The state Board of Equalization is contending that the Berkeley Patients Group, one of the oldest and largest medical cannabis dispensaries in California, owes $6 million in back taxes, Berkeleyside has learned.

The board claims that the dispensary on San Pablo Avenue did not pay taxes on the medical marijuana it sold from July 2004 to June 2007 and now owes $4.4 million in taxes and about $1.6 million in interest.

The charges come on the heels of a September 2010 ruling in which the Board of Equalization determined that another Berkeley cannabis collective, Patients Care Collective, had to pay $639,000 for back taxes it owed from January 1, 2005 to September 8, 2008 on the sales of cannabis and marijuana cookies.

The Berkeley Patients Group, which has about 13,000 members and serves 800 to 1,000 patients each day, is contesting the charges, according to Elisabeth Jewel, whose firm Aroner, Jewel, & Ellis advises BPG on governmental regulations. Until February 2007, the laws regarding the collection of taxes for the sale of cannabis were murky, which is why the BPG did not pay, she said.

“There is no allegation of malfeasance in terms of collecting a tax and not paying it,” said Jewel. “The Berkeley Patients Group contends it was not clear to them that they had to pay sales taxes on what they consider medicine.”

The Board of Equalization will hold a hearing on the charges at its February 22-24 meeting in Sacramento. While the board would not officially confirm there is a claim pending against BPG, a spokesman did confirm the BPG hearing was on the agenda, which has not yet been made public. Berkeleyside learned about BPG’s late tax payments from a source close to the board, who asked not to be named.

While state law allows collectives and dispensaries to cultivate marijuana, rules governing its sales have evolved in recent years, according to Matt Kumin, a San Francisco attorney who specializes in small business transactions and has worked with numerous cannabis cooperatives. Prior to 2005, few cannabis collectives paid sales taxes because the Board of Equalization did not permit them to take out seller’s permits to report their proceeds. The Board of Equalization at that time did not want to be seen as promoting the sale of products that were illegal under federal law, said Kumin.

In February 2007, however, the board clarified its stance and said all dispensaries must take out seller’s permits, although they did not have to state what they were selling. The board also declared that collectives and dispensaries had to pay sales taxes.

Since the clarification of the rules in 2007, the BPG has been paying tax on the medical cannabis sold out of the San Pablo Avenue facility, said Jewel. But the organization does not think it should be liable for any taxes prior to that clarification.

“During that time the Board of Equalization had very murky policies regarding dispensaries and the collection of sales tax,” said Jewel. “As soon as the board had clarified their policies, BPG began paying the tax.”

The former chair of the board, Betty T. Yee, acknowledged at the September hearing that the rules have been unclear.

“The application of tax on medical cannabis has had a little bit of a rough history on the board,” Yee told Erik Miller, a manager at the Patients Care Collective.

Berkeley Patients Group plans to argue that they should not have to pay back taxes because prior to the 2007 clarification, the group considered medical cannabis to be a medicine and California law exempts prescription medicine from being taxed, said Jewel.

But that argument probably won’t work. The Patients Care Collective tried to use that same argument in its September 2010 hearing, but the Board of Equalization dismissed the idea. Board members noted that in order to be considered a medicine, a substance had to be commonly regarded as a medicine or dispensed by a pharmacy. Medical cannabis does not meet that standard, they said.

The state is not exactly sure how many medical cannabis dispensaries there are in California. About 300 dispensaries currently pay taxes, with another 500 evading them, Alan Davenport, an analyst for the Board of Equalization told a group gathered at a recent convention for the California branch of NORML.

The board has audited about 40 of those dispensaries, said Davenport.

The state collects anywhere from $58 million to $105 million in taxes from medical marijuana each year, according to Anita Gore, the spokesperson for the Board of Equalization. There are approximately $700 million to $1.3 billion in sales of medical cannabis in the state each year, she said.

Berkeley expects to reap about $300,000 in sales tax from medical marijuana in fiscal 2011 and $460,000 in fiscal 2012 , according to Mary Kay Clunies-Ross, the city spokesperson.

The Board of Equalization audited the Berkeley Patients Group and informed it of its tax liability in 2007, said Jewel. It has taken more than three years for the case to work its way through the system.

If the BPG loses, it will not shut its doors and will try to continue its existing level of services, which include massage, acupuncture, arts and crafts and a hospice program, said Jewel.

The Board of Equalization has a program called Offer in Compromise in which businesses in arrears can work out a payment schedule. If the BPG is liable for the $6 million, it will probably go into that program, she said.

Erik Miller of the Patients Care Collective could not be reached for comment to see what his organization is doing to pay its $639,000  tax liability. At the September hearing he told the board repaying the money would be difficult.

“We are a small not-for-profit company and we don’t have the ability to pay hundreds of thousands in taxes which we perhaps erroneously did not collect,” said Miller. “We are going to have to find a way to mitigate this or it is going to put us out of business.”

To see a video of the September 2010 Board of Equalization hearing regarding the Berkeley Patients Care Collective, go here and use the pull down menu to find item C7.

Frances Dinkelspiel, Berkeleyside and CItyside co-founder, is a journalist and author. Her first book, Towers of Gold: How One Jewish Immigrant Named Isaias Hellman Created California, published in November...