” Moore said. “The general rule for refunds is that they may be claimed within three years from the end of the calendar year in which tax was due, or the calendar year in which the tax was paid as the result of an assessment.”

Moore said the department is still researching exactly how much cannabis producers have paid in gross receipts taxes in the past three years, but should have an idea within the next few days. He also said the department has not decided whether or not it will take the issue to the state Supreme Court.