Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

Wednesday, November 18, 2015

Effective general overview of the state of US marijuana reforms as of Fall 2015

I am giving a lecture this afternoon to a local bar association about the state of marijana reform in Ohio and throughout the United States as of Fall 2015.  Helpfully, this recent article from BloombergBNA provides a useful national overview with a number of state-level specifics.  The piece is titled "Marijuana in America, 2015: A Survey of Federal And States' Responses to Marijuana Legalization and Taxation," and I recommend it for those looking to get up to speed on a lot of the legal and tax basics ASAP.

November 18, 2015 in Medical Marijuana Commentary and Debate, Medical Marijuana State Laws and Reforms, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Thursday, November 5, 2015

Pueblo County voters in Colorado approve local marijuana tax to fund college scholarship

Images (4)This local story from Colorado, which is headlined "New in Colorado: College scholarships funded by weed" (and amazingly does not make any jokes about higher education), discusses an interesting local tax initiativ that looks to reinvestment marijuana revenues to a very sound cause.  Here are the details:

A Colorado county that boasts the world's largest outdoor marijuana farm and has been actively courting the new pot industry has approved the world s first marijuana-funded college scholarship.

Pueblo County voters approved the pot tax by a 20-point margin Tuesday.  The 5 percent excise tax on marijuana growers is expected to raise about $3.5 million a year by 2020, with the money available for any high school senior in the county who attends one of two public colleges in the county.

The scholarship awards will depend on how many students apply, but county planners are projecting about 400 students a year will get scholarships of about $1,000 each per year.  The awards are the world's first scholarships funded entirely by pot taxes.  "It's a landmark vote," said Brian Vicente, a Denver-based marijuana attorney who wrote Colorado's 2012 legalization measure.  "This is the first time you have marijuana tax money being used directly for scholarships, and that's pretty remarkable."  Pueblo's booming pot industry didn't oppose the measure, which brings their tax rate from 15 percent to 20 percent, phased in over five year....

Scholarship backers insist the fund isn't any different than the scholarships already funded by alcohol companies.  "Adding a scholarship that comes from an industry we are fostering is a logical method to address several of our community issues, including an unemployment rate that lags the statewide average," said Chris Markuson, Pueblo's economic development director.

Through aggressive recruitment efforts and financial incentives, the southern Colorado county has attracted a booming industry of marijuana growers fleeing higher costs in the Denver area....

Pueblo also has taken the unusual step of putting marijuana growers on equal footing with traditional farmers when it comes to water rights — something it's able to do because its water supply in the Arkansas River Basin is controlled locally, not by the federal government.   "We are aggressive, trying to build the Silicon Valley of the marijuana industry," Markuson said.

Just last week Pueblo officials announced an $8 million incentives package to lure pot growers to convert a defunct Boeing rocket plant into a production facility for hemp oil that will eventually employ 163 people.  Pueblo County now accounts for about 3 percent of Colorado's recreational marijuana sales, but about 20 percent of the state's recreational pot production.  The county has about 65 commercial pot growers, including the 36-acre Los Suenos farm, which is believed to be the world's largest pot cultivation site.

The two colleges eligible for scholarship spending — Pueblo Community College and Colorado State University-Pueblo — did not immediately return calls about the new weed scholarships.

Sal Pace, a county commissioner who pushed the scholarship ballot measure, called the pot industry a natural source of funds.  "For years we ve been floating the idea of a special funding source in Pueblo to help kids afford college," Pace said.  "This seemed like a natural fit."

November 5, 2015 in Business laws and regulatory issues, Campaigns, elections and public officials concerning reforms, Initiative reforms in states, Recreational Marijuana Commentary and Debate, Taxation information and issues , Who decides | Permalink | Comments (0)

Thursday, October 22, 2015

"Marijuana, Ohio, and Esau"

Te title of this post is the headline of this lovely and astute new Huffington Post commentary authored by Pat Oglesby. Here are excerpts from its start and end:

"Politics is always the lesser of two evils," Federal Fifth Circuit Judge John Minor Wisdom told me when I was one of his law clerks. I didn't quite understand that then, in the late 1970s, but I get it now.

