Is medical marijuana sold under Colorado's Amendment 20 subject to state sales tax, and who has to collect it?

Opinion 09-06: Medical marijuana sold under Amendment 20 was subject to state sales tax, and the vendor had to collect

Plain-English summary

By 2009, medical marijuana dispensaries had spread across Colorado in the wake of Amendment 20 and a permissive Department of Justice memo. The governor asked the AG six tax questions. The AG's answers tracked Colorado's basic sales-tax architecture: any sale of tangible personal property is taxable unless a specific exemption applies. Medical marijuana was tangible personal property, no question. The two exemptions that mattered (drugs dispensed by prescription under § 39-26-717(1)(a), and agricultural products under § 39-26-716) did not reach medical marijuana sold to patients, with one narrow exception: marijuana seeds, which are exempt by name under § 39-26-716(4)(b). The food exemption under § 39-26-707(1)(e) did not reach edible marijuana products either, because Department of Revenue regulations excluded medicinal items.

The licensing answer followed: anyone selling medical marijuana at retail had to obtain a retail sales tax license under § 39-26-103, and the obligation to collect and remit the sales tax fell on the vendor under § 39-26-105(1)(a). The AG cited the federal income-tax principle (gross income includes income from illegal sources, 26 U.S.C. § 61) to underscore that the legality of the underlying transaction did not affect the tax obligation. A retail sales tax license, the AG noted, was not an endorsement of legal compliance; it was just the way the State tracked the money.

Currency note

This opinion was issued in 2009. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Colorado has since legalized adult-use marijuana under Amendment 64 (2012), enacted a comprehensive marijuana taxation regime, and amended its medical marijuana statutes; the 2009 framework is no longer the governing law.

Background and statutory framework

Colorado voters adopted Amendment 20 in 2000, codified at Colo. Const. art. XVIII, § 14, authorizing the medical use of marijuana for patients with defined "debilitating medical conditions." Amendment 20 protected qualifying patients and their primary care-givers from state criminal prosecution but, as the People v. Clendenin court noted, did not protect their suppliers. Distribution of marijuana remained illegal under federal law (21 U.S.C. § 841(a)(1)) and, except as authorized by Amendment 20, under state law.

In October 2009, the U.S. Department of Justice issued the so-called Ogden Memo, telling U.S. Attorneys not to focus federal resources on individuals "in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." The memo did not change federal law; it changed enforcement priorities. After the memo, dispensaries proliferated in Colorado.

Colorado's sales tax was structured as a tax on tangible personal property at retail (§ 39-26-104(1)(a)). Tangible personal property meant corporeal personal property (§ 39-26-102(15)). Retail sale meant all sales except wholesale (§ 39-26-102(9)). Department of Revenue's regulation defined tangible personal property to embrace "all goods, wares, merchandise, products and commodities, and all tangible or corporeal things which are dealt in, capable of being processed or exchanged."

Three exemptions could plausibly have applied. Section 39-26-717(1)(a) exempted "[a]ll sales of drugs dispensed in accordance with a prescription." Section 39-26-716 exempted several agricultural products. Section 39-26-707(1)(e) generally exempted food.

What the AG concluded at the time

Question 1: Tangible personal property, yes

The AG concluded that medical marijuana fell squarely within the statutory and regulatory definition of tangible personal property. The Telluride Resort and Spa rule about starting with the statutory provisions, and the A.D. Store rule that Colorado applies sales tax provisions broadly, both pointed the same way.

Question 2: Not "dispensed in accordance with a prescription"

The AG explained that "prescription" is a defined medical term. Department of Revenue Regulation 39-26-717.1 required a prescription to be a written or oral order from a practitioner specifying the recipient and any label directions. Amendment 20 did not contemplate that. Under Colo. Const. art. XVIII, § 14(2), a physician simply provided written documentation that a patient had a debilitating medical condition and "might benefit from the medical use of marijuana." That was diagnosis-by-attestation, not a prescription.

