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Green Collar Club v. State, Department of Revenue

Court of Appeals of Washington, Division 2

March 27, 2018


          JOHANSON, J.

         Rainier Xpress (RX), Green Collar Club (GCC), and Triple C Collective, LLC (TCC) (collectively "Taxpayers") appeal the superior court's order denying their summary judgment motion and the order granting summary judgment to the Department of Revenue (DOR). At issue is whether the Taxpayers engaged in taxable retail sales of medical marijuana between 2011 and 2014. First, the Taxpayers argue that GCC and TCC were not engaged in "retail sales." Second, the Taxpayers argue that the transactions were exempt from sales tax under either the prescription drug or medicine of botanical origin exemptions. We hold that as a matter of law, the Taxpayers engaged in retail sales that were not tax exempt. Accordingly, we affirm.


         I. Background: Community Garden Operations

         The Taxpayers are businesses involved with community gardens established under former RCW 69.51A.085 (2011). Former RCW 69.51A.085(1) provided that "[qualifying patients may create and participate in collective gardens for the purpose of producing, processing, transporting, and delivering cannabis for medical use subject to" enumerated conditions.[1] RX admits that it sold products containing medical marijuana to collective garden members. GCC and TCC deny involvement with such sales.

         GCC's and TCC's community garden formation agreements provided that "members" of the collective garden would acquire and supply resources to produce, process, and share medical marijuana. The agreements also provided that the members would establish a "management entity which will direct and oversee the day to day operations of the Collective Garden for the benefit of its members." Clerk's Papers (CP) at 83, 288. A maximum of 10 members who were qualified to obtain medical marijuana under ch. 69.51 A RCW could participate in a collective garden at any one time. And each garden's formation agreement provided that the garden would have 3 "permanent" members and 7 memberships reserved for nonpermanent members.

         GCC and TCC submitted substantively identical declarations describing the nature of their medical marijuana business operations. The declarations assert that GCC and TCC provide "management services" to community gardens pursuant to "management agreements." CP at 77, 282. Under the management agreements, GCC and TCC staffed each garden's "meeting place" during "regular hours, " controlled access to the facility so only members could obtain medical marijuana, maintained membership applications and resignations, verified and confirmed that members were authorized to obtain medical marijuana, maintained records, and produced reports of the management company's expenditures made on behalf of the garden. CP at 77, 282. The offices that GCC and TCC operated were locations where "the participating patient members access" the medical marijuana and "make the ongoing contributions necessary to keep a supply of medicine for the participating patient members." CP at 78, 283.

         To obtain medical marijuana at the collective gardens' meeting places, patients authorized to obtain medical marijuana approached an attendant at a window and furnished valid documentation. GCC and TCC management company employees and garden members staffed the window. Once staff confirmed the valid documentation, the prospective member signed a membership agreement and completed a membership application. Members of the collective garden could select from various marijuana products and then make "an appropriate contribution to the garden" for the marijuana selections. CP at 80, 285.

         GCC and TCC provided "menus" containing descriptions of marijuana products and associated prices for specific amounts of each product. Most people contributed money in exchange for the medical marijuana products. Other types of contributions included assisting members in making selections, contributing hardware, and providing labor at the grow site or processing facility. GCC and TCC declared gross income of tens of thousands of dollars per month for medical marijuana sales during the relevant taxing period on their excise tax returns.

         After selecting their medical marijuana and making their "contribution, " nonpermanent members were required to "formally resign their membership." CP at 79, 284. Any person seeking medical marijuana at the collective gardens, whether new or returning, needed to complete this process each time so that others could become nonpermanent members and obtain marijuana.

         II. Procedural Facts

         The DOR notified the Taxpayers that medical marijuana sales are subject to sales tax. The Taxpayers paid the taxes for transactions that occurred between 2011 and 2014. Then they requested refunds. The DOR denied the refund requests.

         The Taxpayers then filed actions for tax refunds under RCW 82.32.180. The superior court consolidated the three refund actions. The Taxpayers and the DOR filed cross motions for summary judgment. The superior court granted summary judgment to the DOR and denied summary judgment to the Taxpayers. The Taxpayers appeal.


