tax law

Some San Jose Pot Shops Owe Millions in Unpaid Marijuana Taxes

City of San Jose and pot shop owners are in the middle of a turf war over unpaid taxes and the semantics surrounding the sale of marijuana.

Records reviewed by the NBC Bay Area Investigative Unit show there are five marijuana businesses that owe the City of San Jose more than $2.1 million dollars in unpaid taxes, penalties and interest.

“Whether we want to be or not, we are somehow or another regulating a medical drug, something no city in the country really knows much about,” said San Jose Mayor Sam Liccardo.

The 1996 Compassionate Use Act legalized medicinal marijuana in California. Voters in San Jose then approved Measure U in November 2010, allowing the city to tax the sale of medical marijuana. Since then, the city has collected more than $17 million from the 10% Marijuana Business Tax on sales from collectives and dispensaries.

But records requested by the NBC Bay Area Investigative Unit show five currently operating marijuana businesses in San Jose are “non-compliant” with the city’s tax law.

“That’s probably conservative,” said Liccardo when asked about the $2.1 million in missing tax revenue. “It’s probably more.”

“We can always do better,” Liccardo added.

The list of currently operating and non-compliant marijuana businesses in San Jose includes: The Sovereign Wellness Center, San Jose Medicinal Group, Nor Cal Care, MediMarts and The All American Cannabis Club.

Two of the longest operating businesses have refused to pay the marijuana business tax because they have taken the position they are not selling pot, but instead operate as collectives and provide medicine to members.

The owners of Medi Marts and The All American Cannabis Club told the Investigative Unit that they have refused to pay taxes because they fear that would be admitting that they sold an illegal substance, which is a crime according to the federal law. "It implicates a sale,” said Dave Armstrong, President and CEO of MediMarts in San Jose. “There’s guys in federal prison right now that because they paid a tax on cannabis it’s considered a sale of a controlled substance."

"They’re doing 10 years in prison,” added Armstrong.

Armstrong claims that he is running a closed-loop collective: the pot he grows is provided to “co-owners” not customers. As a result, the money they pay for the pot is an equitable contribution and not a sale. It's a semantic argument that he feels allows him to avoid paying the sales taxes to San Jose.

"We are all making equal contributions to the overall costs to make the medicine and provide it to them… so there’s no profit involved,” said Armstrong.

He says he is willing to pay an administrative fee and an enforcement fee and has asked the city to change the wording from the current “marijuana business tax.”

The owner of the All American Cannabis Club has not paid any Marijuana Business Tax since he opened his location five years ago. “I want to pay sales tax,” said Dave Hodges. “But by paying sales tax, I’m admitting that I’m selling marijuana… which is violating the law.”

Both Hodges and Armstrong point to language on the city of San Jose’s monthly Marijuana Business Tax return that reads: “…payment of the tax… does not authorize unlawful business.”

“If the law were to say you can sell marijuana, we would gladly pay sales tax. But the law doesn’t say that.”

In a hidden-camera investigation, the Investigative Unit also found out what these businesses would say to a customer inquiring about unpaid sales tax.

At MediMarts, the employee behind the receptionist desk told our undercover producer that they would never be closed for not paying taxes.

"We are not even close to being shut down,” said the employee.

An employee at the All American Cannabis Club claimed that they actually were paying taxes.

"No that’s incorrect,” said Angelique Gaeta, who coordinates the marijuana business tax for the City of San Jose. “They’re not paying taxes.”

According to records, since 2011 the city has collected more than $17 million in taxes from pot shops.

But Gaeta has also confirmed that the five active and operating medical marijuana businesses on San Jose's non-compliant list owe more than $2 million in unpaid marijuana taxes, penalties and interest. Gaeta says she anticipates the city, “going after these individuals and businesses to collect the taxes and these businesses will eventually be shut down.”

Dave Armstrong, owner of MediMarts, said he is not worried about the city shutting him down. “Why should I be?” he said. “I am the only one who seems to understand the concept.”

Hodges, from The All American Cannabis Club, said he was a bit more worried. “It’s a concern of mine ever since I started five years ago,” he said.

While the two sides battle over the semantics of selling marijuana and the requirement to pay taxes, Mayor Liccardo made his position clear: “Pack up, it’s time to move on and pay up on your way out,” said Liccardo.

“I would say to the Mayor,” said Hodges, “He won by 2000 votes and there’s a large population in San Jose who wants us here and we’re gonna stay here.”

Both sides anticipate court battles to ultimately decide this issue.

The Investigative Unit also reached out to management of the three other non-compliant marijuana businesses in San Jose. A manager at Nor Cal Care who requested we not use his name said his facility is in the process of repaying back-taxes to the city of San Jose. He said in another month, his tax payments will be up to date and Nor Cal Care will be removed from the “non-compliant” list. Calls to the management of the Sovereign Wellness Center were not returned and calls to San Jose Medicinal Group were not answered.

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