Federal law sealed the issue. Schedule I controlled substances (21 U.S.C. § 812(c)) cannot be dispensed under prescription (21 U.S.C. § 829), as confirmed by the U.S. Supreme Court's footnote 5 in Oakland Cannabis Buyers' Co-op. Marijuana is a Schedule I substance. So even apart from the state-law definitional issue, federal law foreclosed the prescription characterization.

Question 3 & 4: Agricultural exemption only for seeds

Section 39-26-716(4)(b) exempted "all sales and purchases of seeds." Marijuana seeds qualified for that exemption. Other forms (leaves, buds, flowers, plants) did not. Edible products containing marijuana were not "food" under § 39-26-707(1)(e) because Revenue Regulation 26-102.4.5 excluded medicines, therapeutic products, and items "primarily used for medicinal purposes." Under Colorado Dept. of Revenue v. Woodmen of the World, the burden was on the taxpayer to establish a clear right to an exemption, and that burden was not met.

Question 5: Retail sales tax license required

The AG drew on a 2007 California State Board of Equalization "Special Notice" for the same proposition: a seller's permit "does not mean you have the authority to make unlawful sales. The permit only provides a way to remit any sales and taxes due." The AG framed Colorado law the same way. Section 39-26-103(1)(a) made it unlawful to engage in the business of selling at retail without first obtaining a retail sales license. That requirement applied to anyone selling medical marijuana, regardless of the underlying legality of the sale.

The federal-tax analogy reinforced the point. Gross income for federal income tax purposes includes income from illegal sources (26 U.S.C. § 61, 26 C.F.R. § 1.61-14). The federal government does not impose a sales tax but does impose 26 U.S.C. § 280E, which disallows deductions and credits for trafficking in Schedule I or II controlled substances. The point was symmetric: tax obligations arise from the activity, not from its legality.

Question 6: Vendor must collect and remit

Section 39-26-105(1)(a) made the vendor responsible for collecting and remitting state sales tax. Section 39-26-106(2)(a) required the vendor to add the tax to the sales price and show it as a separate item. Once collected, the funds were public money held in trust for the state under § 39-26-118(1) until remitted. Critically, the vendor was liable for the tax even if the vendor had not actually collected from the consumer.

Common questions

Did this opinion legalize medical marijuana sales?

No. The opinion expressly noted that the retail sales tax license "does not represent an endorsement of an enterprise's compliance with the law and does not legitimize an illegal act." It was tax guidance, not licensing or criminal-law guidance.

What about marijuana seeds, the one exempt category?

Sales of marijuana seeds were exempt under § 39-26-716(4)(b) because that statute exempted "all sales and purchases of seeds" without limitation by plant type. The AG did not opine on whether seed sales were otherwise legal under Amendment 20 or federal law; the exemption applied if the sale itself was permitted.

Did the AG say marijuana sales were illegal?

The AG noted that distribution of marijuana was illegal under federal law (21 U.S.C. § 841) and, except for Amendment 20-authorized transfers between primary caregivers and patients, illegal under state law. The opinion did not adjudicate whether any specific dispensary's transactions were legal or illegal; it addressed tax treatment regardless of legality.

Could a vendor refuse to collect sales tax because the underlying transaction was federally illegal?

No. Under the AG's reading, the vendor's obligation to collect and remit sales tax under § 39-26-105(1)(a) did not depend on the legality of the underlying transaction. The vendor was personally liable for the tax even if it had not collected.

