Once marijuana is legal generally, medical users no longer need to prove anything to obtain it. But should they pay tax? This post, written for Vermont in early 2015, looks at a conundrum: Medicine is usually tax-exempt, and marijuana is medicine for some people, but it is a recreational intoxicant for others. Some recreational users fake conditions like chronic pain or insomnia to disguise themselves as patients. That phenomenon threatens a tax on marijuana — if medical marijuana gets a tax break. (A version of this post with footnotes on the same page as text is Part I.A. of this document.)
Medical Marijuana – Current Tax Law
The Vermont Legislature has not specified whether medical marijuana is sales-tax-exempt. For now, no sales tax is being collected on it. A possible rationale for this practice is that Vermont does not impose sales tax on “supplies . . . intended to alleviate human suffering,”
Sales taxes do apply to medical marijuana in most states that both allow medical marijuana and impose sales taxes. Beyond the sales tax, a number of localities, especially in California, impose extra taxes specifically on medical marijuana. And in November 2014 California balloting, although “more than a dozen local pro-medical marijuana initiatives fail[ed] . . . every proposed medical cannabis tax passed.”
The first four states to legalize recreational marijuana sales (CO, WA, AK, and OR) exempt medical card-holders from excise taxes. Exemption has created problems. In Colorado, most legal marijuana was being sold without excise tax to medical card-holders. The recreational market there only recently surpassed the medical market, and out-of-state customers account for a large share of its sales. Qualification as a medical buyer there – obtaining a medical card – is reportedly easy and cheap. A Washington State supporter of legalization, Seattle City Attorney Pete Holmes, said he “had a store owner in Colorado tell me that only chumps and tourists go to the recreational side. . . That’s completely upsetting the Colorado market.” But in Washington, too, taxed sales face competition from untaxed medical sales. The problem is not just that healthy buyers posing as sick are evading tax; some medical buyers are reselling the tax-free product they bought.
Medical Alcohol – Current and Prior Tax Law
The federal alcohol tax generally exempts spirits used in the production of medical products, like cough syrup. To prevent this tax exemption from benefitting recreational drinkers, spirits, to be tax exempt, must be incorporated into some secondary product that is not sold or used “for beverage purposes.” The Federal Alcohol and Tobacco Tax and Trade Bureau first looks at “the content and description of the ingredients” of the product; if the product survives that document-based screening, testers perform an “organoleptic examination” – one based on the sense organs — to determine, for instance, if they can swallow it.
Although a doctor may recommend a dose of off-the-shelf spirits, no prescription is necessary. Alcohol taxes are low enough that, even after tax, a dose of medical (or “medicinal”) alcohol is cheap compared to many prescription drugs. Insurers like Medicare don’t pay for spirits.
Medicinal alcohol was legal during Federal alcohol Prohibition. “[P]atients willing to pay about $3 for a prescription and another $3 or $4 to have it filled could get a pint of booze.” “Presumably, doctors were doing examinations and diagnoses, but it was mostly bogus,” said Daniel Okrent. “There may have been some people who were being prescribed because there was a perceived medical need, but it was really a way for some physicians and pharmacists to make a few extra bucks.”
Other tax relief for medical conditions
It is rare that the medical condition of an individual determines a tax result – although blind individuals get an extra federal income tax exemption. And taxpayers argue, for instance, that costs of a home swimming pool, to the extent they do not add to the value of the house, if ordered by a physician and used exclusively for a medical reason, may be deductible as medical expenses. No excise tax benefit that depends on the diagnosed illness of the user is obvious–except for early state exemptions from marijuana taxes. An analogous determination, whether a particular individual should qualify for Social Security disability, has led to enough litigation to create a specialized area of law practice. The stakes for individual medical marijuana determinations may be too low for the government to bother seeking correct determinations. That is, the cost to the state of proving that a particular user does not qualify for a medical tax exemption might exceed what it could collect in taxes from him.
Non-tax relief at retail
In various cases, certain purchasers obtain non-tax relief on retail prices at the point of sale, as for means-tested food stamps, for instance. That is, they pay a lower price that has nothing to do with taxes. In Berkeley, California, in 2015, which imposes excise tax on sales of medical marijuana, “medical marijuana dispensaries . . . will be required to donate at least 2 percent of their cannabis to low-income residents.”
Whether to exempt medical marijuana from tax may seem to require a classic tax policy balancing between simplicity (tax everyone the same) and fairness (treat different taxpayers according to their individual facts). The argument for tax exemption for medical marijuana is simple: “Don’t tax my medicine.” The rationale for special treatment is that the public should assist – or at least not burden – sick people financially. That rationale might apply with special force to those who cannot afford treatment. Taxing medical marijuana could allow the accusation that the Legislature wants “the budget to be balanced on the backs of sick patients.”