Marijuana legalization is gaining steam, and the question is becoming not "whether to legalize" but "how."  And it's about the money.  A recent RAND report put it this way: "A state that legalizes marijuana by allowing limited private sales creates a privilege to sell it. T hat privilege is worth money, maybe lots of money."

So the money is up for grabs.  And a small group plans to grab all the money in Ohio. The "Responsible Ohio" ballot initiative, to be voted on in November, lets medical and adult-use marijuana be grown and processed only in "ten designated sites," all owned by wealthy funders of the initiative.   Sites like a "40.44 acre area in Butler County, Ohio, identified by the Butler County Auditor, as of February 2, 2015, as tax parcel numbers Q6542084000008 and Q6542084000041."  And the initiative caps taxes permanently.   All by Constitutional amendment.

The Responsible Ohio initiative sets up, for some of my friends in the cannabis community, a choice between two evils: prohibition and what NORML's Keith Stroup calls "a bitter pill to swallow" and "a perversion of the voter initiative process."  But he points out that, for now, the Responsible Ohio initiative "is the only option available to stop the senseless and destructive practice of arresting marijuana smokers in Ohio. Each year nearly 20,000 Ohio residents are arrested on marijuana charges.  That's an enormous price to pay when we have the ability to end prohibition now, albeit with some undesirable provisions."...

And look -- Responsible Ohio doesn't have a monopoly on grabbing marijuana money. But it is the first marijuana consortium to limit its taxes permanently in a State Constitution.  That's outrageous.  There are at least six better ways to divide the new wealth and income from marijuana commerce than to give it all to the first self-nominated grabbers.  But that brings me back to Judge Wisdom's point about the lesser of two evils.  Different people have different views about which evil is lesser. Where you stand depends on where you sit.  That's why we vote.

Polls seem to be saying Responsible Ohio may win.  If it does, much of the blame will be on elected officials who should have seen this coming and figured out a way to handle it.  Combined with possible legalization of marijuana in Canada, a win for Responsible Ohio would shake the windows and rattle the walls in Legislatures across the country.  Sure, figuring out how to share the newly-created wealth from marijuana legalization fairly is not easy.  But it's not impossible.

October 22, 2015 in Initiative reforms in states, Recreational Marijuana Commentary and Debate, Taxation information and issues , Who decides | Permalink | Comments (0)

Sunday, September 20, 2015

Colorado tax revenues from marijuana now clearly exceeding those from alcohol

As highlighted by this recent Forbes article, headlined "Colorado Now Reaping More Tax Revenue From Pot Than From Alcohol," the Centennial State now seems to be reaping more public revenue benefits from the wicked weed than from the golden grape. Here are the details:

The tipping point has finally occurred in Colorado: The state is raising more revenue from marijuana taxes than from alcohol.

According to the Colorado Department of Revenue, the state has received nearly $70 million in tax revenue from marijuana from July 1, 2014 through June 30, 2015, easily beating the nearly $42 million in taxes on alcohol....

Colorado is having record recreational sales this summer. In June, recreational marijuana sales hit $50 million for the first time, then in July sales rose over $55 million. If you add in medical marijuana sales, the total comes to $96 million for July, also higher than June’s total of $85 million. The portion of these sales in July that is earmarked for school construction projects is $3 million....

“It’s crazy how much revenue our state used to flush down the drain by forcing marijuana sales into the underground market,” said [Mason] Tvert [of the Marijuana Policy Project] in a statement. “It’s even crazier that so many states are still doing it. Tax revenue is just one of many good reasons to replace marijuana prohibition with a system of regulation.”