Citations

• Colo. Const. art. XVIII, § 14 — Amendment 20 authorizing medical use of marijuana for patients with debilitating conditions.
• C.R.S. § 39-26-103(1)(a) — requirement to obtain a retail sales license before engaging in the business of selling at retail.
• C.R.S. § 39-26-104(1)(a) — sales tax on the purchase price of all sales of tangible personal property at retail.
• C.R.S. § 39-26-105(1)(a) — vendor's obligation to collect and remit sales tax.
• C.R.S. § 39-26-106(2)(a) — vendor's obligation to add the tax separately on the sales price.
• C.R.S. § 39-26-118(1) — sales tax collected is public money held in trust for the state.
• C.R.S. § 39-26-716(4)(b) — exemption for sales and purchases of seeds.
• C.R.S. § 39-26-717(1)(a) — exemption for sales of drugs dispensed in accordance with a prescription.
• C.R.S. § 39-26-707(1)(e) — exemption for food, narrowed by Revenue Regulation 26-102.4.5 to exclude medicinal items.
• 21 U.S.C. § 812(c) — Schedule I classification of marijuana.
• 21 U.S.C. § 829 — restrictions on dispensing of controlled substances by prescription.
• 26 U.S.C. § 61 — federal income includes income from illegal sources.
• 26 U.S.C. § 280E — disallowance of deductions and credits for trafficking in Schedule I or II controlled substances.
• Colorado Dept. of Revenue v. Woodmen of the World, 919 P.2d 806 (Colo. 1996) — strong presumption of taxation; burden on taxpayer to establish exemption.
• Telluride Resort and Spa, L.P. v. Colorado Department of Revenue, 40 P.3d 1260 (Colo. 2002) — sales tax analysis begins with the statutory provisions.
• United States v. Oakland Cannabis Buyers' Co-op, 532 U.S. 483 (2001) — U.S. Supreme Court holding that Schedule I substances cannot be dispensed under prescription.
• Gonzales v. Raich, 545 U.S. 1 (2005) — U.S. Supreme Court holding that federal law applied to medical marijuana under the Supremacy Clause.

Source

• Landing page: https://coag.gov/attorney-general-opinions/
• Original PDF: https://coag.gov/app/uploads/2019/08/No.-09-6-Six-Questions-Regarding-Taxation-of-Medical-Marijuana.pdf

Original opinion text

STATE OF COLORADO

John W. Suthers
Attorney General

DEPARTMENT OF LAW

Cynthia H. Coffman
Chief Deputy Attorney General

Office of the Attorney General
State Services Building
1525 Sherman Street - 7th Floor
Denver, Colorado 80203
Phone (303) 866-4500

Daniel D. Domenico
Solicitor General

FORMAL OPINION OF JOHN W. SUTHERS Attorney General

No. 09-06
AG Alpha No. EX AD AGBDD
November 16, 2009

Governor Bill Ritter, Jr., through his Chief Legal Counsel Thomas M. Rogers, III, requested an opinion from this office regarding the applicability of state sales tax to the purchase and sales of medical marijuana.

QUESTIONS PRESENTED AND SHORT ANSWERS

The Governor's Chief Legal Counsel presented the following six questions:

Question 1. Is medical marijuana "tangible personal property" subject to the state sales tax under the Colorado tax code, section 39-26-104(1)(a), C.R.S.?
Answer 1. Yes. Medical marijuana is tangible personal property and is subject to the state sales tax, unless eligible for a specific sales tax exemption.

Question 2. Do transactions involving medical marijuana constitute "sales of drugs dispensed in accordance with a prescription" such that they would qualify for tax exemption under section 39-26-717(1)(a), C.R.S.?
Answer 2. No. Medical marijuana is not dispensed in accordance with a prescription.

Question 3. Do medical marijuana transactions qualify for the agricultural tax exemptions under section 39-26-716, C.R.S.?
Answer 3. Generally not, except as discussed in response to Question 4, below.

Question 4. Does the form of marijuana sold or purchased alter the tax treatment of the transaction?
Answer 4. Yes. Pursuant to section 39-26-716(4)(b), C.R.S., all sales and purchases of seeds are exempt from sales tax in Colorado. Other forms of marijuana sold or purchased would not qualify for this sales tax exemption.

Question 5. Regardless of the legality of the activity, are individuals and enterprises that engage in the sale of medical marijuana pursuant to Amendment 20 required to obtain a license and otherwise comply with the requirements of section 39-26-103, C.R.S.?
Answer 5. Yes. Unless subject to a particular exemption, it is unlawful under section 39-26-103(1)(a), C.R.S., for any individual or enterprise to engage in the business of selling at retail without first having obtained a retail sales license issued by the Colorado Department of Revenue.

Question 6. If such transactions are taxable, whose obligation is it to collect and remit any sales tax due for the purchase or sale of medical marijuana?
Answer 6. The obligation to collect and remit sales tax due is borne by the vendor.

