Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

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Wednesday, April 15, 2015

What is the "right" price for marijuana (especially to combat a black market)?

The question in the title of this post is the focal point for discussion by a student this week in my marijuana law seminar. Here are some key materials that provide background professional normal on this interesting issue:

2010 Rand Working Paper, "Estimated Cost of Production for Legalized Cannabis"

2005 MPP/Miron Report, "The Budgetary Implications of Marijuana Prohibition"

The Price of Weed website/resource

April 15, 2015 in Assembled readings on specific topics, Recreational Marijuana Commentary and Debate, Taxation information and issues | Permalink | Comments (0)

Understanding the tax issues and problems posed by Section 280E

As highlighted in many prior posts, students in my marijuana law school seminar are in the midst of assembling readings and leading discussions concerning the research topic(s) that are the focal point for class project(s).  This week, besides the prior topics noted here and here that still on the agenda, is for review of the impact of a federal tax code provision that creates unique problems for state-legal marijuana businesses.  Cribbing from this on-point commentary, my student provides this introduction to this issue:

In 1982, Congress enacted Section 280E of the Tax Code as a way to punish drug traffickers . . . This provision of the Tax Code disallows all deductions and credits for business expenses related to the trafficking of illegal drugs. Since the federal government classifies marijuana as a schedule I narcotic, marijuana falls under this regulation. In 2007, in Californians Helping to Alleviate Medical Problems Inc. (CHAMP) v. Commissioner of Internal Revenue, the U.S. Tax Court ruled that IRC 280E applies to cannabis businesses operating legally pursuant to state law.
 
Despite the foregoing, marijuana operators are able to mitigate some of the impact of 280E in two ways, costs of goods sold (COGS) and deductions for non-trafficking services and expenses.  Per the CHAMP case, marijuana businesses can still take COGS.  Namely, COGS should amount to those costs that go into the production and/or manufacturing of the cannabis.  But it has never been clear what the IRS will actually accept as cannabis COGS.
 
On January 23, 2015, the IRS released an internal legal memorandum outlining how Section 280E should be applied in the cannabis industry.  Though this memorandum may not be used or cited by taxpayers as precedent, it outlines how some IRS officials analyze Section 280E and how to determine COGS.  In the IRS memorandum, marijuana retailers and producers are required to compute COGS under inventory rules that predate the enactment of Section 280E . . .
 
Ultimately, the memorandum outlines a very narrow reading of the costs that can be included in COGS by suggesting that the IRS will not allow cannabis businesses to allocate purchasing, handling, storage, and administrative costs to COGS.
 
In addition to COGS, CHAMP also dictates that a marijuana business that provides other non-cannabis related services, like yoga, massage, or education, can deduct expenses related to those other lawful services . . . For example, a cannabis business can maximize the physical floor space it devotes to other services and minimize the floor space it devotes to cannabis sales. It could give employees not directly involved in cannabis distribution job tasks that do not involve cannabis. This way, the marijuana business can place the greatest amount of expenses in the “deductible” column, resulting in a smaller tax hit.
 
Cannabis businesses will only attain full relief from Section 280E when Congress amends the Tax Code or when Congress re-schedules or decriminalizes marijuana.  (See also: Olive v. Commissioner).
 
My student also provided links to these stories highlighting the practical impact of Section 280E:

April 15, 2015 in Federal Marijuana Laws, Policies and Practices, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Friday, April 10, 2015

Taking stock of modern marijuana markets and state tax realities

This notable new New York Times article about Colorado's tax revenues and marijuana markets details some important fiscal lessons from the first few years of marijuana legalization. Here are excerpts:

Colorado’s marijuana tax collections are not as high as expected. In February 2014, Gov. John Hickenlooper’s office projected Colorado would take in $118 million in taxes on recreational marijuana in its first full year after legalization. With seven months of revenue data in, his office has cut that projection and believes it will collect just $69 million through the end of the fiscal year in June, a miss of 42 percent.

That figure is consequential in two ways. First, it’s a wide miss. Second, compared with Colorado’s all-funds budget of $27 billion, neither $69 million nor $118 million is a large number. “It’s a distraction,” Andrew Freedman, Colorado’s director of marijuana coordination, says of the tax issue. And despite the marijuana tax miss, overall state revenues are exceeding projections, which may force the state to rebate some marijuana tax receipts to taxpayers.

In the political debate over marijuana policy, fiscal benefits — bringing marijuana into the legal economy and taxing it — have loomed large. The summary of the marijuana legalization question put before voters in 2012 stipulated the first $40 million raised by one of the three taxes on recreational marijuana would be put toward school construction each year. In practice, Colorado is likely to receive just $20 million from that tax this year.

But it’s not just Colorado. When Scott Pattison, the executive director of the National Association of State Budget Officers, appeared on C-Span’s Washington Journal call-in show to discuss state finances in December, callers repeatedly suggested that legal marijuana could fix budget gaps in other states. One asserted, incorrectly, that legal marijuana had increased Colorado’s tax revenues by a billion dollars.

Colorado’s marijuana taxes are part of a broader trend in recent years: States, looking for ways to close budget shortfalls without raising broad-based taxes, have leaned on “sin” revenues: higher taxes on cigarettes, higher fees and fines and higher revenue from gambling. And as they have sought to squeeze more revenue from these sources, they have often been disappointed....

In the case of marijuana, Colorado’s revenue has disappointed because legal recreational marijuana sales have been lower than expected. State officials thought many customers of medical marijuana dispensaries would migrate to the recreational market. But this process has been slow, in part because there is a financial disincentive to switch: Medical marijuana is subject only to general sales tax, while a 15 percent tax is imposed on recreational marijuana at wholesale and a further 10 percent at retail, in additional to the general sales tax.