September 20, 2015 in Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)

Tuesday, September 1, 2015

"Legal Marijuana in Arizona Would Generate $72M Yearly in Tax Revenue, New Report Says"

The title of this post is the headline of this notable Phoenix New Times article reporting on a notable new policy report emerging in Arizona.  Here are the details (with links from the original article):

Previous marijuana tax-revenue estimates were far too low, states a new report by the nonpartisan Grand Canyon Institute.

Arizona would raise about $72 million in revenue annually beginning in 2019 if voters make recreational marijuana legal in Arizona with an anticipated ballot initiative in 2016, says the report, published on the group's website.

Backers of the Campaign to Regulate Marijuana Like Alcohol announced August 19 that their planned ballot measure would raise at least $40 million a year for Arizona schools. The campaign, sponsored in part by the Marijuana Policy Project, claims to have gathered about 65,000 signatures already toward a citizens' initiative expected to appear on the ballot in November 2016.

The institute "finds that the revenue projections were conservative as proponents claimed," the GCI report states. If the program were in effect now, sales of marijuana products would produce about $64 million annually, it says.

"If the initiative were to make the ballot and be passed by voters," the report goes on, "the GCI expects 2019 to be the first year with a full rollout of retailers and at that point, due to inflation and population growth, the expected totals would be $72 million: with almost $29 million each to K-12 education and helping fund all-day Kindergarten, plus $14 million to the Dept. of Health Services."

The report begins by stating that the GCI, which has a 12-member board of directors made up of local leaders on both sides of the political aisle, neither supports nor opposes marijuana legalization. "Our estimate was done conservatively so, if anything, it understates [total] revenue a bit — enough to give some wiggle room for administrative costs," Dave Wells, GCI research director and author of the report, tells New Times.

September 1, 2015 in Initiative reforms in states, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Thursday, August 27, 2015

"Pioneer Pot States Have Collected More Than $200 Million In Marijuana Taxes"

The title of this post is the headline of this notable new Huffington Post article.  Here is how it gets started:

The first two states to legalize recreational marijuana have collectively raked in at least $200 million in marijuana tax revenue, according to the latest tax data -- and they're putting those dollars to good use.

In Colorado, after about a year and a half of legal recreational marijuana sales, the state has collected more than $117 million in excise taxes from both the recreational and medical marijuana markets, according to the most recent data from the Colorado Department of Revenue.

Washington state got a slower start. Its retail shops didn't begin selling recreational marijuana until July of last year, but they are keeping pace with Colorado's. About $83 million in excise taxes have already been collected in the year since sales first began, according to the most recent tax data from the Washington State Liquor and Cannabis Board.

And the total haul for both states is several million higher if all additional revenue from marijuana -- such as sales taxes, jurisdictional taxes, fees and licensing costs -- is included.

August 27, 2015 in Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)

Wednesday, August 19, 2015

"Colorado Marijuana Tax Revenue Nearly Doubles in One Year"

The title of this post is the headline of this new Time piece, which includes these passages:

It’s been a year and a half since the legalization of marijuana went into effect in Colorado.  Business for purveyors of marijuana was good from the beginning, but has soared in the past year, according to data collected by the Colorado Department of Revenue.

The state collected $9.7 million in taxes related to marijuana sales in June 2015, up nearly $5 million from the same month last year.  By May, the state had collected more than $88 million in marijuana taxes in 2015.

Revenue from marijuana sales has been used to fund improvements to the state’s public schools.  “The people who were smoking marijuana before legalization still are. Now, they’re paying taxes,” Gov. John Hickenlooper told USA Today in February.

August 19, 2015 in Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)

Tuesday, July 14, 2015

Ninth Circuit affirms federal Tax Court approach to (over)taxing marijuana businesses

As reviewed by this recent Forbes article, headlined "Big Court Defeat For Marijuana Despite Record Tax Harvests," the Ninth Circuit late last week in Olive v. CIR, No. 13-70510 (9th Cir. July 10, 2015) (available here), affirmed the basic approach that federal authorities have adopted to determining the tax obligations of state-legal marijuana businesses.  The Forbes piece provides this overview of the issues and the ruling:

Should marijuana businesses pay tax on gross profits or net profits? It sounds like a silly question.  Virtually every business in every country pays tax only on net profits, after expenses.  But the topsy-turvy rules for marijuana seem to defy logic.  And taxes are clearly a big topic these days under both federal and burgeoning state law.

