Authored By: Justin E. Hobson
Justin’s practice includes all aspects of business taxation. He has particular experience counseling clients on a variety of cross-border tax matters, including global restructuring, cross-border transactions, entity formation, tax treaties, accounting for income taxes, transfer pricing, import and export taxes, customs duties, and value-added taxes.
March 7, 2018
The Oregon Department of Revenue (ODOR) recently issued a permanent administrative rule relating to the retail sales tax imposed on certain marijuana items. OAR 150-475-2100. The rule itself provides guidance to retailers on how certain types of marijuana items should be classified and how such items should be subject to the retail sales tax imposed on them. However, the administrative rule reaches beyond the statutory language adopted by the Oregon Legislature to suggest that, somehow, cannabis seeds are subject to the retail sales tax. Prepare yourself for a bit of legal analysis and simple logic. Let’s take a look at how ODOR got it wrong.
The Oregon Revised Statutes (ORS) cannabis tax rules are codified in ORS 475B.700 through ORS 475B.760. ORS 475B.700 contains the relevant definitions for the cannabis tax. The provision includes definitions for the terms “cannabinoid product,” “immature marijuana plant” and “useable marijuana.” Each of these terms are defined by reference to their definition under ORS 475B.015.
ORS 475B.705 contains the enabling language and the tax rates. It states that a tax is imposed on “the retail sale of marijuana items” in Oregon. The tax is imposed on the consumer, but withheld and remitted by the retailer. ORS 475B.705(2) imposes a 17-percent tax on the retail sales price of several marijuana items, including “immature marijuana plants” and cannabinoid products other than those intended to be used by applying the product to the skin or hair.
ODOR’s Administrative Rule
ODOR adopted Oregon Administrative Rule (OAR) 150-475-2100 regarding the retail sales tax imposed on certain cannabis items. The rule states that the definitions found in ORS 475B.015 apply the terms used in the rule and that “seeds” are taxed at the rate in ORS 475B.705(2)(c).
Getting It Wrong — The Legal Analysis
The Oregon statute covering the retail sales tax begins by creating defined terms. There is nothing inherently wrong with doing this. In fact, ORS 475B.700 creates defined terms not otherwise used by chapter 475B. However, it fails to do something important. It fails to incorporate the many defined terms found in ORS 475B.015. The defined terms found in ORS 475B.015 only apply to ORS 475B.010 through 475B.545. Among the terms incorporated are cannabinoid product, immature marijuana plant, marijuana items and usable marijuana.
Let’s jump to the low hanging fruit. ORS 475B.015(24)(a) defines the term “marijuana seeds” to mean “the seeds of the plant Cannabis family Cannabaceae.” The definition of “marijuana seeds” is not carried over to the tax section by virtue of ORS 475B.700. It’s glaringly omitted. OAR 150-475-2100 attempts to remedy this by rule and adopting all defined terms in ORS 475B.015.
Next, the term “marijuana” is defined by ORS 475B.015(17)(a). It means “the plant Cannabis family Cannabaceae, any part of the plant Cannabis family Cannabaceae and marijuana seeds.” The definition of “marijuana” is not carried over to the tax section by virtue of ORS 475B.700. It’s also glaringly omitted. Again, the administrative rule attempts to remedy this by adopting all defined terms in ORS 475B.015.
One important term that is carried over to the tax section is the term “marijuana item.” The enabling language found in ORS 475B.705(1) states “a tax is hereby imposed on the retail sale of marijuana items in this state.” Marijuana items are defined by ORS 475B.015(19) to mean “marijuana, cannabinoid products, cannabinoid concentrates and cannabinoid extracts.” Cannabis seeds do not fall within the definition of cannabinoid products, cannabinoid concentrates or cannabis extracts. That only leaves “marijuana” as the potential category for cannabis seeds. If we assume that the defined terms in ORS 475B.015 carried over to the tax section, then it is clear that cannabis seeds are “marijuana” as that term is defined, and therefore, would be a “marijuana item.” However, we cannot make this assumption because ORS 475B.700 fails to incorporate the defined term “marijuana” from ORS 475B.015.
But wait, there’s more. ORS 475B.705(1) simply states that taxes are imposed on the retail sale of marijuana items. ORS 475B.705(2) sets the applicable tax rates — and this is where the Oregon Legislature really swung and missed. Tax rates are set for the following items:
- Marijuana leaves,
- Marijuana flowers,
- Immature marijuana plants,
- Cannabinoid edibles,
- Cannabinoid concentrates,
- Cannabinoid extracts,
- Cannabinoid products intended to be applied to the skin or hair, and
- Cannabinoid products not intended to be applied to the skin or hair.
Cannabis seeds do not fit within any of these. The only reasonable possibility is that they are cannabinoid products not intended to be applied to the skin or hair. So let’s take a look at the defined term “cannabinoid products.”
ORS 475B.015(5)(a) defines cannabinoid products to mean “a cannabinoid edible and any other product intended for human consumption or use, including a product intended to be applied to the skin or hair, that contains cannabinoids or dried marijuana leaves or flowers.” Cannabis seeds are not edibles, and they are not intended for human consumption. They are also not used for any cannabinoids that they may contain. Cannabis seeds are intended to be germinated, grown and harvested. ODOR may argue that this intent constitutes “use” within the meaning of ORS 475B.015(5)(a), but this should be a losing argument.
ODOR did not look to the cannabinoid product argument when making their permanent administrative rule. OAR 150-475-2100(2)(c) states that seeds are subject to the rate set by ORS 475B.705(2)(c). That section imposes a 17-percent tax on “immature marijuana plants.” It doesn’t impose a tax on seeds. A plant is not a seed. Therefore, the tax imposed by ORS 475B.705(2)(c) cannot apply to cannabis seeds.
You may recall our prior blog post on making a difference. We provided written comments to ODOR suggesting that they lacked statutory authority to tax seeds. They disagreed with our position. In their written response (PDF), ODOR makes two arguments. First, they argue cannabis seeds are a “marijuana item.” Second, they argue that there was legislative intent to tax all marijuana items, including seeds. Lastly, they believe it is appropriate to tax seeds at the rate imposed on immature plants in an attempt to comply with the statutory language.
The first argument fails a law school admissions test (LSAT) logic problem. ODOR’s argument relies on the defined term “marijuana” found in ORS 475B.015(17)(a). The defined term “marijuana” does not apply to the tax statutes. The defined terms relevant to the retail sales tax on cannabis items are found in ORS 475B.700. Those terms do not include a definition for “marijuana.” Reliance on the definition found in ORS 475B.015(17)(a) is misguided.
Legislative intent is a tool used to interpret statutes, contracts and other items when an item is ambiguous. Legislative intent is not used when a document or statute is facially clear — meaning there is no ambiguity in the drafting. There is only one potential term that might be ambiguous. That term is the word “use” in the definition of cannabinoid product. My view is the term “use” is intended to mean utilizing and consuming the THC, CBD or other cannabinoids the product contains. It should not mean germinating a seed to create a seedling, immature plant, mature plant and finally useable marijuana.
Even if we lost the cannabinoid product argument, ODOR’s permanent administrative rule states that seeds are subject to the tax rate imposed on immature plants. Seeds and immature plants are separately defined terms — a seed is not a plant. Therefore, the tax rate imposed on immature plants should not be imposed on seeds.
So what do you do if you’ve purchased seeds in Oregon and paid the sales tax ODOR says you must pay? Stay tuned for our next post on the fun hoops ODOR set out for you to request a refund!