But marijuana is strange medicine. Healthy people don’t want to use hospital services, antifungals, or prosthetic devices – but many like marijuana. So any mechanism for the delivery of public assistance to medical marijuana users faces a tricky person: Who really is deserving? The slipperiness of medical marijuana tax exemption is illustrated by the example of a medical purchaser who has a symptom-free day and uses marijuana recreationally.
What conditions allow recommendations for (and use of) medical marijuana? The list varies widely by state. Some conditions allowing use of medical marijuana, like chronic pain, may be too subjective to prove or disprove to the satisfaction of skeptics. Report co-author Mark Kleiman does not buy the notion that a system can always reliably distinguish between medical users and recreational users: “The difference between marijuana and medical marijuana is precisely the difference between water and holy water . . . As long as you can tell a random lie to a random doc and access untaxed cannabis, why should you pay the taxed price?”
Abuse of medical rules is more prevalent in some states than in Vermont, says the Report: “In . . . Vermont, the medical-marijuana system is more controlled, serving more as an adjunct to the health system than as a loophole for recreational users.” For instance, Vermont requires a six-month relationship between doctor and patient before medical marijuana can be recommended for pain and several other conditions. Vermont’s reported success in making such determinations for its medical-only system might seem to bode well for a possible tax exemption. But prices of medical marijuana in Vermont, even tax-free, remain high, maybe high enough to give no advantage to users who pretend to be sick. But prices of medical marijuana may come down over time. And unless the State can minimize system-gaming and leakage, a parallel medical path to marijuana risks more than revenue.
Rather than try to identify sick buyers, the state might direct tax breaks to particular products that seem more medical than recreational. That’s the approach of a proposal by Washington State Senator Jeanne Kohl-Welles: “High-CBD products, typically used by medical patients, would be given a tax break, eliminating the need for most patients to have authorizations” – though she would provide special rules for medical uses involving high THC products. And it’s the thrust of an approach of State Senator Ann Rivers, who would let medical users buy only processed products, not bud.
A means test, allowing financial benefits to only those medical users who can’t afford marijuana, could be a pre-requisite for excise tax relief. Or means testing could deliver relief directly, not via tax break. Means-tested spending-side payments could subsidize needy medical users even more than tax exemption could. But means testing does not eliminate the problem of distinguishing medical use from recreational use.
One view of the medical-recreational difficulty now facing Vermont comes from long-time marijuana advocate Keith Stroup of the National Organization for the Reform of Marijuana Laws (NORML): “[W]e . . . now have convincing evidence that once medical users are given a special (lower-tax) status, it becomes politically difficult to make the changes needed to merge the medical use consumers with recreational consumers. This is a challenge the legalization movement will continue to confront so long as medical use is defined as a separate market from recreational use.“
But tax relief for medical users may turn out to be unnecessary. Even paying full tax, medical users may be better off after legalization than they are now. Say “A” is the future after-tax price of recreational marijuana, and “B” is the tax-free price of medical marijuana now, before recreational legalization. If A is less than B, medical users will be better off than before, even paying full tax. So Vermont’s current high prices for medical marijuana may allow the state to create a single, unified system that is better than current law for both medical and recreational users – without tax exemption.
Buying taxed recreational marijuana would bring other savings for medical users. Each year, Vermont medical users must revisit their health care providers, submit new forms and a new photograph, and pay a new $50 fee; “There are no provisions to waive the fee.” (Colorado’s low fee for medical cards – $15 – may incentivize medical over recreational use.) Those costs will disappear in the legal recreational market. So will the hassles of recurring application and documentation.
 This discussion of medical cannabis is part of my Tax Supplement to the RAND report for Vermont, where I was one of eight co-authors. There’s a lot of Vermont-specific material. It was written in January 2015.
 Vermont Legislative Joint Fiscal Office, “Medical Marijuana Tax and Fee Report,” http://www.leg.state.vt.us/jfo/reports/2012-02%20Medical%20Marijuana%20Fee%20and%20Tax%20Report.pdf
pages 2 and 4, February 2012 (hereinafter “VLJFO”).
 32 Vermont Statutes Annotated [V.S.A.] section 9741, http://www.leg.state.vt.us/statutes/fullsection.cfm?Title=32&Chapter=233&Section=09741. In Vermont, prescribed medicine bears no sales tax, in line with a national consensus. Many over-the-counter drugs and devices are exempt from Vermont sales taxes as well. Id.
 VLJFO, supra note 2, at 2.
 “Laws to Tax Marijuana,” State Tax Notes, Vol. 59, No. 4, 251, 257 Table 1, https://newtax.files.wordpress.com/2014/08/laws-to-tax-marijuana-published-version-in-state-tax-notes.pdf; available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2214910, January 24, 2011 (hereinafter “Laws to Tax”).