But Mr. Freedman says the biggest drag on revenue is that so much of Colorado’s marijuana market remains unregulated. A 2014 report commissioned by the state’s Department of Revenue estimated 130 metric tons of marijuana was consumed in the state that year, while just 77 metric tons was sold through medical dispensaries and recreational marijuana retailers. The rest was untaxed: a combination of home growing, production by untaxed medical “caregivers” whose lightly regulated status is protected in the state constitution and plain old black-market production and trafficking....

But even if Colorado got all this right, improved revenues would not be among the most important effects that marijuana legalization has on the state. “Tax revenue is nice to have, but in most states is not going to be enough to change the budget picture significantly,” Mr. Kleiman says. “The stakes in reducing criminal activity and incarceration and protecting public health are way higher than the stakes in generating revenue.”

April 10, 2015 in Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (2)

Wednesday, February 11, 2015

Notable Colorado figures for marijuana tax revenues for 2014

This new AP article, headlined "Colorado collected about $76 million in recreational and marijuana pot revenue in 2014," reports on the latest official reporting of tax revenues collected on legal marijuana sales in Colorado for last year. Here are some of the details and some context for what they mean:

Marijuana makes money. But legalizing it doesn't eliminate the black market or solve a state's budget problems. Those are the lessons from Colorado's first full year of tax collections on recreational pot. The year-end report, released Tuesday, tallied about $44 million in new sales taxes and excise taxes from recreational pot.

Add fees and pre-existing taxes from medical pot, which has been legal since 2000, and Colorado's total 2014 pot haul was about $76 million....

Colorado started selling recreational weed on Jan. 1, 2014. But its first month of sales resulted in only $1.6 million for the state. By December, that figure was $5.4 million. The reason for the increase? Regulatory delays. Red tape meant stores opened slowly, with many municipalities waiting months before allowing pot shops to open....

But legal weed isn't an overnight flood of tax money. "Everyone who thinks Colorado's rollin' in the dough because of marijuana? That's not true," said state Sen. Pat Steadman, a Denver Democrat and one of the Legislature's main budget-writers....

Colorado's pot regulators have struggled to establish a wholesale pot price to collect excise taxes. "Taxing a percentage of price may simply not work," said Pat Oglesby, a former congressional tax staffer who now studies marijuana's tax potential at the Chapel Hill, N.C., Center for New Revenue. He pointed out that the two latest legal weed states -- Alaska and Oregon, both still working on retail regulations -- will tax marijuana by weight, similar to how tobacco is taxed.

Every state in the union, liberal to conservative, has a market for marijuana. And making pot legal doesn't guarantee those consumers will leave the black market and happily sign up to start paying taxes. In Washington state, medical marijuana isn't taxed. It is in Colorado, but all adults are allowed to grow up to six plants on their own. That means the states' new marijuana markets had legal competition from Day One. And that doesn't account for the black market, which of course is completely free of taxes and regulations.

Lawmakers in both Colorado and Washington are looking for ways to drive pot smokers out of the lower-taxed medical pot market and into the recreational one. But obstacles are stiff. "If there is untaxed medical pot, the taxes are voluntary. When you make it voluntary, people won't necessarily pay," Oglesby said.

The marijuana market is far from settled. Colorado benefited from first-in-the-nation curiosity and marijuana tourism. As more states legalize, Colorado and Washington will face competition. "Colorado is probably kind of a best-case scenario" for pot tax collections, said Jeffrey Miron, a Harvard University economist who studies the drug market. "If a number of other states legalize -- and two of them already have -- then bit by bit, Colorado revenue is likely to decline."

There's an even bigger uncertainty looming for states considering legal weed -- a new president in 2016. "The huge unknown is still federal policy," Miron said. "A new president can radically change state policies toward legalization."

I believe that Colorado's official year-end accounting can be found in this link/document, and I notice that there appears to be no column for state (or federal) income taxes paid by persons now working legally in the state-legalized marijuana market. Though certainly direct taxes on marijuana manufacturing and sales is the most tangible and measurable consequences of marijuana reform, I tend to think the biggest long-term economic impact for a state comes from creating a (huge?) industry with collateral businesses all of which will provide lots of jobs for individuals who will pay (lots of?) income tax on what they make in this new industry.

February 11, 2015 in Medical Marijuana Data and Research, Medical Marijuana State Laws and Reforms, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (2)

Friday, February 6, 2015

"Is marijuana making too much money for Colorado?"

The title of this post is the headline of this notable new article in the Christian Science Monitor.  Here are excerpts:

Recreational marijuana use has been legal for more than 13 months in Colorado.  In that time, sales have raised over $50 million for the state, according to Complex.com. Amendment 64, which legalized recreational marijuana in the state stipulated the first $40 million would be set aside to for schools.

However, according to Rolling Stone, the surplus tax revenue from the sale of marijuana is roughly $30 million.  Under state law this means that adult Coloradans are now entitled to a refund, which will be in the form of a check for a whopping $7.63.

The state of Colorado has a law on the books titled the Taxpayers' Bill of Rights, which was a voter-sponsored amendment that passed back in 1992, according to the state's treasurer's office.  The law mandates that the state treasurer's office must return excess tax revenue to the taxpayers if the amount exceeds a figure that is calculated with a formula that accounts for inflation and population growth.   The law has returned some $2.2 billion to the people of Colorado, according to the Associated Press.

