Grants Pass is having to roll back its local tax on recreational marijuana sales after conceding that the tax is on shaky legal standing. Customers at one of the two retailers in Grants Pass have been overcharged as a result.

City officials approved a 10 percent local tax on all recreational sales and 5 percent on medical sales in 2014, before Oregon voters passed Measure 91 and legalized recreational cannabis. Since then, the state Legislature has enacted a 17 percent state tax on recreational sales with a provision that cities and counties can also charge an additional 3 percent.

The law also says voters must approve a local tax.

Until November, the city's stance on marijuana taxes was not an issue, because the city previously had a ban on all marijuana commerce in town. Voters lifted the moratorium in November, and now Grants Pass has two recreational stores that opened about a month ago.

On the threat of litigation, city officials recently concluded it needs to repeal the tax. That's because the owner of one of the stores has been refusing to charge the tax on the grounds that it's illegal.

Fred Tamayo, owner of Southern Oregon Cannabis Connection, was opposed to the tax from the beginning.

"Basically the city is asking us to tax 10 percent on recreational marijuana and 5 percent on medical marijuana, and this is an illegal act," Tamayo told the Daily Courier. "My customers could sue me, because I can't impose a tax that's illegal."

The state statute is clear on the matter: Medicinal sales can't be taxed at all, and recreational can be taxed up to 3 percent by cities and counties, and only if voters approve it.

"Everybody that's read the legislation, the law, knows it's an illegal tax," Tamayo said. "I'm not the brightest light in the greenhouse, but even I know that it's an illegal tax."

The city has not collected any taxes yet because the stores have just opened and taxes are collected at the end of each month. Now that the legality of the tax is in question, the city has no aims to collect.

That's a problem, however, because the other store, Diamond Cannabis, has been dutifully charging a 10 percent city tax on retail.

Diamond Cannabis co-owner Carrie Boltz told the Daily Courier that her highly visible retail shop on Sixth Street downtown did so to not challenge local authority.

"Diamond Cannabis is honored to be located in Historic Downtown Grants Pass," Boltz said in a statement. "Therefore, we make a huge effort to work with the city of Grants Pass and be 100 percent compliant. This means for the month of May, we did charge the 10 percent tax."

City officials knew of the problem last year when the Daily Courier followed up on marijuana tax revenues. At that point, the city's stance was that, if needed, it could try and argue that the tax should be grandfathered in, as it predated the state statutes.

"Our tax was enacted before the state came out with the 3 percent limitation," said City Attorney Mark Bartholomew. "When you do something prior to that, you have a good argument ... that it can be grandfathered in."

This is the same tact the Josephine County Board of Commissioners took when it looked into the same 10 percent tax in 2014.

The county never enacted the tax, however, and went through the proper channels to impose its current 3 percent tax that voters approved in November — steps the city never took.

Boltz declined to say how much her store overcollected. She said Diamond Cannabis is no longer charging the tax and plans to work with customers who have concerns about purchases made last month.

"When we received news that the city was not going to be enforcing the tax, we immediately adjusted," she said. "Any Diamond Cannabis customers who have questions are encouraged to come into the shop with their receipt."

Tamayo said that had he been charging the city tax, his store would have collected about $5,400 in city taxes on retail sales since they opened a month ago.

He estimates that the average person comes in and buys about $45 to $50 worth of product, making the personal cost of the tax about $5 to an individual customer.

— Reach reporter Troy Shinn at 541-474-3806 or tshinn@thedailycourier.com