Can a cannabis retailer claim Washington's qualifying-patient exemption without preserving the recognition-card number used for each sale?

Plain-English summary

The Washington Department of Revenue denied medical-cannabis sales-tax exemptions because two retailers did not retain copies of patient recognition cards or preserve the card number used for each exempt sale.

The retailers' point-of-sale system stored a customer profile and current recognition-card number. When a customer received a new card, the system overwrote the old number. During an audit of January 2018 through June 2021, some transactions therefore appeared tied to card numbers that had not yet been issued on the sale date. The retailers said valid older cards existed at the time, but neither the system nor later spreadsheets recovered those original numbers.

RCW 82.08.9998 authorizes the Department to specify the information needed to establish exemption eligibility. Its 2016 Special Notice required retailers to verify a current card, enter the number in the traceability system, keep a copy of the card, and retain exempt-sale records—including the number used by the purchaser—for at least five years. The retailers failed both the card-copy requirement and the transaction-number requirement, either of which was enough to deny the exemption.

What this means for you

Medical-cannabis retailers

Keep an immutable record of the recognition card used for each exempt transaction. Updating a customer profile must not erase the prior card number associated with earlier sales.

Point-of-sale vendors

Design the system for tax evidence, not just current customer data. Store historical card identifiers, sale dates, receipts, and card images or required copies for the full retention period.

Accountants and audit teams

The retailer bears the burden of proving an exemption. The Department does not have to reconstruct eligibility from health-agency databases or infer that a different card must have existed.

Common questions

Q: Was a list of current recognition-card numbers enough?

A: No. The current numbers made some older sales appear to predate card issuance and did not identify the card actually used for each transaction.

Q: Did later point-of-sale spreadsheets fix the problem?

A: No. They added transaction details but did not recover the overwritten historical card numbers.

Q: Were the retailers also contesting sales of paraphernalia or sales on expired cards?

A: No. They narrowed the appeal to transactions that appeared to occur before the recorded card's issuance date.

Q: What records did the Department require?

A: The Special Notice required verification of a current card, entry of the number in the traceability system, a retained copy of the recognition card, and five years of exempt-sale records including the applicable card number.

Citations and references

• RCW 82.08.9998 (medical-cannabis retail sales-tax exemption and documentation authority)
• RCW 82.32.070(1) and WAC 458-20-254(3)(a)(ii) (five-year records and exemption support)
• RCW 69.50.375(3)(e) (recognition-card copy requirement cited by the Special Notice)
• Washington DOR Special Notice dated May 6, 2016, “Sales and use tax exemptions for marijuana retailers with a medical marijuana endorsement”
• Budget Rent-A-Car, Inc. v. Department of Revenue, 81 Wn.2d 171, 500 P.2d 764 (1972)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 45WTD044.pdf
• Source archive: Volume 45 ZIP (member wtdvol45/45WTD044.pdf)

Original ruling text

Det. No. 23-0051, 45 WTD 044 (May 5, 2026)

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Cite as Det. No. 23-0051, 45 WTD 044 (2026)
BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
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DETERMINATION
No. 23-0051
Registration No. . . .
Registration No. . . .

RCW 82.08.9998: EXEMPTIONS – RECORD KEEPING REQUIREMENTS
FOR CANNABIS PRODUCTS EXEMPTION. The legislature explicitly granted the Department the authority to determine the “information establishing eligibility for the exemption” a taxpayer must maintain to qualify for this exemption. The Department established those criteria for in a special notice issued May 6, 2016. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination. Kelly, T.R.O. – Two marijuana 1 retailers protest the Department’s assessments to the extent the Department disallowed [exemptions] for sales of marijuana to customers made prior to the issuance of the customers’ patient recognition card ID numbers. Taxpayers contend that their point-of-sale software did not maintain a copy of the original ID number when customers got new recognition cards with new ID numbers. While marijuana products can be exempt from taxation under RCW 82.08.9998, Taxpayers did not follow the recordkeeping requirements. We deny the petition. 2 ISSUES Have Taxpayers provided the Department with suitable records under WAC 458-20-254 (Rule 254) to prove certain sales of marijuana products are exempt from retail sales tax under RCW 82.08.9998? FINDINGS OF FACT
[Taxpayer] doing business as [Entity 1] and [Entity 2] (referred to as Taxpayers) are affiliated entities operating as recreational and medical marijuana retailers selling marijuana products and paraphernalia . . . . The term “marijuana” was the statutory term for the entirety of the audit period. Through SSHB 1210, Chapter 16, Laws of 2022 (effective June 9, 2022), the [l]egislature replaced the term “marijuana” with the term “cannabis.” 2 Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410. 1

