May 5, 2022

NM expected to pay an estimated $15 million in tax refunds to medical cannabis companies

New Mexico cannabis businesses are expected to pay cannabis excise and gross receipts taxes by the end of this month. But the state’s Taxation and Revenue Department is also expected to issue about $15 million dollars worth of gross receipts refunds to medical cannabis companies that paid those taxes prior to the enactment of the Cannabis Regulation Act, which legalized recreational-use cannabis.

State Taxation and Revenue Secretary Stephanie Schardin Clarke told NM Political Report that while the estimated refund amount may sound like a lot of money, it is a fraction of the estimated $31.5 million the state is expected to collect from non-medical cannabis sales. Further, she said, the estimated $15 million in gross receipts refunds is an even smaller fraction of what the state sets aside for reserves.  

In the grand scheme of things, we have something like an $8 billion general fund budget, give or take,” Schardin Clarke said. “So there are other things that happen all the time that are just ups and downs in that revenue base.”

The tax refunds are the culmination of a years-long legal dispute between the Taxation and Revenue Department and Sacred Garden, a long-time medical cannabis producer. In 2014, Sacred Garden unsuccessfully requested a refund of three years worth of gross receipts taxes the company paid. By 2018, Sacred Garden filed an appeal with the New Mexico Court of Appeals. 

A panel of appellate judges ruled in favor of Sacred Garden in 2020 and wrote that a doctor’s recommended use of medical cannabis is essentially the same as a prescription for pharmaceutical drugs. The Taxation and Revenue Department challenged that notion and filed a petition with the New Mexico Supreme Court, arguing that a recommendation by a doctor is not the same as a prescription. New Mexico tax laws allow for some exemptions of gross receipts tax, including the sale of prescription drugs. Earlier this year, the state supreme court dismissed the case, writing that the high court should have never accepted it. 

Since the inception of the state’s medical cannabis law, medical cannabis producers were required to pay a gross receipts tax. But the Cannabis Regulation Act includes a provision that exempts medical cannabis sales from gross receipts taxes, meaning all medical cannabis sales after June 29, 2021, are tax exempt. Non-medical cannabis sales however are subject to both gross receipts taxes as well as a cannabis excise tax. 

Even though more than two dozen cannabis companies may be getting a sizable tax refund, medical cannabis patients who saw a tax line item on their receipts prior to June 2021, should probably not be expecting a refund themselves. 

While most businesses, cannabis or otherwise, pass gross receipts taxes on to their customers, only the business is liable for that tax. Sometimes mistaken for a sales tax, New Mexico’s gross receipts tax is actually a tax on the gross income of a business. 

Schardin Clarke said it can often feel the same to the consumer though.  

“In a traditional sales tax state, the sales tax is actually due from the buyer, but it gets collected and remitted through the business, and so it kind of feels the same,” Schardin Clarke said. “It still shows up on your receipt, and you still pay it at the end of the day. But a gross receipts tax is actually due on the seller, that’s what makes [New Mexico] a little unique.”

Schardin Clarke said it is up to each business to decide how or if they want to pass those refunds back to consumers. 

“I would think logistically, it might be difficult, even if they, out of the goodness of their hearts, wanted to refund this to customers,” Schardin Clarke said. “I don’t know how easy that would be to find those people.”

Now that the legal case is officially closed, Schardin Clarke said her department is “standing ready” to receive requests for refunds from those medical cannabis companies that paid gross receipts taxes prior to June 2021. Technically, she added, those businesses will first have to amend prior tax returns and then request a refund of any amount owed by the state. 

While the state won’t see an accurate amount in tax revenue until later this month at the earliest, the state’s Regulation and Licensing Department and its Cannabis Control Division reported $40 million in combined medical and adult-use sales last month.