February 24, 2022

NM Supreme Court tosses cannabis tax case

Kit Leong/Shutterstock

New Mexico State Supreme Court

The New Mexico Supreme Court effectively ended a years-long legal battle over medical cannabis and taxes. 

In an order filed on Wednesday morning, the court wrote that a previous decision from the New Mexico Court of Appeals that medical cannabis was exempt from gross receipts taxes prior to June 2021 should be upheld. 

“Having considered the petition, response, and briefs of the parties, the judgment of the Court is that the writ shall be quashed as improvidently granted,” the court wrote. 

In other words, the high court should have never accepted the case. 

The lawyer for Sacred Garden, the medical cannabis company that sparked the legal battle, did not respond to a request for comment. 

Duke Rodriguez, whose cannabis company Ultra Health joined the case last year, told NM Political Report on Wednesday that he was “thrilled” with the high court’s decision. 

“I think it’s a recognition that the state never had the legal authority to collect gross receipts tax on the sale of [medical] cannabis,” Rodriguez said. “This finally rights that wrong.”

The issue of gross receipts tax, which is often incorrectly referred to as a sales tax, and cannabis goes back several years, and spans two gubernatorial administrations, when medical cannabis producer Sacred Garden requested a refund for the gross receipts taxes it paid to the state. Sacred Garden’s reasoning was that medical cannabis was essentially the equivalent to other prescription drugs, which are exempt from gross receipts tax. Through an administrative hearing, the state’s Taxation and Revenue Department, under then-Gov. Susana Martinez, denied the request. Sacred Garden took the issue to the New Mexico Court of Appeals, which ultimately ruled that a recommendation for medical cannabis by a qualified medical professional was the same as a prescription for other types of medication. 

In early 2020, the department, which was by then under current Gov. Michelle Lujan Grisham, challenged the court of appeals decision and filed a petition with the state supreme court. Throughout its filings, the Taxation and Revenue Department argued that a recommendation to use medical cannabis is not the same as a prescription and that if the state Legislature had intended to exempt medical cannabis from gross receipts taxes it would have explicitly included that in the state’s medical cannabis law, known as the Lynn and Erin Compassionate Use Act. 

In 2021, the Legislature passed the Cannabis Regulation Act, which legalized the use, sale and possession of non-medical cannabis, but also explicitly exempted medical cannabis from gross receipts taxes. The act, which Lujan Grisham signed in April 2021, went into effect in June 2021 and imposes both gross receipts and a cannabis excise tax for non-medical cannabis. But current rules prevent medical cannabis patients from buying more than 15 ounces in a 90-day period, whereas recreational-use cannabis sales are only limited to two ounces per transaction, with no limit on the number of transactions. That means if a medical cannabis patient needs more than 15 ounces of medical cannabis in a three-month time span, the patient would have to purchase recreational cannabis and pay roughly 12 to 20 percent in taxes.

Charlie Moore, a spokesperson for the Taxation and Revenue Department said the department still expects further action from the New Mexico Court of Appeals, but that the department will start issuing refunds when that happens. 

“While the department is disappointed with the supreme court’s decision to quash its review of the case, we respect the decision and will move forward to issue refunds to the affected taxpayers once the court’s decision is mandated to become final.”

The New Mexico Supreme Court did issue a mandate on Wednesday remanding the issue back to the state court of appeals, but it’s unclear what sort of action the lower court may take as a panel of appellate judges issued an opinion in January 2020, stating that “the refund claims were erroneouslsy denied.” 

Generally, there is a statute of limitations of three years for tax refunds in New Mexico, but it is unclear if that would still apply in this case. Moore said he was unsure exactly how much money the state will end up paying in gross receipt refunds, but he said the department was looking into it. But, Rodriguez estimates the state could end up paying about $30 million based on reported medical cannabis sales. Gross receipts tax rates also vary throughout the state as local counties, and in some cases municipalities, can add their own gross receipts tax to the state’s. Gross receipts tax is applied to any goods or services sold, except for goods or services deemed exempt in statute. Often, businesses will recoup money spent on gross receipt tax by passing the cost on to consumers.

While individual cannabis companies could face large refunds, Rodriguez said the court’s ruling is “not just a financial win,” but also a “clear affirmation that cannabis is medicine.” 

Even though the Taxation and Revenue Department has argued in court filings that there is a difference between a prescription for medication and a recommendation for medical cannabis, another state department last year likened medical cannabis dispensary workers to pharmacists in terms of COVID-19 vaccine priorities.  

In April 2020, Lujan Grisham told Growing Forward, the collaborative podcast between NM Political Report and New Mexico PBS, that she “philosophically” believed that “medical cannabis is medicine,” but that the Taxation and Revenue Department continued to challenge the notion that medical cannabis should have been exempt from taxes because it needed clarification from the state supreme court.

“This is an area where clarity rules because otherwise, you have a department that is guessing based on what they think legislative intent is or isn’t,” Lujan Grisham said at the time. “You would put a department in a position to be challenged for making arbitrary and capricious decisions all the time, as they were guessing or taking the side of the particular taxpayer.”

Non-medical cannabis sales are slated to begin no later than April 1 of this year and state revenue projections from cannabis taxes have ranged from tens of thousands of dollars to hundreds of thousands of dollars.