Det. No. 23-0051, 45 WTD 044 (May 5, 2026)

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The Department of Revenue’s (Department’s) Audit Division (Audit) inspected both Taxpayers’ records for the period of January 1, 2018, through June 30, 2021 (Audit Period). Taxpayers possess medical cannabis endorsements. This allows Taxpayers to make sales tax exempt sales of qualifying products to customers with qualifying patient recognition cards. Audit reviewed Taxpayers’ records to verify the sales to customers with qualifying patient recognition cards. Taxpayers did not retain copies of customers’ patient recognition cards. Instead, Taxpayers’
[point-of-sale system] retained reports containing records of individual transactions and associated patient recognition card ID numbers. Audit compared the provided ID Numbers to the Department of Health’s database. This process revealed several issues including (1) sales of non-qualifying marijuana paraphernalia products, (2) sales to ID Numbers that were expired at the time of sale, (3) and sales to ID Numbers prior to their date of issuance. Audit came to understand that instead of creating a new profile for a customer when that customer received a new ID Number, Taxpayers overrode that customer’s prior number with the new one. This resulted in the point-of-sale system not retaining the prior ID Number. As Taxpayers retained no documentation, these sales were disallowed. On May 27, 2022, Audit issued [Letter 1] to [Entity 1] for a total of $. . . . 3 On May 27, 2022, Audit issued [Letter 2] to [Entity 2] for a total of $. . . . 4 Taxpayers timely filed petitions for administrative review. Subsequently, Taxpayers clarified that they were not contesting the adjustments to the extent that they related to sales of non-qualifying marijuana paraphernalia products or sales to ID Numbers that were expired at the time of sale. Taxpayers are only contesting the adjustments to the extent they relate to sales made prior to medical card issuance. Taxpayers contend that the original ID Number data had been overridden but valid records existed at the time of sale. Taxpayers made repeated attempts to get more detailed information from [point-of-sale system] with limited results. Eventually Taxpayers provided additional records to bolster their argument, including a spreadsheet prepared by [point-of-sale system] showing ID Numbers, point-of-sale device identification, receipt numbers, dates of sale, employee names, patient names when available, and other transaction detail. Audit reviewed the information but did not believe it warranted adjustment to the assessments. As the new information did not contain any old ID Numbers that might have been overridden, Audit concluded the new records did not resolve the issue of sales to ID Numbers prior to their date of issuance. This comprised $. . . in adjusted sales and use tax, $. . . in disallowed deductions to sales and use tax, and $. . . in interest to that point. 4 This comprised $. . . in adjusted sales and use tax, $. . . in disallowed deductions to sales and use tax, and $. . . in interest to that point. 3