BACKGROUND

In 2000, Colorado voters amended the Colorado Constitution by adopting an amendment (hereinafter "Amendment 20") authorizing the medical use of marijuana for persons suffering from defined "debilitating medical conditions." Colo. Const. art. XVIII, § 14.

Amendment 20 left many legal questions unanswered. The Blue Book circulated in connection with Amendment 20 stated that under the proposed amendment, possession of marijuana would be permitted for patients who have registered with the state, but distribution of marijuana would still be illegal in Colorado. Consequently, Amendment 20 provides certain protections from state criminal liability for qualifying patients and primary care-givers, but "nothing in the amendment protects their original suppliers from prosecution or conviction on drug-related charges." (People v. Clendenin, Loeb, J., specially concurring).

Further complicating the application of Amendment 20, federal law prohibits the manufacture, distribution, dispensing, or possession with intent to manufacture, distribute or dispense marijuana. 21 U.S.C. § 841(a)(1); 21 U.S.C. § 812(c). The United States Supreme Court has held that under the Supremacy Clause of the United States Constitution, where federal and state law conflict, federal law prevails. Gonzales v. Raich, 545 U.S. 1, 29 (2005). In another case, the Court has upheld application of federal law to enjoin distribution of medical marijuana under a California law that is similar to Amendment 20. See U.S. v. Oakland Cannabis Buyers' Co-op, 532 U.S. 483 (2001).

Nevertheless, fourteen states, including Colorado, currently have laws in some form addressing the use of marijuana for medical purposes. On October 19, 2009, the United States Department of Justice issued a memorandum addressing the issue (hereinafter, "Department of Justice Memorandum"). The Department of Justice Memorandum clarified that compliance with a state's medical marijuana laws does not constitute a defense to a charge under 21 U.S.C. § 841 and related provisions, but it stated that United States Attorneys should not "focus" federal resources on individuals "whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." Recently, Colorado has witnessed a surge in dispensaries providing medical marijuana to patients.

Despite the legal confusion surrounding the medical marijuana industry, the taxation question is relatively straightforward. Colorado's sales tax applies to "the purchase price paid or charged upon all sales and purchases of tangible personal property at retail." § 39-26-104(1)(a), C.R.S. Colorado law contains no sales tax exemption for legally prohibited or otherwise unauthorized sales. Sales of medical marijuana are subject to state sales tax, unless a specific sales tax exemption applies.

DISCUSSION

Question 1. Is medical marijuana "tangible personal property" subject to the state sales tax under the Colorado tax code, section 39-26-104(1)(a), C.R.S.?

Colorado imposes a tax on "the purchase price paid or charged upon all sales and purchases of tangible personal property at retail." § 39-26-104(1)(a), C.R.S. Tangible personal property means corporeal personal property. § 39-26-102(15), C.R.S. "Retail sale" is defined as "all sales made within the state except wholesale sales." Section 39-26-102(9), C.R.S. The Colorado Department of Revenue ("Revenue") further defines "tangible personal property" via regulation as follows:

"Tangible personal property" embraces all goods, wares, merchandise, products and commodities, and all tangible or corporeal things which are dealt in, capable of being processed or exchanged . . . . (Revenue Regulation 39-26-102.15, 1 C.C.R. 201-4.)

Under the plain language of both the statutory and the regulatory definition of "tangible personal property," medical marijuana constitutes tangible personal property subject to state sales tax, unless it qualifies for a specific sales tax exemption. See Telluride Resort and Spa, L.P., v. Colorado Department of Revenue, 40 P.3d 1260, 1264 (Colo. 2002) ("In taxation matters, we commence our analysis with the statutory provisions.").

Question 2. Do transactions involving medical marijuana constitute "sales of drugs dispensed in accordance with a prescription" such that they would qualify for tax exemption under section 39-26-717(1)(a), C.R.S.?