Rolling Stone reports that state lawmakers are now left grasping for ways to put the excess tax revenue genie back in the bottle. This would include introducing a bill that would leave marijuana revenue exempt from taxpayer refunds. Back in 1992, few in the state would have expected Colorado would lead America’s pot revolution and therefore lawmakers left so-called sin tax revenue in the Taxpayers’ Bill of Rights....

Colorado’s windfall hasn't gone unnoticed by other states. After Colorado and Washington state, Oregon and Alaska became the next two states to legalize marijuana with ballot measures succeeding back on November 4, of last year. In Alaska the law goes into effect on February 24 and Oregonians can buy legal pot on July 15, according to the Marijuana Policy Project. Oregon stands to earn $50 to $100 million in annual tax revenue and Alaska could bring in up to $20 million, according to NerdWallet, who calculated what each state could potentially earn if they were to legalize marijuana.

February 6, 2015 in Initiative reforms in states, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Saturday, January 17, 2015

RAND produces big new policy report: "Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions"

Vermont275As reported in this local AP piece, headlined "RAND study: Marijuana legalization could be big bucks from sales, tourism," the RAND Drug Policy Research Center has just released a big new report on marijuana reform with a focus on Vermont.   The AP piece provides an effective summary of the basics of the RAND report and local political recaction in Vermont:

Vermont could reap hundreds of millions of dollars in tax revenue if it were to legalize marijuana, but only if nearby states didn't also jump on the bandwagon, according to a study released Friday.

The study comes as states across the country increasingly explore the potential budget boost from taxing an underground industry, even while the nascent legal pot business in Colorado and Washington experiences growing pains.

In Vermont, the Rand Corporation found that revenue from marijuana consumers could generate between $20 million and $75 million a year for the state.  The larger figure could be reached through what the report calls "marijuana tourism and illicit exports."  It also found that nearly 40 times as many marijuana consumers live within 200 miles of Vermont than live in the state.

The preface to the report, which doesn't make a recommendation about whether the state should legalize marijuana, says it's meant to "inform the debate." While it was prepared for Vermont, it says its conclusions could be useful to other states considering marijuana legalization.

Such high revenue is by no means assured, the report said. "If the federal government intervened to stop such cross-border traffic or if another state in the Northeast decided to legalize marijuana and set lower tax rates, these potential revenues might not materialize," it said.

Vermont allows the use of medical marijuana, and the possession of small amounts of marijuana has been decriminalized. Democratic Gov. Peter Shumlin has said he believes the state will follow Washington and Colorado in legalizing it, but he wants to see how it plays out in other states before easing laws. "I continue to support moves to legalize marijuana in Vermont but have always said that we have to proceed with rigorous research and preparation before deciding whether to act," Shumlin said. "This report will help us do that."

The price of marijuana in Washington has plunged since the sky-high prices when pot shops opened six months ago, and now growers complain the state isn't properly regulating supply. Regulators in Colorado have capped production to deter weed from spilling into nearby states, but that has meant more demand than supply.

Last spring, the Vermont Legislature passed a law requiring Shumlin's administration to produce a report about the consequences of legalizing marijuana. No proposals to legalize marijuana have been introduced in the Legislature. After the Friday presentation by the report's authors, portions of it were recounted during a hearing of the House Ways and Means Committee. "It seems to me the big question is do we go forward with this," said Committee Chairwoman Janet Ancel, D-Calais. She said the question on how to tax it is complicated.

The report provided few hard answers. It said that many questions can't be answered in advance, such as whether easing marijuana laws would increase abuse and how to keep it from minors and out of other states. "There is no recipe for marijuana legalization," the report said, "nor are there working models of established fully legal marijuana markets."

Here are links to the full report and materials that RAND released with this report:

January 17, 2015 in Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Friday, January 2, 2015

"Legal weed brings modest tax boosts in Colorado, Washington"

The title of this post is the headline of this notable new AP article, which includues these passages: 

To see the tax implications of legalizing marijuana in Colorado, there's no better place to start than an empty plot of land on a busy thoroughfare near downtown Denver. It is the future home of a 60,000-square-foot public recreational center that's been in the works for years.

Construction costs started going up, leaving city officials wondering whether they'd have to scale back the project. Instead, they hit on a solution — tap $3.2 million from pot taxes to keep the pool at 10 lanes, big enough to host swim meets.

The Denver rec center underscores how marijuana taxation has played throughout Colorado and Washington. The drug is bringing in tax money, but in the mix of multibillion budgets, the drug is a small boost, not a tsunami of cash.

Much of the drug's tax production has been used to pay for all the new regulation the drug requires — from a new state agency in Colorado to oversee the industry, to additional fire and building inspectors for local governments to make sure the new pot-growing facilities don't pose a safety risk....

In Colorado, where retail recreational sales began Jan. 1, 2014, the drug has a total effective tax rate of about 30 percent, depending on local add-on taxes. Through October, the most recent figures available, Colorado collected about $45.4 million from sales and excise taxes on recreational pot sales.

That puts the state on pace to bring in less than the $70 million a year Colorado voters approved when they agreed to a statewide 10 percent sales tax and 15 percent excise tax on recreational pot. Voters set aside the first $40 million in excise taxes for school construction; so far that fund has produced about $10 million.

But adding fees and licenses and the taxes from medical marijuana sales, Colorado had collected more than $60 million through October. Local governments can add additional taxes, too. That's what led to additional revenue streams like Denver's $3.2 million for a bigger pool at its rec center.

