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The lure of drug taxes

By Kay Bell · Bankrate.com
Tuesday, February 22, 2011
Posted: 3 pm ET

Drugs have always tempted individual users. Today, they also are attractive to states and local jurisdictions facing fiscal difficulties.

Several states require that dealers of various illegal drugs buy tax stamps. Now, lawmakers in more states and municipalities are looking at similar ways to make some much-needed legal money off illegal acts.

The taxation of illegal drugs always makes the weirdest tax laws lists. Such statutes seem not only strange, but unenforceable. C'mon. How many dealers are going to pop into the local tax office to register and pay these levies?

But that's part of the plan.

If the criminals do pay the taxes, great! Easy money for tax collectors, who routinely point out that it's not their job to track down bad guys, but to bring in money.

If, on the more likely other hand, the criminals don't pay the taxes and then get busted for dealing drugs, law enforcement has not only the criminal charge, but also a civil tax charge to file.

And remember, Al Capone ended up going to jail not for all his well-known nefarious acts, but because he didn't pay taxes on the income received from those illegal activities.

With the advent of medical marijuana, states in which the herb is sold to patients have been exploring ways to tax this treatment. The latest marijuana tax effort comes from, you guessed it, California.

Sales of medical marijuana in California have always been taxable at the state level. Now the city of Los Angeles wants a cut of the drug tax pie, or perhaps I should say brownie.

When Los Angeles voters go to the polls March 8 for a special election, they also will decide on Measure M. This proposal would add a 5 percent sales tax to all sales of medical marijuana within the city limits.

If approved, the new tax money would go to Los Angeles' general municipal services fund, where it could be used to pay for, in part, "crime suppression services."

So the tax money raised from medical marijuana would then help pay the law enforcement officers who arrest the sellers of the wacky weed to healthy buyers. I love it!

Several other Golden State cities already have passed taxes on medical marijuana. But Carmen Trutanich, Los Angeles city attorney, questions whether the City of Angels has the authority to do so.

In a report to the city council, Trutanich noted that medical marijuana collectives in Los Angeles are required to operate as nonprofits. And since tax-exempt organizations' sales aren't subject to California sales tax, the city won't be able to collect any sales tax from the operations.

Still, Measure M will go to Los Angeles' voters. Whatever they decide, the election likely won't be the end of the effort to tax medical marijuana and other offbeat but potentially lucrative revenue sources.

What's the sales tax rate in your state and hometown? Would you support efforts there to tax illegal activities? Or do you think such laws are a waste of time by state and local lawmakers?

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