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Pennsylvania Board of Finance and Revenue Hears First Medical Marijuana Tax Case; EisnerAmper Secures Victory for Grower

Jul 17, 2023


When a marijuana grower discounted prices to marijuana dispensaries, the Pennsylvania Department of Revenue sought to collect gross receipts tax based on the pre-discounted price.  Our team, consisting of members of the State and Local Tax and Cannabis groups, succeeded in challenging the assessment, securing a ruling that only actual receipts and not the original list price are the basis for taxation.

The Tax

In 2016 Governor Tom Wolf signed Senate Bill 3 to legalize the medical use of cannabis, with a corresponding tax imposed on the gross receipts received by a grower/processor on sales to licensed dispensaries at a rate of 5%.  The tax is charged against, and paid by, the grower/processor and cannot be passed through as a separate line item on invoices or statements issued to dispensaries.  Additionally, the Medical Marijuana Act stipulated that the tax shall be administered in the same manner as tax imposed under Article XI of the Tax Reform Code of 1971.

This Case

In 2022 the Pennsylvania Department of Revenue finalized an audit of our client, a state-licensed grower/processor which resulted in additional medical marijuana tax.  The grower, like many manufacturers or wholesalers, offered various wholesale prices to retailers (dispensaries) based on the volume of product purchased; all prices were negotiated before the sale.  For its own books and records, the grower recorded its sales based on the standard price, and the volume discount as a separate line item.  For all other reporting purposes, including medical marijuana tax, external financial statements, and income taxes, the sale was recorded as a single transaction based on the agreed-upon price between the buyer and seller.  After examining the taxpayer’s books and records the auditor assessed tax on the volume discount; in its Notice of Assessment the Department indicated that “discounts should not be deducted from total sales before calculating the medical marijuana gross receipts tax due.”

Our team appealed the assessment to the first administrative level, the Pennsylvania Board of Appeals, who denied the request for relief on the basis that there is no provision in the statute allowing for a deduction of discounts.  We subsequently petitioned to the next level of administrative review, the Board of Finance and Revenue (BF&R). 

Arguments and Decision

Counsel for the Department of Revenue argued that Article XI of the Tax Reform Code does not recognize trade discounts or any other adjustments from the gross receipts of the seller, and that such discounts are consistently disallowed from gross receipts analysis.  At oral argument, the Department conceded that Article XI does not specifically address the Medical Marijuana Tax nor does it define what a gross receipt is; however, the Department proffered, and we concurred with, Black Law’s definition of gross receipts: “the total amount of money or other consideration received by a business taxpayer for goods or services performed in a year, before deductions.”

Focusing on the definition of gross receipts, we explained to the three-member board that consideration received by the taxpayer was the amount promised by the dispensary in exchange for goods, and that amount was never discounted, deducted from, or reduced.  We further argued, and the BF&R agreed, that when words of a statute are clear and free from all ambiguity, words and phrases shall be construed according to the rules of grammar and according to common usage.  In its conclusion, the BF&R stated that “the term ‘gross receipts received’ must be given its plain meaning, and this Board concludes that because Petitioner did not receive these discounted amounts, the Department erroneously assessed the tax in question.”

The Board of Finance and Revenue granted the taxpayer’s request for 100% relief.  The Department of Revenue has 30 days to appeal the order to Commonwealth Court; as of the date of this publication there is no indication an appeal was filed.

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Vincent M. Occhino

Vincent Occhino is a Manager in the State and Local Tax Group. His specific areas of service encompass nexus studies, income/franchise tax refund reviews, multi-state tax planning, and cost of performance studies.

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