In Washington, where recreational pot sales began in July, recreational weed is taxed on a three-tier system as the plant moves from growers to processors to retailers. The total effective tax rate is about 44 percent. State tax officials are just getting a look at the first few months of pot taxes, and the money is coming in slowly because there aren't many stores there yet. State economists have predicted pot sales will bring in $25 million by next July.

The state anticipates a $200 million increase by mid-2017, and about $636 million to state coffers through the middle of 2019.

January 2, 2015 in Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)

Wednesday, December 24, 2014

"Who Shares In Marijuana Taxes? The Surprising Answer"

The title of this post is the headline of this notable new Forbes piece by Robert Wood.  Here are excerpts:

Taxes on marijuana are big, and it’s easy to see why. A discussion about legalizing marijuana often segues into one about tax revenues. Marijuana for medical use is legal in 23 states and the District of Columbia. Recreational marijuana is legal in DC and in four states, Colorado, Washington, Oregon and Alaska. More states will be coming.

In the meantime, cannabis — even for medical use — remains illegal under federal law. That leads to numerous legal woes for operations that are legal under state law. One sweet spot among legislators is tax revenue. It is a boon for the states. It could be a boon for the feds too.

The proposed Marijuana Tax Equity Act (H.R. 501), if passed, would end the federal prohibition on marijuana and allow it to be taxed. Growers, sellers and users would not to fear violating federal law. But dealing with taxes would be another story. The bill would impose an excise tax of 50% on cannabis sales and an annual occupational tax on workers in the field of legal marijuana.

Even if passed, one wonders if such high taxes could be collected. In the meantime, Colorado has trumpeted its tax revenues, though perhaps prematurely. It turned out that the $33.5 million Colorado projected to collect in the first six months of 2014 was too optimistic. When the smoke cleared, Colorado was missing $21.5 million in pot taxes! Yet the math isn’t difficult.

There’s a 2.9% sales tax and a 10% marijuana sales tax. Plus, there is a 15% excise tax on the average market rate of retail marijuana. If you add them up, it’s 27.9%. But much of the volume goes to black market buys where sales taxes aren’t paid. But that could change.

In fact, Colorado is making some marijuana businesses happy with its rebate program. Sales tax applies to marijuana sales and vendors are required to collect and remit the tax to the state. However, Colorado rewards all businesses with a rebate for the prompt payment of taxes, letting businesses keep a percentage each month. Calling it a ‘vendor fee,’ Colorado allows businesses to keep 3.3 percent of the 2.9 percent state sales tax.

According to estimates by the Denver Post, Colorado’s medical and recreational marijuana stores have collected — and kept — over $447,000 in sales taxes in the 10 months ended October 31, 2013. That could mean more than 400 marijuana stores in the state will end up clearing approximately $575,000 for all their trouble. It is what has allowed pot shops to keep more than $500K in sales tax.

That’s not bad, and at least it is something for their trouble. The idea that retailers should get a little sweetener for collecting sales tax is nothing new. But in the marijuana context, it can be especially attractive precisely because it would otherwise be hard to collect.

Already, with typically higher taxes for recreational than medical use, there is a clear incentive to resort to the illegal market. The Marijuana Policy Group suggested that only 60% of purchases in Colorado may be made through legal channels. One reason is price, another is taxes....

The 2.9% medical marijuana tax compared with 27% on the recreational variety is a big spread. Some patients could be reselling their 2.9% medical stock to the public. But the sales tax rebate may be one of the few places marijuana businesses feel fairly treated.

December 24, 2014 in Federal Marijuana Laws, Policies and Practices, Taxation information and issues | Permalink | Comments (0)

Thursday, November 20, 2014

Congressional Research Service analyzes federal proposals to tax marijuana

A helpful reader helpfully alerted me to this notable new Congressional Research Service report titled "Federal Proposals to Tax Marijuana: An Economic Analysis." Here is the detailed report's summary:

The combination of state policy and general public opinion favoring the legalizing of marijuana has led some in Congress to advocate for legalization and taxation of marijuana at the federal level.  The Marijuana Tax Equity Act of 2013 (H.R. 501) would impose a federal excise tax of 50% on the producer and importer price of marijuana. The National Commission on Federal Marijuana Policy Act of 2013 (H.R. 1635) proposes establishing a National Commission on Federal Marijuana Policy that would review the potential revenue generated by taxing marijuana, among other things.

This report focuses solely on issues surrounding a potential federal marijuana tax. First, it provides a brief overview of marijuana production. Second, it presents possible justifications for taxes and, in some cases, estimates the level of tax suggested by that rationale.  Third, it analyzes possible marijuana tax designs.  The report also discusses various tax administration and enforcement issues, such as labeling and tracking.  

Economic theory suggests the efficient level of taxation is equal to marijuana’s external cost to society. Studies conducted in the United Kingdom (UK) and Canada suggest that the costs of individual marijuana consumption to society are between 12% and 28% of the costs of an individual alcohol user, and total social costs are even lower after accounting for the smaller number of marijuana users in society. Based on an economic estimate of $30 billion of net external costs for alcohol, the result is an external cost of $0.5 billion to $1.6 billion annually for marijuana. These calculations imply that an upper limit to the economically efficient tax rate could be $0.30 per marijuana cigarette (containing an average of one half of a gram of marijuana) or $16.80 per ounce. An increased number of users in a legal market would raise total costs, but not necessarily costs per unit.

