S.D. sales taxes apply on medical marijuana, state Revenue official says

PIERRE, S.D. (KELO) — People who buy medical marijuana from most businesses in South Dakota will be subject to the state government’s 4.5 percent sales tax and any local sales taxes once it becomes legal July 1, the chief lawyer for the state Department of Revenue said Wednesday.

“The answer to that question is yes,” Michael Houdyshell told the Legislature’s Executive Board.

He said that a state sales-tax exemption for prescription drugs won’t apply, because physicians won’t be prescribing marijuana for patients.

Physicians instead will be certifying that a patient has a debilitating condition that may benefit from the patient using marijuana. Patients will decide whether to apply to the State Department of Health for a card certifying the patient has such a debilitating condition and can purchase marijuana.

Houdyshell’s remarks came as state Revenue Secretary Jim Terwilliger sat alongside and nodded in agreement. Houdyshell said marijuana remains an illegal drug under the federal government’s definition of controlled substances. He said businesses have asked whether marijuana sales are subject to the state tax.

“I just wanted to make sure you were aware of that, and that the public’s aware of that, and in fact, the industry as well, because the Department of Revenue will be working with these establishments as well to make sure they’re in compliance with the state tax laws,” Houdyshell said.

Medical-marijuana dispensaries, for example, would have to remit the sales tax to the state treasury.

Still unresolved is how tribal governments, because they aren’t subject to state laws, will treat medical marijuana bought from tribal businesses. State Health Secretary Kim Malsam-Rysdon responded to a question about where tribal governments stand. “To the point of what the tribes’ plans are and how they work with this program, I think that is a question that is still pending from the perspective of the state medical marijuana program.”

Senate Democrat leader Troy Heinert, a member of the Rosebud Sioux Tribe, gave his perspective. “If tribes go down this road, whether we have a state-licensed program or not, there’s nothing precluding them. We (state government) have no taxing authority. If they want to do that on tribal land, they can do that now, and that would be a federal issue, not a state issue,” Heinert said.

Heinert added, “They wouldn’t be able to transport it, sell it off-reservation. But if they chose to, if they passed it through their own government and their own ordinance, they pretty much do it however they want.”

The state sales tax question wasn’t addressed two years ago, when the Legislative Research Council estimated the potential fiscal impacts from Initiated Measure 26.

The LRC letter dated July 26, 2019, from then-director Jason Hancock said,

“The fiscal note examines the fiscal impacts associated with the Department of Health, local governments, and prison and jail costs. The initiated measure allows local governments to charge a reasonable fee for a local license, permit, or registration, which may offset any potential costs to local governments. However, the potential costs and revenues to local governments is indeterminable. In addition, the measure is likely to have minimal impact on prison and jail costs. The Legislative Research Council concluded that a portion of marijuana users would legally obtain marijuana for medical reasons, which would prevent some convictions. However, states that have enacted medical marijuana laws have seen an increase in overall marijuana usage, dependence and abuse in adults, which would offset any potential savings.”

Jason Hancock

Hancock’s official note from LRC stated, “Legalizing cannabis for medical use would have an initial cost to the state of $677,309. Once the medical cannabis program is operational, it is expected that ongoing program revenues would cover program costs for a net to zero. This measure will likely have minimal impact on prison and jail costs.”