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ANALYSIS
Washington requires persons making retail sales to collect and remit retail sales tax unless an exemption applies. RCW 82.08.020; RCW 82.08.050. “Retail sale” is statutorily defined and includes the sale of tangible personal property. RCW 82.04.050(1)(a). “Tangible personal property” means property that can be “seen, weighed, measured, felt, or touched . . . .” WAC 45820-193(1)(c). Generally, the sale of marijuana is a retail sale subject to retail sales tax as tangible property. Accordingly, Taxpayer must remit retail sales tax for retail sales and pay retailing business and occupation (B&O) tax on its gross proceeds of sales unless an exemption applies. RCW 82.08.020; RCW 82.04.250. The legislature provides an exemption from retail sales tax for the sale of certain marijuana products by marijuana retailers with marijuana endorsements to qualifying patients or designated providers who have been issued recognition cards. RCW 82.08.9998(1)(a). Taxpayers are marijuana retailers with a medical marijuana endorsement. Because RCW 82.08.9998 provides an exemption from a prescribed tax, we construe its application narrowly. See Budget Rent-A-Car, Inc. v. Dep’t of Revenue, 81, Wn.2d 171, 500 P.2d 764 (1972); Det. No 01-007, 20 WTD 214, 231 (2001) (stating the Department construes exemptions narrowly in favor of taxation). Additionally, the taxpayer has the burden to prove the right to any exemption from taxation. See Det. No. 190185R, 40 WTD 231, 234 (2021). RCW 82.08.9998 includes the requirements to claim the exemption. Namely, “Each seller making exempt sales under subsection (1) of this section must maintain information establishing eligibility for the exemption in the form and manner required by the department.” RCW 82.08.9998. In RCW 82.08.9998, the “department” refers to the Department of Revenue. See RCW 82.02.010(2). In RCW 82.08.9998(2), the legislature explicitly granted the Department the authority to determine the “information establishing eligibility for the exemption” a taxpayer must maintain. Every taxpayer “must” keep and preserve, for a period of five years, “suitable records” as may be necessary to determine the tax for which taxpayer is liable. RCW 82.32.070(1). WAC 458-20-254 is the Department’s administrative rule detailing recordkeeping [and] explains further what suitable records must be kept. With regards to exemptions, the taxpayer must keep “complete and adequate records” to demonstrate the amounts of all exemptions claimed “through supporting records or documentation required by statute or administrative rule, or other supporting records or documentation necessary to substantiate” the deduction. Rule 254(3)(a)(ii). RCW 82.08.9998(2) does not contain specific requirements but states the seller “must maintain information establishing eligibility for the exemption in the form and manner required by the department.” The Department clarified what information taxpayers must maintain for the retail sales and use tax exemption for marijuana retailers with a medical endorsement by issuing a Special Notice on May 6, 2016 (Special Notice). In addition to the fact that the Special Notice predates the Audit Period, it explicitly states it is intended for marijuana retailers with a medical endorsement, like Taxpayers. Special Notice, p. 1. [The Department stated, u]nder the section titled “How do I document these exemptions?” . . . :

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Retailers must:
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Verify the qualifying patient or designated provider has a current recognition card.

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Enter the qualifying patient or designated provider’s recognition card number into LCB’s traceability system.

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Keep a copy of the qualifying patient or designated provider’s recognition card as required by RCW 69.50.375[(3)](e). Retailers only need to keep one copy of each valid recognition card and do not need to get multiple copies of the same card for repeat customers.

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Keep records of tax exempt sales, including the applicable recognition card number used by the purchaser, for at least five years.

Id. at 3. Taxpayers must satisfy every requirement in the notice. In the instant case, Taxpayers fail two separate requirements, each of which individually would be sufficient to deny the petition. First, Taxpayers failed to keep a copy of the qualifying patient or designated provider’s recognition cards. Taxpayers were required to keep copies of these cards and not merely equivalent information under the Special Notice. While Taxpayers provided records to include ID Numbers, point-of-sale device identification, receipt numbers, dates of sale, employee names, patient names when available, and other transaction detail, Taxpayers did not provide copies of actual cards. Second, Taxpayers failed the last requirement. In overriding ID Numbers in their . . . point-of-sale system, Taxpayers lost any records of applicable ID Numbers they had accepted for the sales. While Taxpayers worked with [point-of-sale system] to prepare a spreadsheet, Taxpayers were unable to retrieve any of this specific data. Taxpayers were required to keep this data for five years. Taxpayers failed to do so, and Taxpayers’ records instead only contain records of sales to ID Numbers prior to their date of issuance. Such records do not satisfy the recordkeeping requirement. Taxpayers hold the burden to prove the right to any exemption. It is not the Department’s burden or responsibility to verify tax exempt sales beyond Taxpayers’ records. Because Taxpayers cannot verify tax exempt sales, Audit properly denied the exemption. DECISION AND DISPOSITION We deny Taxpayers’ petition. Dated this 13th day of March 2023.