Some could also view excise taxes as a means to curtail demand, particularly as the price of marijuana can be expected to drop from current retail prices of up $200-$300 per ounce to prices closer to the cost of production at $5-$18 per ounce, if broadly legalized. The demand for marijuana is estimated to be relatively price inelastic, meaning that consumer demand is relatively insensitive to price changes.  Although previous studies of marijuana demand largely examine consumers willing to engage in illegal activities, it appears that higher tax rates would have a minor effect on reducing demand. With this said, tax policy, coupled with adequate law enforcement, could be an effective tool to limit marijuana consumption among youth, as empirical studies indicate that their demand is more sensitive to price than non-youth.

Excise taxes on marijuana could also be levied primarily to raise revenue, as has been historically the case with tobacco and alcohol. As an illustration, assuming a total market size of $40 billion, a federal tax of $50 per ounce is estimated to raise about $6.8 billion annually, after accounting for behavioral effects associated with price decreases following legalization.

The choices in administrative design could affect consumer behavior, production methods, evasion rates, or the tax base of a federal marijuana excise tax. Some of the more significant choices include whether to exempt medicinal uses or homegrown marijuana from tax.

November 20, 2014 in Federal Marijuana Laws, Policies and Practices, Medical Marijuana Data and Research, Recreational Marijuana Data and Research, Taxation information and issues , Who decides | Permalink | Comments (0)

Friday, October 24, 2014

Taxing issues as marijuana reformers try to get tax issues right

Americans_for_Tax_Reform_ATR_--_Blue_LogoPatrick Gleason, who is the Director of State Affairs at Americans for Tax Reform, has this notable new commentary at Forbes headlined "Marijuana Taxes On The Ballot This November." Here are excerpts:

Voter approval of retail marijuana sales in Colorado and Washington State in 2012 presented lawmakers in those state capitals with a difficult task not faced before in the U.S.: how to tax and regulate legal recreational marijuana.  As Joe Henchman, Vice President at the non-partisan Tax Foundation has pointed out, “Because marijuana can be purchased as a cigarette, an edible, a liquid, or vapor, all with a wide variety of concentrations, a specific excise tax is untenable.”  Since then, Colorado and Washington State lawmakers have imposed onerous and excessive taxes on marijuana; but on Nov. 4, Washington State voters will have the opportunity to tell their representatives in the state legislature to reconsider.

During the 2014 session of the Washington legislature, state lawmakers passed Senate Bill 6505, which deemed the marijuana industry to be non-agricultural, thereby removing excise tax protections that apply to the state’s agriculture industry.  This redefining of the industry will permit, if allowed to stand, more than $24 million in higher taxes over the next decade than would’ve otherwise been the case.  On Nov. 4, Washington residents will vote on Advisory Question Number 8, a ballot measure that would urge the legislature to either maintain or repeal this reclassification of marijuana products as non-agricultural.

Washington State taxes marijuana with a 25 percent assessment on sales from producers to processors, a 25 percent tax on sales from processors to retailers, followed by another 25 percent tax on retail sales.  That’s not all.  Then there is the Evergreen State’s Business & Occupation gross receipts tax, a 6.5 percent state sales tax, along with local sales taxes. Altogether this brings the estimated effective tax rate on marijuana products to approximately 44 percent.  In light of the onerous tax treatment of marijuana products and companies tied to that industry, it would be a positive development for Washington voters to vote repeal on Advisory Question 8 and urge lawmakers in Olympia to reverse the non-agricultural reclassification that will beget such punitive taxation.

But it’s not just at the state level where the marijuana industry faces excessive and unfair taxation. It’s a basic principle of sound tax policy that the code should not pick winners and losers or disproportionately target certain industries or groups of taxpayers.  Yet unlike any other business, newly-legalized cannabis dispensaries are not allowed to deduct ordinary and necessary business expenses like equipment, rent, and wages from their federal taxable income....

Section 280E of the tax code denies ‘ordinary and necessary’ business expenses as a deduction against income derived from Schedule 1 substances.  Unfortunately, tax law does not make any distinction between illegal street drug sales and state-established, legal cannabis dispensaries.  These latter businesses comply fully with state law, pay all applicable taxes, and are vigorously regulated. There is no reason why the tax code should deny ordinary and necessary business expenses to legitimate businesses established under state law.  The result is an arbitrary and punitive situation where legal employers face very high average effective tax rates that Congress never sought to impose on businesses.

Colorado, like Washington State and the federal government, exorbitantly taxes marijuana.  Between the state’s 15 percent wholesale excise tax, a 10 percent state tax on marijuana retail sales, plus traditional state and local sales taxes, the effective rate on cannabis approaches 30 percent in the Rocky Mountain State.

It’s great to have 50 laboratories of democracy across the U.S., and the trials with legal marijuana taking place in Washington and Colorado will be instructive for other states and the federal government.  Yet, when such heavy and unreasonable taxation is imposed, it blunts the positive effects of legal cannabis – such as the eradication of black markets and drug cartels – and makes it impossible to fully learn from the experience.  Washington voters and members of Congress have the opportunity to help get it right, if they so choose.

October 24, 2014 in Federal Marijuana Laws, Policies and Practices, Recreational Marijuana Commentary and Debate, Taxation information and issues | Permalink | Comments (1)

Tuesday, August 5, 2014

Rules for the Marijuana Industry or Preventing Marijuana From Becoming Big and Bad

 Do you want legalized marijuana to replicate the harms caused by tobacco and alcohol use? Do you want the marijuana business to become the new "Big" as in Big Tobacco? Assuming your answer is no,  Vikas Bajaj's "Rules for the Marijuana Market" published  in yesterday's New York Times offers some policy recommendations for preventing these results. 