The State of Colorado applies its sales tax provisions broadly. See A.D. Store v. Department of Revenue, 19 P.3d 680, 682 (Colo. 2001). In construing tax statutes there is a strong presumption that taxation is the rule and exemption the rare exception. Colorado Dept. of Revenue v. Woodmen of the World, 919 P.2d 806, 810 (Colo. 1996). The burden is on the taxpayer who claims an exemption to establish clearly the right to such an exemption. Id. Like Colorado courts, "[u]nless the statutes and the constitution place the property within a stated category of exemption, we resolve doubts regarding the meaning of statutes and the constitution in favor of subjecting the property to payment of its fair proportion of taxation." Telluride Resort and Spa, L.P. v. Colo. Department of Revenue, 40 P.3d 1260, 1264 (Colo. 2002).

Section 39-26-717(1)(a), C.R.S., exempts from state sales tax, among other items, "[a]ll sales of drugs dispensed in accordance with a prescription." The words "prescription" and "dispensed" are medical terms not defined within state statutes governing sales tax, but are further discussed in regulation. Revenue's rule defining "prescription" for purposes of the sales tax exemption in section 39-26-717(1)(a), C.R.S. provides as follows:

A "prescription" means any order in writing, dated and signed by a practitioner, or given orally by a practitioner, and immediately reduced to writing by the pharmacist, assistant pharmacist, or pharmacy intern, specifying the name and address of the person for whom a medicine, drug, or poison is ordered and directions, if any, to be placed on the label. (Department of Revenue Regulation 39-26-717.1, 1 C.C.R. 201-4.)

Under Amendment 20, no such prescription is contemplated. Instead, a physician merely provides written documentation that a patient has a debilitating medical condition and "might benefit from the medical use of marijuana." Colo. Const. art. XVIII, §§ 14(2)(a)(I) and (II); (2)(c)(I) and (II), and (3)(b)(I).

Moreover, under federal law, marijuana, medical or otherwise, cannot be distributed by prescription. In addition to meeting any state licensure and regulatory requirements, any individual or entity aspiring to dispense a controlled substance must comply with federal law and obtain a registration from the United States Drug Enforcement Administration ("DEA"). 21 C.F.R. § 1301.11. Such registration is available only for dispensing of schedules II through V controlled substances. 21 C.F.R. 1301.13. Under federal law, marijuana is a schedule I controlled substance. 21 U.S.C. § 812(c). Unlike drugs in other schedules, schedule I controlled substances cannot be dispensed under a prescription. See also 21 U.S.C. § 829 (governing "prescriptions" and describing requirements associated with schedule II through V controlled substances only); U.S. v. Oakland Cannabis Buyers' Co-op, 532 U.S. 483, 492 n5 (2001) (Schedule I drugs cannot be dispensed under a prescription).

Sales of medical marijuana are not and cannot be "dispensed in accordance with a prescription" and therefore are not exempt from sales tax pursuant to section 39-26-717(1)(a), C.R.S.

Question 3. Do medical marijuana transactions qualify for the agricultural tax exemptions under section 39-26-716, C.R.S.?
Question 4. Does the form of marijuana sold or purchased alter the tax treatment of the transaction?

Section 39-26-716, C.R.S., exempts several agriculturally-related products from state sales tax. The majority of the provisions listed under section 716 are not applicable to retail sales of medical marijuana. Subsection 4(b) of section 716, however, exempts from state sales tax "all sales and purchases of seeds." Marijuana sold in the form of seeds would qualify for this exemption. Marijuana sold in the form of leaves, buds, flowers or plants would not qualify, and would be subject to sales tax.

Section 39-26-707(1)(e), C.R.S., generally exempts sales of food from sales tax. Marijuana sold in the form of food would not qualify for this exemption, however. Revenue Regulation 26-102.4.5, 1 C.C.R. 201-4, clarifies that the following items do not constitute "food" and do not qualify for sales tax exemption under section 39-26-707(1)(e), C.R.S.: medicines, therapeutic products and deficiency correctors such as vitamins and minerals, cod liver oil, and "other such items which are primarily used for medicinal purposes or as health aids." By definition, any food product containing medical marijuana and sold pursuant to Amendment 20 must be used "for medicinal purposes" and would not be exempt from sales tax under section 39-26-707, C.R.S.

