Tuesday, July 14, 2015
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.
Sunday, June 21, 2015
The 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
This 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.
Friday, May 8, 2015
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.
Wednesday, April 15, 2015
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
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:
Friday, April 10, 2015
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.”
Wednesday, February 11, 2015
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
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"
As 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
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.
Wednesday, December 24, 2014
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.
Thursday, November 20, 2014
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
Patrick 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.
Tuesday, August 5, 2014
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?
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
As 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.
Thursday, July 17, 2014
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.
Sunday, June 1, 2014
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.
Tuesday, April 15, 2014
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.