This excerpt from Bajaj's opinion piece outlines the policy goals for regulating legal  marijuana:

Beyond keeping marijuana out of the hands of minors, a good regulatory system has to limit the increase in drug abuse that is likely to accompany lower prices and greater availability after legalization. It should protect consumers from both dangerous and counterfeit products, reducing the physical risk from a psychoactive substance. And a well-regulated system should undermine and eventually eliminate the black market for marijuana, which has done great damage to society.

Another goal not stated in this discussion is to prevent marijuana monopolies.

Bajaj offers three recommendations. The first recommendation is to tax marijuana "to curb use." This recommendation is not new but Bajaj suggests an interesting twist:

Colorado and Washington have imposed high tax rates that are based on price, much like existing sales taxes. But Mark Kleiman, a public policy professor at the University of California, Los Angeles, rightly warns that those taxes will lose their bite when prices inevitably decline as marijuana businesses become more efficient at production. A better approach would be to tax the drug based on its potency — which can be measured in various ways, including by the amount of the component THC in a batch — and increase the rate over time to keep up with inflation.

Bajaj's second recommendation is "don't market to minors." This recommendation is also generally accepted but important to avoid even the appearance of emulating Big Tobacco which Project SAMS builds on in its recent ad [see Doug's post ] 

Finally, Bajaj recommends that "growers shouldn't be sellers"  "to ensure that the industry does not evolve into a group of politically and financially powerful vertically integrated businesses."  ASA's report on state laws, summarized in a post by Alex, supports  Bajaj's recommendation but this "seed to sale" model is used by New York's new MMJ law. 

I found Bajaj's insights into how Big Alcohol was and is regulated interesting and informative. And his suggestion about the potency tax is intriguing.  Any comments on this recommendation pro or con?

 

 

 

August 5, 2014 in Taxation information and issues | Permalink | Comments (2)

Friday, August 1, 2014

"Colorado’s Rollout of Legal Marijuana Is Succeeding: A Report on the State’s Implementation of Legalization"

I highlighted and celebrated in this post a few months ago that The Brookings Institution was committed to "researching the new marijuana industry, not as advocates, but as social scientists, interested in how our federal system comes to terms with statewide decisions to legalize a substance that is illegal in the rest of the country, and how states implement those policy changes." The first significant report resulting from that research carries the title that is the title of this post. And here are excerpts from the start of this notable 35-page Brookings report:

In November 2012, Colorado voters decided to experiment with marijuana. Formally, they approved Amendment 64, modifying the state constitution.  This move was historic and did something which, to that point, no other state or modern foreign government had ever done: legalize retail (recreational) marijuana.  As part of the amendment, the state was required to construct legal, regulatory, and tax frameworks that would allow businesses to cultivate, process, and sell marijuana not simply to medical patients — as had been happening in Colorado for over a decade—but to anyone 21 and older.  This change came despite existing federal prohibition of marijuana and opposition from the governor, state attorney general, many mayors, and the law enforcement community.

At its heart, this report is about good government and takes no position on whether the legalization of retail marijuana was the correct decision.  Instead, it takes for granted that Amendment 64 and its progeny are the law and should be implemented successfully, per voters’ wishes.  The report examines what the state has done well and what it has not. It delves into why, and how, regulatory and administrative changes were made.  Finally, it offers an evaluation of how effective the implementation has been.

Prior related post:

August 1, 2014 in Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Thursday, July 24, 2014

Analysts predict Oregon would generate $38.5 million in tax revenue in first year of pot legalization

OregonAs detailed in this lengthy new report, titled simply "Oregon Cannabis Tax Revenue Estimate," a prediction of marijuana usage is at the heart of economists' prediction of significant tax revenues is the citizens of Oregon legalize recreational marijuana this fall. Here is the report's Executive summary:

Oregonians are slated to vote on the “Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act” in November 2014. The measure would regulate, tax, and legalize marijuana for adults 21 and older with legal use beginning in July, 2015.

Economists at ECONorthwest conducted an independent study to estimate the amount of money that would be generated in the short term if the Act passes. The money generated in taxes would go to schools, state and local police, and programs for drug treatment, prevention, drug education, and mental health.

The key findings of this analysis are:

• $38.5 million in excise tax revenue would be generated during the first fiscal year of tax receipts;

• $78.7 million in excise tax revenue would be generated during the first full biennium of tax receipts.

The report does not look at the impact on courts, police, and jail operating costs due to legalization. The forecast is based on a comprehensive methodology that includes the following: the cost of production; price elasticity; the price of marijuana and its retail products; market demand; the short-term demand remaining in the gray market; accessibility of non-medical sales; new market entrants; home production; and non-resident demand.

The “Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act” legalizes the growth, processing, wholesaling, and retailing of marijuana for adult purposes. If enacted, retail sales in Oregon could begin July 1, 2016.

Petitioners for this Act asked ECONorthwest to forecast state government tax revenues that would arise in the first fiscal year of its implementation, presumed to be July 1, 2016 through June 30, 2017 (FY 2017). Similarly, they asked ECONorthwest to estimate tax revenues in the first full biennium, July 1, 2017 to June 30, 2019 (2017-19 biennium). This report summarizes ECONorthwest’s research and forecast.

