Prescription drugs in Louisiana are exempted from state sales tax. That won't be the case for medical marijuana, a drug that will be "recommended" by doctors rather than "prescribed."
With that nuance of words, the state’s full sales tax — currently at 5 percent — will be tacked on to purchases of the drug when it becomes available, likely later this year, according to the state Department of Revenue, settling what had been an open question in the industry.
The 5th penny of sales tax is slated to roll off the books at the end of this month, so marijuana could be taxed at a lower rate when it hits the market, depending on whether the Legislature passes any changes to the sales tax.
Local sales taxes also will apply to sales of the drug in most places, under current laws.
The Louisiana Department of Revenue confirmed in a statement this week that the prescription drug exemption on the state sales tax does not apply to medical marijuana sales. The sales tax applies at the point of sale to consumers, who will buy the drug from nine initial licensed marijuana pharmacies in regions throughout the state.
State Sen. Fred Mills, who authored the legislation that enacted Louisiana’s medical marijuana program, was under the impression the drug would not be subject to the full state sales tax.
“In my mind it’s not taxable,” Mills said. “If the Department of Revenue sees it differently, … I guess it kind of leaves it wide open for some more discussion.”
Mills, who learned from a reporter that the state sales tax will apply to marijuana, said he initially drafted his bill several years ago to specifically make sure it wouldn’t be taxed. At the time, he worried then-Gov. Bobby Jindal, at the height of an anti-tax fervor, would not sign the bill.
In the ensuing months, Mills struck several compromises and made several key changes to the legislation in an effort to pass it through the Legislature. Among them was a provision that required doctors to “recommend” rather than “prescribe” the drug, a nuance aimed at protecting doctors from running afoul of federal laws against marijuana.
It's also a word nuance that now plays into the taxation of medical marijuana. The sales tax exemption for drugs, the revenue department notes, requires that the drug be prescribed by a physician.
Mills said he is worried the extra 4 or 5 percent could be a burden to patients if prices for the drug end up being high. Insurance won’t cover medical marijuana, meaning patients will have to pay out of pocket to cover the costs.
“My hope is we don’t make this cost prohibitive, especially for low-income people who want the drug,” he said.
Most local taxing authorities in Louisiana don’t exempt pharmaceutical drugs from their sales taxes, said Karen White, executive counsel with the Louisiana Municipal Association. That means that in most cases, marijuana is subject to local sales taxes regardless of whether it is a prescription drug.
Still, White said she expects local taxing authorities to take a look at the issue as the industry grows.
“As there is a proliferation, the people within that taxing district will make a decision as to whether they want to exempt marijuana as well,” she said.
Louisiana's state tax exemption for prescription drugs is the second-largest sales tax exemption on the books, according to the state's tax exemption budget. The exemption was worth nearly $360 million in fiscal year 2015-2016, and is part of the state constitution.
It is not clear how much revenue the sales tax on medical marijuana will raise. A report from the Colorado consultant Marijuana Policy Group in 2016 estimated the market for chronic pain alone could generate between $3.7 million and $4.7 million, assuming a 4 percent sales tax rate. But those numbers assume the program is fully embraced by the medical community, which is an open question.
A report last year from the Third Way, a left-leaning think tank, found of the 28 states that had legalized medical marijuana, 10 states and D.C. had levied a tax on the drug. Those taxes ranged from a specific sales tax paid by the purchaser, an excise tax paid by the grower or seller, a surcharge paid by the seller, the application of a statewide pharmaceutical rate, or the application of a general sales tax.
Louisiana joins Colorado, which levies its 2.9 percent state sales tax rate on medical marijuana; New Jersey, with a 7 percent generic sales tax; and Rhode Island and D.C. in applying a general sales tax to the drug.
Medical marijuana is generally taxed less than recreational marijuana, on which states have levied excise and sales taxes to raise millions of dollars in revenue. In a report last year, the Tax Foundation found tax rates varied widely for the eight states that had legalized recreational marijuana.