 David Downs, http://www.eastbayexpress.com/oakland/green-lit-california-legalization-measure-is-a-go-for-2016/Content?oid=4127974, November 19, 2014.
 Excise taxes are imposed on particular products and services. Examples are taxes on tobacco, alcohol, jet fuel, and heavy trucks.
 Other legalizing states exempt medical marijuana from tax, but the size of their problems remains to be seen.
 Trevor Hughes, “Marijuana legal but often scarce in Washington state,” http://www.usatoday.com/story/news/nation/2014/09/26/washington-marijuana-legal-scarce/16266573/. Medical marijuana appears to be very easy to get in some early medical marijuana states, like California. See, e.g., Rocco Pendola, http://www.thestreet.com/story/12262234/2/medical-marijuana-in-california-is-a-total-scam-but-its-dope.html, January 27, 2014.
 “’How can you have two parallel systems, one that’s regulated, paying taxes, playing by the rules, and the other that’s not doing any of those things?’ said Rick Garza of the Washington Liquor Control Board, which oversees recreational pot.” Gene Johnson and Kristen Wyatt, “Medical marijuana a challenge for legal pot states,” http://news.yahoo.com/medical-marijuana-challenge-legal-pot-states-052859824–finance.html, January 2, 2015.
 John Ingold, “Colorado to crack down on medical marijuana patients and caregivers,” http://www.denverpost.com/news/ci_25443826/colorado-crack-down-medical-marijuana-patients-and-caregivers,” March 28, 2014. See also Mark A.R. Kleiman, http://www.samefacts.com/2015/01/drug-policy/the-medical-value-of-cannabis-and-the-fraud-of-medical-marijuana/#respond, January 4, 2015: “Some sick people get relief from whole cannabis, but ‘medical marijuana’ is a political fraud, and the ‘medical marijuana’ business is mostly a sham, with most of the volume going to non-medical users – many of them with diagnosable cannabis use disorder – and resellers.”
 Megan Gambino, http://www.smithsonianmag.com/history/during-prohibition-your-doctor-could-write-you-prescription-booze-180947940/#g1rAtsPG11EjpAi7.99, October 7, 2013 (hereinafter “Gambino”).
 Gambino, supra note 15, quoting Daniel Okrent, author of Last Call: The Rise and Fall of Prohibition (New York: Scribner 2010). Chapter 13 of Okrent’s book discusses medicinal use of alcohol during Prohibition, at pages 193-200.
 That exemption requires an eye doctor’s certificate that “(i) the central visual acuity of the individual for whom the exemption is claimed did not exceed 20/200 in the better eye with correcting lenses or (ii) such individual’s visual acuity was accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees.” Treas. Reg. sec. 1.151-1(d), http://www.law.cornell.edu/cfr/text/26/1.151-1 (as of January 7, 2015).
 H&R Block, “Can I deduct the costs of installing a swimming pool or a whirlpool tub used for rehabilitation?” http://www.hrblock.com/tax-answers/services/jsp/article.jsp?article_id=67593 (as of January 1, 2015). Cf. IRS, Publication 502 (2013), Medical and Dental Expenses, http://www.irs.gov/pub/irs-pdf/p502.pdf, not mentioning pools and saying only, “You cannot include in medical expenses the cost of dancing lessons, swimming lessons, etc., even if they are recommended by a doctor, if they are only for the improvement of general health.” The IRS is bound to be wary of a deduction for pool construction that depends on not only a medical diagnosis but also valuation of the house with and without the pool – and on non-use for recreation by anyone ever. The same subjective need holds true for massages, which the IRS also ignores in Publication 502, though taxpayers may seek to have doctors characterize them as specific remedies for physical ailments. Blue Cross and Blue Shield of Illinois, “Items generally considered Eligible from IRS Publication 502,” http://www.bcbsil.com/aon/pdf/213_information.pdf, as of January 11, 2015. Itemizers can deduct medical expenses only to the extent that they exceed a floor of 10 percent of adjusted gross income.
 “Board certified social security disability lawyers engage in the comprehensive legal practice of counseling and representing persons with disabilities and their representatives about their rights to receive benefits from the social security administration.” National Board of Legal Specialty Certification, “Board Certified Social Security Disability Lawyer,” available at http://www.nblsc.us/, as of January 14, 2015.
 The stakes for the individual – paying the tax on marijuana – do not approach the cost of high-priced treatments like orphan drugs.
 Ian Lovett, “Berkeley Pushes a Boundary on Medical Marijuana,” http://www.nytimes.com/2014/09/03/us/03berkeley.html?_r=0.