Many observers and legislators suggested that legalizing marijuana would mean huge tax revenues.  With legalized medical marijuana now giving way to more and more states legalizing recreational use, the cash hauls look ever more alluring.  Washington state regulators say the state collected $65 million in first-year taxes from recreational marijuana sales in just 12 months on cannabis sales of over $260 million from June 2014 to June 2015.  In Colorado, the governor’s office estimated that it would collect $100 million in taxes from the first year of recreational marijuana....

Now ... the IRS has convinced the influential Ninth Circuit Court of Appeals that marijuana dispensaries cannot deduct business expenses, must pay taxes on 100% of their gross income.  The case, Olive v. Commissioner, was an appeal from a U.S. Tax Court decision.  Martin Olive sold medical marijuana at the Vapor Room, using vaporizers so patients do not even have to smoke.

But even good records won’t make vaporizers or drug paraphernalia deductible.  The Ninth Circuit upheld the Tax Court ruling that § 280E prevents legal medical marijuana dispensaries from deducting ordinary and necessary business expenses. Under federal tax law, the Vapor Room is a trade or business that is trafficking in controlled substances prohibited by federal law....

On the question whether marijuana businesses should pay tax on their net or gross profits, the tax code says the latter. Indeed, Section 280E of the tax code denies even legal dispensaries tax deductions, because marijuana remains a federal controlled substance.  The IRS says it has no choice but to enforce the tax code.

One common answer to this dilemma is for dispensaries to deduct expenses from other businesses distinct from dispensing marijuana.  If a dispensary sells marijuana and is in the separate business of care-giving, for example, the care-giving expenses are deductible.  If only 10% of the premises is used to dispense marijuana, most of the rent is deductible.  Good record-keeping is essential, but there is only so far one can go. For example, in the case of the Vapor Room and Martin Olive, with only one business, the courts ruled that Section 280E precluded Mr. Olive’s deductions....

The IRS is clear that you can deduct only what the tax law allows you to deduct.  The trouble started in 1982, when Congress enacted § 280E. It prohibits deductions, but not for cost of goods sold.  Most businesses don’t want to capitalize costs, since claiming an immediate deduction is easier and faster.  In the case of marijuana businesses, the incentive is the reverse. So the IRS says it is policing the line between the costs that are part of selling the drugs and others.

Sure, deduct wages, rents, and repair expenses attributable to production activities. They are part of the cost of goods sold. But don’t deduct wages, rents, or repair expenses attributable to general business activities or marketing activities that are not part of cost of goods sold.

2013′s proposed Marijuana Tax Equity Act would end the federal prohibition on marijuana and allow it to be taxed – at a whopping 50%. The bill would impose a 50% excise tax on cannabis sales, plus an annual occupational tax on workers in the field of legal marijuana.  Incredibly, though, with what currently amounts to a tax on gross revenues with deductions being disallowed by Section 280E, perhaps it would be an improvement.  More recently, Rep. Jared Polis (D-Co.) and Rep. Earl Blumenauer (D-Or.) have suggested a phased 10% rate here, ramping up to 25% in five years.

July 14, 2015 in Federal court rulings, Federal Marijuana Laws, Policies and Practices, Taxation information and issues , Who decides | Permalink | Comments (0)

Sunday, June 21, 2015

Noticing significant tax revenues now flowing from marijuana legalization

How-colorado-allocates-marijuana-taxes_largeThe Motley Fool folks have been keeping an eye on the modern marijuana industry, and this recent article highlights why these folks reasonably think the industry is likely to continue to grow. The article is headlined "These 3 Charts Show Why More States Will Soon Legalize Marijuana," and here are excerpts (along with a reprinting of one of the referenced charts):

Want to know why states are legalizing recreational marijuana? Let me give you a hint: It has something to do with the color green. Not the color of the plant, but the color of money.

