Is a lab's testing of medical marijuana for safety and potency subject to Connecticut sales and use tax?

Plain-English summary

A company runs a laboratory that tests marijuana for medical marijuana growers. It measures the plant's chemical components to judge the safety and potency of the product for human medical use, documents the results, and sends the grower a report. It asked whether these testing services are subject to Connecticut sales and use tax.

DRS ruled no — and gave two independent reasons:

1. Testing services aren't on the taxable list. In Connecticut, a service is taxable only if the law specifically enumerates it. Testing services are not among the enumerated taxable services in Conn. Gen. Stat. § 12-407, so they fall outside the tax entirely.
2. A specific exemption would apply anyway. Even if testing services were enumerated, Connecticut separately exempts services used to determine the probable consequences to human health of consuming or using a product, substance, or element (Conn. Gen. Stat. § 12-412(41)). Testing marijuana to gauge its safety and potency for human medical use fits that exemption, giving an alternate basis for non-taxability.

The bottom line is that the service escapes tax twice over: it isn't an enumerated taxable service, and it would qualify for a health-consequences testing exemption even if it were.

What this means for you

Testing and analytical laboratories

Pure testing/analysis work is generally outside Connecticut's sales tax, because the state taxes only the services it specifically lists and testing isn't one of them. If your lab's output is a report of test results, that's a strong indicator you're not selling a taxable service. The extra exemption in § 12-412(41) is a helpful backstop when your testing bears on the health effects of a product a person will consume or use.

Cannabis-industry businesses

Lab fees a grower pays to have product tested for safety and potency are not taxable in Connecticut. (This ruling addresses only the testing service — other transactions in the supply chain can have their own tax treatment.)

Accountants and tax professionals

The primary holding rests on the enumerated-services rule of Conn. Gen. Stat. § 12-407 (against the § 12-408 imposition), with testing services simply absent from the list. The § 12-412(41) exemption is offered as an alternative ground — useful whenever a service's function is assessing probable human-health consequences of a substance's use, regardless of the substance.

Common questions

Q: Are laboratory testing services taxable in Connecticut?
A: Generally no. Testing services are not among the services the law enumerates as taxable, so they're outside the sales and use tax.

Q: Does it matter that the product being tested is marijuana?
A: Not to the result. The service is non-taxable because testing isn't an enumerated service; and separately, testing to determine a product's safety/potency for human use fits the health-consequences exemption in § 12-412(41).

Q: What is the § 12-412(41) exemption?
A: It exempts services used to determine the probable consequences, for human health, of consuming or otherwise using a product, substance, or element — an independent reason this marijuana testing is exempt.

Q: Does this ruling apply to my lab?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. A service that goes beyond testing/analysis, or that the legislature later enumerates, could be treated differently.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407 (services taxed only if specifically enumerated; testing services are not listed)
• Conn. Gen. Stat. § 12-408 (imposition of sales tax on retail sales)
• Conn. Gen. Stat. § 12-412(41) (exemption for services determining a product's probable consequences for human health)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2016-1

Original ruling text

Ruling 2016-1 - Sales and Use Taxes Testing Services

FACTS:

The Company provides testing services to medical marijuana growers.  The testing services are meant to determine and measure various chemical components of marijuana (the “Product”) in order to determine the safety and potency of the Product for use as a medical drug by humans.  Once the tests are performed, the Company documents the results for the Product and generates a report summarizing the test results.  This report is then sent to its customer, the medical marijuana grower.

ISSUE:

Are the Product testing services provided by the Company subject to sales and use taxes?

RULING:

The Product testing services provided by the Company are not subject to sales and use taxes.

DISCUSSION:

Connecticut generally imposes sales tax on retail sales of tangible personal property, unless specifically exempt.  Conn. Gen. Stat. § 12-408.  In contrast, sales of services are exempt from sales tax unless specifically enumerated as taxable in Conn. Gen. Stat. § 12-407.  Testing services are not currently included in the list of enumerated services in Conn. Gen. Stat. § 12-407.  For this reason, the Product testing services provided by the Company to its customers are not subject to sales and use taxes.

Moreover, there is an exemption for sales of services used to determine the probable consequences in relation to human health of the consumption or other use of any product, substance or element that would be applicable even if such services were enumerated as taxable.  Conn. Gen. Stat. § 12-412(41).  This exemption would provide an alternate basis for the determination that the service of testing marijuana in order to determine its safety and potency for use as a medical drug by humans is not subject to sales and use taxes.

OFFICE OF COUNSEL

January 22, 2016