 Statement of Kari Boiter, of Americans for Safe Access in Washington state, in Casey Jaywork, http://www.seattlemet.com/news-and-profiles/publicola/articles/sen-kohl-welles-wants-to-lift-cap-on-pot-stores-merge-medical-marijuana-into-i-502-system-december-2014, December 11, 2014.
 “No one is perfectly whole. A [physician] friend puts it this way: ‘We all have chronic pain in the soul.’’’ Laws to Tax, supra note 5, at 274.
 Quoted in Aaron Mesh, “Into the Weeds: Oregon can avoid the bad trips other states took on legal pot,” Willamette Week, http://www.wweek.com/portland/article-23790-into_the_weeds.html, January 7, 2014.
 See note 10 and accompanying text, supra. The same line between medical and recreational needs drawing — in medical-marijuana-only states just to allow possession, and in fully legal states that provide tax exemption. But in the medical-only states, the harm from denying medicine to a sick patient may seem worse than the harm from allowing a legal purchase by a faker. So Vermont allows appeals only from denials of medical marijuana cards, with no analog for a card that is granted. 18 V.S.A. section 4473(5)(A), http://www.leg.state.vt.us/statutes/fullsection.cfm?Title=18&Chapter=086&Section=04473. In a state with separate systems for medical and recreational, the line drawing is just about money, not about access.
 Report, page 2.
 18 Vermont Statutes Annotated section 4472(1). Some conditions for which medical marijuana is allowed, like cancer, are harder to fake than others, like chronic pain.
 See chapter Seven of the Report: “integrated producer-retailer operations . . . receive the full retail price, which we understand is generally $15 per gram. That translates to $425 per ounce or $6,800 per pound; yet, by their reports, all of that revenue is needed to cover expenses.” See also Erin Mansfield, “Vt. medical pot growers seek to break even,” http://www.rutlandherald.com/article/20141221/THISJUSTIN/712219963, December 21, 2014.
 Tax relief could be provided either (1) through separate stores for the sick and well, or (2) at an all-comers point of sale, with medical users paying less.
 This kind of line drawing can cause disrespect for the law, and even for the medical profession. And “If healthy people want something and have to say they are sick to get it, they may come to think they are sick or even become sick, like the child who hates school and develops a stomachache in the morning.” Laws To Tax, supra note 5, at 274.
 Evan Bush, http://blogs.seattletimes.com/pot/2014/11/21/state-sen-kohl-welles-outlines-bill-to-transform-marijuana-regulation/. The Report explains CBD, found to be therapeutic rather than intoxicating, in detail. If the high-CBD marijuana is low in THC (the primary intoxicant in marijuana), it is unlikely to appeal to recreational users.
 Gene Johnson, “Key lawmaker’s proposal: medical pot shops without dried pot,” http://www.bellinghamherald.com/2015/01/06/4063391_lawmakers-proposal-medical-pot.html?rh=1#storylink=cpy. Processed products, though, might be the wave of the future in the recreational market. No one can be sure.
 Some states incorporate means testing into medical marijuana rules. In Rhode Island, for instance, medical marijuana users on Medicaid and other means-tested assistance programs pay only nominal fees for a card. Department of Health, State of Rhode Island and Providence Plantations, “Rules and Regulations Related to the Medical Marijuana Program,” section 3.11, http://sos.ri.gov/documents/archives/regdocs/released/pdf/DOH/5923.pdf, March 2010, as of January 7, 2014.
 Keith Stroup, http://news.marijuana.com/news/2015/01/merging-the-medical-use-market-with-the-recreational-market-mon-jan-10/. Stroup suggests that states with no medical marijuana law might skip that step and move directly to a unified market.
 Special non-tax rules for medical users may be found appropriate. The 21-year old threshold commonly suggested for recreational marijuana has been relaxed in many states for medical marijuana. In Vermont, patients may be of any age; applications of those under 18 must be signed by a parent or guardian. 18 V.S.A. section 4473(b)(1).
 If wanting to give medical marijuana a tax break, but uncertain about whether A will be less than B, the Legislature could sunset any tax break for medical marijuana after a term of years – and see how prices turn out.
 See note 29 and accompanying text, supra.
 http://vcic.vermont.gov/marijuana_registry/patients, as of January 7, 2014.
 Colorado Legislative Council Staff, “Comparison of Retail Marijuana Excise and Sales Tax Revenue Forecast Assumptions for FY 2014-15,” http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251955678255&ssbinary=true, March 2104: “The cost of a medical marijuana registry card has declined to $15 from $35 and the forecast projects that medical marijuana prices will remain lower than retail marijuana prices, incentivizing marijuana users to continue consuming medical marijuana.”