         I. Statutory Background

         A. Medical Marijuana and Collective Gardens

         In 1998, Washington voters approved Initiative 692 (1-692), which was later codified at ch. 69.51 A RCW. Laws of 1999, ch. 2 (1-692, approved November 3, 1998). Under this chapter, "qualifying patients" could possess medical marijuana and have an affirmative defense against criminal offenses for marijuana production, possession, and use if they meet specific statutory conditions. Former RCW 69.51A.040 (2011); State v. Reis, 183 Wn.2d 197, 204-05, 351 P.3d 127 (2015). A person was a "qualifying patient" if a Washington licensed health care professional diagnosed a patient with a terminal or debilitating medical condition, advised the patient of the benefits and risks of marijuana, and provided "[v]alid documentation" indicating that "in the health care professional's professional opinion, the patient may benefit from the medical use of marijuana." Former RCW 69.51A.010(4)(a)-(e), (7)(a) (2010).[2] To assert the affirmative defense, a qualifying patient who is not registered with the department of health must present the patient's "valid documentation" to any law enforcement official questioning the asserted medical use or possession of marijuana. Former RCW 69.51 A.043.

         Health care professionals who comply with enumerated conditions do not commit a crime under state law when they advise patients about the risks and benefits of medical use of marijuana, state that the patient may benefit from it, or provide them with valid documentation to obtain medical marijuana. Former RCW 69.51A.030 (2011).

         Qualifying patients may participate in "collective gardens" to pool resources and grow medical marijuana for their own use. Former RCW 69.51A.085(1); Cannabis Action Coal. v. City of Kent, 183 Wn.2d 219, 221-22, 351 P.3d 151 (2015). No more than 10 qualifying patients may participate in a single collective garden at one time. Former RCW 69.51A.085(1)(a).

         B. Controlled Substances

         State and federal law provide comprehensive statutory schemes to control the manufacture, distribution, and use of controlled substances. Uniform Controlled Substances Act, 21 U.S.C. §§ 801-904 (2012); ch. 69.50 RCW. Individuals who violate these laws are subject to penalties. 21 U.S.C. §§ 841-865; RCW 69.50.401-.465.

         Both bodies of law place controlled substances in numerical schedules I to V. 21 U.S.C. §§ 811-812; RCW 69.50.203-.212. Substances on schedule I are illegal under all circumstances except for research, and they have no accepted medical use. 21 U.S.C. § 812(b)(1)(B)-(C), §§ 841-865 (establishing offenses and penalties); § 823(a)(1) (providing an exception for approved research); RCW 69.50.203; RCW 69.50.401-.465.

         Both federal and state statutes list marijuana as a schedule I controlled substance. RCW 69.50.204(c)(22); 21 C.F.R. § 1308.1 l(d)(23); 21 U.S.C. § 812(c), sched. I, cl. (c)(10); Seeley v. State, 132 Wn.2d 776, 782-83, 940 P.2d 604 (1997). Under federal law, as a schedule I drug, marijuana cannot be lawfully prescribed. 21 U.S.C. §§ 822-23; former RCW 69.50.308 (2013); Seeley, 132 Wn.2d at 782-83. In Washington, controlled substances may be prescribed only under specific statutory conditions, and schedule I drugs are not prescribed under the relevant statute. See former RCW 69.50.308.

         Medical professionals who prescribe controlled substances must be registered with the Drug Enforcement Administration, and a registration to prescribe controlled substances can be obtained only for substances on schedules II to IV. 21 C.F.R. § 1301.11; 21 C.F.R. § 1301.13. Pharmacies and pharmacists are required to distribute drugs approved by federal law for distribution by pharmacies, subject to narrow exceptions. WAC 246-869-010; WAC 246-863-095. Physicians who prescribe marijuana in violation of federal law may have their registration to prescribe controlled substances revoked. Conant v. Walters,309 F.3d 629, 632 (9th Cir. 2002). But under the First Amendment of the United States ...

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