Agricultural Sales Tax Exemption and Medical Marijuana
Much has been written about Section 280E of the Internal Revenue Code and how it impacts the cannabis industry. State and local tax issues, however, have received very little attention. The CohnReznick State and Local Tax team is working diligently to identify state tax incentives that could benefit cannabis businesses, as well as potential hazards to avoid.
Although some states have legalized medical marijuana, many states have yet to determine if and how sales taxes would apply to the purchase of equipment, materials, and supplies used in the production and distribution of medical cannabis.
States generally provide a sales and use tax exemption for certain activities relating to agricultural production. These activities include the raising, cultivating, or harvesting of agricultural products, crops for sale for human consumption, or plants useful to humans.
A handful of states, including California, Connecticut, New Jersey, and Oklahoma, have provided guidance on sales and use tax exemptions relating to medical cannabis cultivation. For states that have not explicitly addressed whether certain aspects of medical cannabis cultivation qualify for a sales and use tax exemption, it is crucial for taxpayers to understand how a state, or locality, would apply its laws to purchases used in such a manner. Although it is tempting to believe that medical cannabis cultivation would be included in the definition of agricultural production, as referenced above, there is cause for deeper consideration.
One can point to Florida as an example. Pursuant to Florida law, the state provides an agricultural exemption from the Florida sales tax for the purchase of power farm or irrigation equipment exclusively used in agricultural production.
Agricultural production, as defined in Section 212.02(32), F.S., refers to the production of plants and animals useful to humans, including the preparation, planting, cultivating, or harvesting of these products or any other practices necessary to accomplish production through the harvest phase, and includes aquaculture, horticulture, floriculture, viticulture, forestry, dairy, livestock, poultry, bees, and any and all forms of farm products and farm production.
Florida law does not explicitly address whether its exemption extends to equipment used in producing or cultivating medical cannabis. Based on the language of the statute, however, the Technical Assistance Unit (TAU) at the Florida Department of Revenue posits that a taxpayer’s purchase of machinery and equipment used for cultivating medical cannabis could be exempt from Florida sales tax, where the machinery and equipment purchased is included in Florida’s definition of power farm and irrigation equipment, since medical cannabis is seemingly a plant useful to humans. Though their stance does not carry the weight of legal precedent that can truly be relied on for supporting a tax position, their stance is supportive of a presumption that administratively Florida would not contest a sales and use tax exemption relating to medical cannabis cultivation in Florida.
In states that have not explicitly addressed this issue, there is greater uncertainty in the legal landscape for purchasers of machinery and equipment used in medical cannabis production and cultivation. To obtain guidance that can be relied on, states will likely request a formal submission directed to their technical assistance units on the question of whether the agricultural exemptions apply to the cultivation of medical cannabis.
Due to the complexity and uncertainty of applicable sales and use tax exemptions relating to marijuana, taxpayers will need to apply more diligence in the states, and localities, in which they maintain agricultural operations, to help ensure that they fully understand the relevant sales and use tax rules to their specific situations.
For more information on cannabis tax and compliance issues, visit CohnReznick.com
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.