July 24, 2014 in Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Thursday, July 17, 2014

Another notable House vote continues federal reform momentum

As reported in this AP piece, which is somewhat inaccurately headlined "House Votes to Allow Marijuana-Related Banking," last night brought another notable vote from the GOP-lead House of representatives concerning federal regulatory rules surrounding federal pot prohibition.  Here are the (somewhat complicated) details of the latest notable vote:

The House voted Wednesday in support of making it easier for banks to do business with legal pot shops and providers of medical marijuana. The 236-186 vote rejected a move by Rep. John Fleming, R-La., to block the Treasury Department from implementing guidance it issued in February telling banks how to report on their dealings with marijuana-related businesses without running afoul of federal money-laundering laws.

Marijuana dealing is still against federal law, so banks who do business with marijuana dispensaries could be accused of helping them launder their money. Federal money laundering convictions can mean decades in prison.

The Treasury guidance was intended to give banks confidence that they can deal with marijuana businesses in states where they're legal. Many banks are still reluctant to do so. That has forced many marijuana operations to stockpile cash, a situation that shop owners say is dangerous.

"They are operating just in cash, which creates its own potential for crime, robbery, assault and battery," said Rep. Ed Perlmutter, D-Colo., whose state has legalized recreational pot use. "You cannot track the money. There is skimming and tax evasion. So the guidance by the Justice Department and the guidance by the Treasury Department is to bring this out into the open."

The vote is largely symbolic since Treasury already had gone ahead with the guidance, but it demonstrates a loosening of anti-marijuana sentiment on Capitol Hill. "Whereas the federal government once stood in the way of marijuana reform at every opportunity, the changing politics of this issue are such that more politicians are now working to accommodate popular state laws so that they can be implemented effectively," said marijuana advocate Tom Angell.

A coalition of 46 mostly GOP moderates and libertarian-tilting Republicans joined with all but seven Democrats to beat back Fleming's attempt to block the Treasury guidance.

July 17, 2014 in Criminal justice developments and reforms, Federal Marijuana Laws, Policies and Practices, Taxation information and issues | Permalink | Comments (2)

Sunday, June 1, 2014

Jobs, jobs, jobs: why legalization will garner fans among those eager for economic development

This local article from Connecticut, headlined "Medical marijuana's first product, jobs," highlights some of the reasons I believe marijuana reform is going to garner a lot more adherents than opponents among those interesting in economic development. Here are excerpts:

Months before any cannabis-based products will reach patients, Connecticut's new medical-marijuana industry has already created hundreds of jobs -- in construction. Former factories are being reconfigured into secure pharmaceutical facilities for the growing, harvesting, curing and preparation of various strains of marijuana that should be delivered to the state's dispensaries by early fall.

Since the state awarded four marijuana producer licenses in January, an estimated $20 million has been committed to the West Haven, Watertown, Portland and Simsbury buildings that in a few weeks will begin growing thousands of pounds of pot....

In a West Haven industrial zone parallel to Interstate 95, David Lipton, managing partner of the Fairfield-based Advanced Grow Labs, is supervising the conversion of 26,000 square feet of space that will house sterile laboratories, heavily lighted grow areas and budding rooms that will promote marijuana flowers, the part of the plant with the highest concentration of active ingredients. During a tour of the sprawling, noisy one-story building last week, more than a dozen electricians, sheet-rock experts and other subcontractors worked to transform the space....

Advanced Grow Labs is one of a series of new projects that are bringing economic growth, said Joseph A. Riccio Jr., commissioner of development for West Haven. Last year, city building permits brought in $800,000 to the city, but in the first five months of this year, the total has already topped $1 million.

He said the medical marijuana industry is obviously fostering jobs while the region still recovers from the recession. "This is a good boost for tradesmen," he said during a phone interview last week. "Every job is a good job."

Lipton estimates his company has invested about $2.5 million in construction and equipment, employing dozens of workers at a time, from structural and mechanical engineers, to steel fabricators to sheetrock installers, tapers, masons, electricians and plumbers. Those workers are generating Worker's Compensation and payroll taxes for the state. "There's definitely a positive effect on the economy," he said, adding various building and work permits from West Haven generated revenue for the city and that once up and running, the company will also pay personal property taxes....

Thirty-two miles to the north, in a hilltop Watertown industrial park near Route 8, Ethan Ruby, CEO of Theraplant, is supervising a similar conversion to a 63,000-square-foot building, about half of which will be renovated for initial production. The operation will have a 900-square-foot safe for storing market-ready material.

Ruby, who heads the state growers' association, said his company has invested about $8 million, nearly half of the estimated $20 million the four producers have spent for the initial phases of operations. On a recent day, Ruby counted 73 workers on-site, including landscapers, sheetrock installers and electricians.

June 1, 2014 in Medical Marijuana Commentary and Debate, Medical Marijuana Data and Research, Medical Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (1)

Tuesday, April 15, 2014

Pat Oglesby's new paper: "The Ace in the Game: Revenue from Legalized Marijuana"

The title of this post is the title of Pat Oglesby's latest paper which, as always, is a must read for anyone who follows these issues.  The paper is part of the program for the upcoming International Society for the Study of Drug Policy conference in Rome (which looks fantastic and which I'm very sad I won't be able toattend.)

Ogleby's paper, available at his blog, serves as a great guide to a range of options and issues related to taxing marijuana.  Here is the abstract: 

After marijuana is legalized, the costs of producing and selling it will collapse. A windfall economic gain will be up for grabs. Policymakers might allow that gain to go to consumers (encouraging use) or to cannabusinesses (encouraging production). Or, through revenue measures, they might direct the gain to elsewhere, or to society as a whole. New revenue for government does not justify legalization of marijuana. New revenue may not cover the costs that legalization creates, and a revenue stream gives government a permanent stake in intoxication. Revenue is only one card in a large deck of drug policy options. But it is the most powerful card.