Question 5. Regardless of the legality of the activity, are individuals and enterprises that engage in the sale of medical marijuana pursuant to Amendment 20 required to obtain a license and otherwise comply with the requirements of section 39-26-103, C.R.S.?

As discussed in the Background section above, distribution of medical marijuana is illegal under federal law. Except where transfer of medical marijuana between a primary care-giver and a patient is authorized by Amendment 20, distribution of marijuana is also illegal under state law. Regardless of the legality of the activity, however, individuals and enterprises that engage in the sale of medical marijuana pursuant to Amendment 20 are required to obtain a retail sales tax license and otherwise comply with the requirements of section 39-26-103, C.R.S. Unless subject to a particular exemption, it is unlawful for any person to engage in the business of selling at retail without first having obtained a retail sales license granted and issued by the executive director of Revenue. § 39-26-103(1)(a), C.R.S.

Colorado is not the first state to consider this question. In February 2007, the California State Board of Equalization, which collects California's state sales and use tax, issued a "Special Notice" clarifying that those who sell medical marijuana in the state of California must hold a seller's permit and are generally subject to sales tax. The "Special Notice" explains: "Having a seller's permit does not mean you have the authority to make unlawful sales. The permit only provides a way to remit any sales and taxes due."

This analysis is consistent with federal treatment of illegally obtained income. While the federal government does not impose a sales tax, for federal income tax purposes, "gross income" includes income derived from illegal sources. 26 U.S.C. § 61; 26 C.F.R. § 1.61-14. But see 26 U.S.C § 280E (disallowing any income tax deduction or credit for any amount paid or incurred in carrying on any trade or business activities related to trafficking in schedule I or II controlled substances prohibited by state or federal law).

Thus, under both federal and state tax law, an individual or business must pay applicable tax even if the taxpayer is noncompliant with the law, and even the taxpayer sells an illegal product. Failing to obtain the required sales tax license and remit required sales taxes would add another illegality to the operation.

A state retail sales tax license does not represent an endorsement of an enterprise's compliance with the law and does not legitimize an illegal act. As under federal tax law, however, state tax law should not allow an individual or business engaged in an unlawful or potentially unlawful enterprise to avoid tax liability.

Under Colorado law, an individual or enterprise that engages in the sale of marijuana pursuant to Amendment 20 (or otherwise, for that matter) must obtain a retail sales tax license and comply with the requirements of section 39-26-103, C.R.S.

Question 6. If such transactions are taxable, whose obligation is it to collect and remit any sales tax due for the purchase or sale of medical marijuana?

The obligation to collect and remit sales tax due is borne by the vendor. § 39-26-105(1)(a), C.R.S. The retailer must add the tax imposed, or the average equivalent thereof, to the sales price or charge, showing such tax as a separate and distinct item. § 39-26-106(2)(a), C.R.S. When added, such tax constitutes a part of the price or charge and is a debt from the consumer to the retailer. Id. All sums of money paid by the purchaser to the retailer as taxes constitute public money, the property of the state in the hands of such retailer, who holds the same in trust for the sole use and benefit of the State until paid to Revenue. § 39-26-118(1), C.R.S.

Revenue Regulation 26-104.1(a), 1 C.C.R. 201-4, explains: "The tax is imposed upon the purchaser. However, if the transaction involves a licensed vendor, the duty is imposed upon the vendor to add the tax to the sales price and to collect and remit the tax to the state." The sales tax constitutes a part of the price, and is a debt from the consumer or user to the vendor or retailer until paid. § 39-26-106(2)(a), C.R.S. The vendor, however, is liable for remitting payment of the amount of the sales tax to Revenue, regardless of whether the vendor has actually collected from the consumer. § 39-26-105(1)(a), C.R.S.

CONCLUSION

Medical marijuana is tangible property that is generally subject to state sales tax. Any individual or enterprise engaged in the sale of medical marijuana therefore must obtain a retail sales license from Revenue, and must collect and remit all state sales tax due.

Issued this 16th day of November, 2009.

JOHN W. SUTHERS
Colorado Attorney General