Because recreational marijuana has now been legal in Colorado and Washington for 18 months and 11 months, respectively, we're finally starting to see just how lucrative the recreational-marijuana business is.... In March alone, consumers in Washington purchased $21.9 million worth of recreational cannabis through legal channels. That was more than twice the amount of the $8.3 million spent on medical marijuana that month.

The rapid ascent of recreational-marijuana sales is nothing short of extraordinary. In July 2014 -- i.e., the inaugural month of recreational sales in Washington -- the handful of stores open at the time sold a mere $2.8 million worth of weed. Over the next eight months, this figure climbed by a factor of 10....

The upshot for the state is a rapidly expanding tax roll. If you add together the taxes that Washington receives from both recreational- and medical-marijuana sales, it's creeping up on $4 million a month. And for the record, it may have eclipsed that mark already, given that the latest available data covers just the month of March.

Colorado is experiencing a similar windfall, as it generates even more tax revenue from legal marijuana sales than Washington does. Last month, taxes from the industry came in at $9.6 million. And if you include the $1.1 million in revenue it received from licensing and other types of fees, you get more than $10.6 million....

In short, say what you will about the legalization of marijuana, particularly for recreational sales, but one thing seems certain: As sales and taxes from the industry continue their sharp ascent, it's going to be hard for other states to stand by idly and watch their neighbors get rich.

June 21, 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)

Sunday, May 10, 2015

Highlighting the high taxes facing those in the legal business of marijuana highs

DownloadThis New York Times article, headlined "Legal Marijuana Faces Another Federal Hurdle: Taxes," highlights the headaches that tax realities pose for state-legal marijuana regimes. Here are excerpts:

The country’s rapidly growing marijuana industry has a tax problem.  Even as more states embrace legal marijuana, shops say they are being forced to pay crippling federal income taxes because of a decades­-old law aimed at preventing drug dealers from claiming their smuggling costs and couriers as business expenses on their tax returns.

Congress passed that law in 1982 after a cocaine and methamphetamine dealer in Minneapolis who had been jailed on drug charges went to tax court to argue that the money he spent on travel, phone calls, packaging and even a small scale should be considered tax write-­offs.  The provision, still enforced by the I.R.S., bans all tax credits and deductions from “the illegal trafficking in drugs.”

Marijuana business owners say it prevents them from deducting their rent, employee salaries or utility bills, forcing them to pay taxes on a far larger amount of income than non-­marijuana businesses with the same earnings and costs.  They also say the taxes, which apply to medical and recreational sellers alike, are stunting their hiring, or even threatening to drive them out of business.

The issue reveals a growing chasm between the 23 states, plus the District of Columbia, that allow medical or recreational marijuana and the federal bureaucracy, which includes national forests in Colorado where possession is a federal crime, federally regulated banks that turn away marijuana businesses and the halls of the I.R.S.

While President Obama and top federal officials have allowed states to pursue legalization, marijuana advocates say the dissonance between increasingly permissive state laws and federal prohibitions is creating a morass of complications and uncertainty.  The tax rule, an obscure provision referred to as 280E, catches many marijuana entrepreneurs by surprise, often in the form of an audit notice from the I.R.S. Some marijuana businesses in Colorado, California and other marijuana-­friendly states have challenged the I.R.S. in tax court....

A normal business, for example, might pay a 30 percent federal rate on its taxable income, which would represent its gross income minus deductible business expenses.  A marijuana business, on the other hand, might pay the same federal rate on all of its gross income because it cannot take these deductions.  The difference can raise the rate on a marijuana business to 70 percent or more of its profits....