 

How to play it? The safest, correctable way to distribute an intoxicant is government monopoly, Uruguay style. Retail-only monopoly can match or beat bootleggers’ wares. But monopoly breeds cronyism and corruption, unless power is spread around and transparent. In the United States, states might need to tweak the monopoly model to keep state control over location and price while assigning sales concessions to businesses.

 

A riskier plan is taxed commercial distribution, Colorado and Washington style. In the inevitable price war, bootleggers will act in a New York minute; Legislatures will not. That is a handicap. And no tax is perfect. Taxing by THC potency is theoretically appealing, but unworkable. A price tax base has several pitfalls. Even a weight base is problematic.

 

Three other models are possible: auctioning licenses, collective farming, and sales by non- profits.

 

Since no one really knows how to legalize, flexibility to change course is of the utmost importance. 

April 15, 2014 in Taxation information and issues | Permalink | Comments (0)

Tuesday, March 18, 2014

Colbert on pot taxes

Stephen Colbert had this amusing little segment about marijuana taxes recently:

The Colbert Report
Get More: Colbert Report Full Episodes,Video Archive

Though Colbert is hilarious as always, those wanting serious coverage of pot taxes should be sure to follow Pat Oglesby's always fantastic work at http://newrevenue.org.

March 18, 2014 in Taxation information and issues , Television | Permalink | Comments (0)

Friday, February 28, 2014

"Everything is Tax" ... seems a fitting mantra for marijuana reform and policy

The title of this post is drawn from the title of this recent published scholarly article that, on the surface and even in substance, seems be about a lot of topics other than marijuana law, policy and reform.  But the title caught my eye, and I think all would-be marijuana reform advocates ought to check out the article, because I strongly believe the marijuana tax stories and regulations that that emerge in state and federal law and policies in the months and years ahead will be the most important predictor of whether pot prohibition eventually gets fully repealed or lives on and on in the United States.  

The article is authored by Susannah Camic Tahk, it is published at 50 Harvard Journal of Legislation 67 (2013), and it is available here via SSRN.  Here is its abstract:

In contrast to major legislative reform packages in the 20th century, the Affordable Care Act of 2010 took the form of a tax bill. Although this legislation is the first massive social and regulatory overhaul completed through the tax code, in the past twenty-five years the U.S. Congress and Presidential administrations have substantially increased their use of tax law for non-revenue-raising purposes. Growing reliance on the tax code represents a structural transformation of how Congress and Presidential administrations have come to approach lawmaking goals. This transformation defies the near-consensus of previous tax scholarship, which, following Stanley Surrey, disapproves of embedding programs in the tax code. However, that dominant view rests on assumptions that have become outdated. This Article analyzes the ongoing structural transformation by observing and explaining the advantages that accrue from pursuing social and regulatory objectives through the tax code. In particular, this Article identifies a number of legislative and normative advantages that tax-embedded policies offer.

February 28, 2014 in Federal Marijuana Laws, Policies and Practices, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Wednesday, February 26, 2014

Pat Oglesby on changing marijuana tax estimates

The past few days have seen changes in marijuana tax estimates in Washington and Colorado.  Pat Oglesby has some insightful thoughts on these developments, and the difficulty of estimating marijuana tax revenue generally, in this post for the Huffington Post today:

While marijuana revenue could be a promising new source of income for states, a wide range of expectations underscores how little we know so far about what mature markets will look like one day. Last week, early projections for marijuana revenue in the first two legalizing states gave way to new ones. In Colorado, expectations rose; in Washington, they collapsed. As projections zig-zag, other states considering legalization don't know what to expect.

 

In Colorado, the number jumped by 60 percent, from $67 million to $107 million. That's for the first fiscal full year of marijuana excise taxes. The old, lower number came from the Legislature last August; the new, higher one came from the Governor on February 18.

 

In Washington, the number collapsed from $1.6 billion to $129 million -- a drop of over 90 percent. Oops. Those numbers are for marijuana excises by the end of Fiscal 2017. The old, higher number came from a criticized 2012 legislative estimate; the new, lower, more plausible one came from the state's official Forecast Council on February 19.

 

That's confusing. But even comparing the official forecasts is confusing. The numbers above are just for excise taxes.

February 26, 2014 in Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Sunday, February 9, 2014

"How Not to Tax Marijuana"

The title of this post is the headline of this effective new Huffington Post commentary by former congressional tax staffer Pat Oglesby.  Here are excerpts:

With marijuana legalization gaining steam, we might ask not just whether to legalize, but how.  Here are three tax mistakes that California and other states can still avoid.

Mistake 1.  Collecting late....

Mistake 2.  Taxing manipulable price....

Mistake 3.  Tying lawmakers' hands....

What about this year's crop of marijuana revenue proposals?  Some ace the test, avoiding late retail collections, price manipulation, and rigidity.  Bills in Maine, Maryland, New York, and Rhode Island — and an initiative in Alaska — tax at the wholesale level by weight, and don't tie lawmakers' hands.  That's 3 for 3 right.  But the most prominent California initiative, The Control, Regulate and Tax Marijuana Act, would tax only at retail by percentage of price, and would freeze taxes through 2022. That gets everything wrong: 0 for 3.

We are just figuring out how to legalize marijuana.  Some legalization plans will work, but some won't.  We can follow, adapt, or learn from models for tobacco and alcohol — which we've been forming and reforming since Colonial times.  That way, we can at least avoid making the same old mistakes over and over.  We'll be making plenty of new ones.

February 9, 2014 in Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)