Colorado and a handful of other states have changed their tax laws to let legal marijuana businesses take deductions on their state returns.  And this month, Senator Ron Wyden and Representative Earl Blumenauer, both Democrats of Oregon, which legalized recreational marijuana last year, introduced legislation that would allow marijuana businesses that are following their states’ legalization laws to take regular deductions on their federal returns.  “It’s affecting thousands of businesses, and it’s doubling, tripling, quadrupling their taxes,” Mr. Blumenauer said. “It just cripples them.”  The current system, he said, encourages marijuana sellers to file tax returns that do not follow the law and simply hope the I.R.S. does not spot them....

Accountants and tax lawyers, who are inundated with calls from marijuana shops these days, say the rules are murky and make little sense.  If marijuana retailers dedicate parts of their stores to yoga, drug education or selling non-­drug merchandise, can they deduct part of their rent? If employees split their time between cleaning the store and selling marijuana, are their salaries partly deductible?

“There’s no clear direction,” said Scott Levy, an accountant in Arizona who said that marijuana sellers made up about one-­fifth of his business.  “You find all these weird little strategies that people use to try to parse the definitions.”

Oddly, accountants said, one expense that marijuana retailers can easily take off their taxes is the marijuana itself.  The wording of the tax laws and their interpretation since states began to legalize medical marijuana has allowed businesses to deduct the expenses of wholesale marijuana or growing the plant, from the price of the seeds or baby plants to the water and growing lights needed to produce it.  Only when retailers go to sell those buds, brownies or marijuana-­infused drinks do the tax restrictions kick in.

May 10, 2015 in Federal Marijuana Laws, Policies and Practices, Taxation information and issues | Permalink | Comments (0)

Friday, May 8, 2015

"Issues with Taxing Marijuana at the State Level"

The title of this post is the title of this notable new report from The Institute on Taxation & Economic Policy that a helpful reader highlighted for me. Here is how it substantively gets started: 

Since 1996, when California voters enacted the nation’s first medical marijuana law, twenty-two states and the District of Columbia have followed suit with laws allowing production and use of marijuana for medicinal purposes.

In 2014, Colorado and Washington took legalization efforts one step further by implementing systems that allow regulated production and retail sale of marijuana. Oregon, Alaska and the District of Columbia are currently creating their own legalization regimes aft er the passage of ballot initiatives legalizing marijuana in each jurisdiction last November.  Given the current political momentum, more states may consider marijuana legalization in the future.  

While much of the debate around marijuana legalization rightly focuses on health and criminal justice effects, legalization also has revenue implications for state and local governments that choose to tax newly legal purchases of marijuana.  This report examines issues surrounding the design and implementation of taxes on marijuana at the state and local level.

Forty-five states levy general sales taxes which, in theory, should apply broadly to most or all retail transactions.  Until recently, however, the illegal and unregulated nature of marijuana has resulted in it being sold entirely outside of state sales tax structures. Twenty states have laws requiring illegal marijuana sellers to purchase and place tax stamps on their marijuana, but virtually no one buys the stamps since selling marijuana is illegal even with the stamps attached.

Now that an increasing number of states are legalizing medical and retail marijuana, the de facto sales tax exemption enjoyed by marijuana is becoming somewhat less common.  Eleven states with legalized medical marijuana apply their sales taxes to the product, and the only two states with functioning, legal markets for retail marijuana (Colorado and Washington) each apply their general sales taxes to marijuana as well. Bringing marijuana out of the black market allows state and local governments to include the product in their sales tax bases in the same manner as most other goods and services.

But appropriate marijuana tax policy could go beyond simply adjusting existing sales tax bases to include the product.  Another potential reason to tax marijuana is to mitigate the negative impact of its use by both discouraging its consumption and raising revenue that can be used to off set its social costs.  In other words, the tax treatment of legalized marijuana could be similar to that of tobacco and alcohol, both of which face significant excise taxes at the federal, state and local levels.

May 8, 2015 in Taxation information and issues , Who decides | Permalink | Comments (0)

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 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)