Monday, September 9, 2019
The title of this post is the title of this new paper recently posted to SSRN and authored by Patrick Cleary, a student at The Ohio State University Moritz College of Law. This paper is the eleventh in an on-going series of student papers supported by Drug Enforcement and Policy Center. (The ten prior papers in this series are linked below.) Here is this latest paper's abstract:
Taxes implicate nearly every area of business. The recent marijuana boom has thrust one tax code provision into the spotlight. IRC § 280E prohibits tax deductions and credits for expenses paid or incurred in the trafficking of Schedule I or II controlled substances. This increases tax liability for marijuana businesses who commonly refer to the provision as an “industry killer.” This paper intentionally goes against the grain to show how IRC § 280E is not the “industry killer” it is portrayed to be and explores ways in which slow growth may be marijuana’s best path forward.
The argument in favor of IRC § 280E is made by explaining the provisions’ development and legal framework before applying it to the marijuana industry . Next, IRC § 280E must be contextualized within the marijuana industry’s rapid growth and the 2017 Tax Cuts and Jobs Act. Lastly, the Oregon example is used to exemplify how IRC § 280E is helping the industry by providing a check on cash flow and preventing prices from being driven down further through saturation.
Prior student papers in this series:
- "The Canna(business) of Higher Education"
- "Marijuana Banking in New York and Around the US: 'Swim at Your Own Risk'"
- "Intellectual Property Survey: Cannabis Plant Types, Methods of Extraction, IP Protection, and One Patent That Could Ruin It All"
- "Marijuana in the Workplace: Distinguishing Between On-Duty and Off-Duty Consumption"
- "An Argument Against Regulating Cannabis Like Alcohol"
- "The State of Marijuana in The Buckeye State and Fiscal Policy Considerations of Legalized Recreational Marijuana"
- "Race Based Statutes at Play with Cannabis: Cultivating a Process for Weeding Out the Competition"
- "Tribal Cannabis: Balancing Tribal Sovereignty and Cooperative Enforcement"
- "Land of the Free, Home of the (Disgruntled) Brave: The Case for Allowing Veterans Access to Medical Marijuana"
- "Cannabidiol (CBD) in the Therapeutics Industry"
Wednesday, August 21, 2019
The fine folks at Pew have this very fine new brief about state marijuana tax revenues titled "Forecasts Hazy for State Marijuana Revenue." I recommend this 16-page document (which is also available on-line here) for many reasons, and here is its astute conclusion:
Supporters of legalizing recreational marijuana expected a new revenue source for states, but market uncertainties continue to challenge revenue forecasters and policymakers. The difficulty in forecasting revenue is compounded by the fact that states have only recently begun to understand the recreational marijuana market: the level of consumer demand for recreational marijuana products, the types of users and how much they might pay for the drug, and competition with the black market. States have learned some lessons but continue to grapple with unknowns.
While forecasters and budget staff gain more information, state officials can avoid budget shortfalls and keep program funding stable by being prudent in how they use these new collections. States should be careful to distinguish between marijuana revenue’s short-term growth and long-term sustainability. While these new dollars can fill immediate budget needs, they may prove unreliable for ongoing spending demands. Policymakers should look to other, more familiar sin taxes for lessons on how to manage marijuana tax revenue most effectively.
August 21, 2019 in Business laws and regulatory issues, History of Marijuana Laws in the United States, Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (2)
Thursday, June 13, 2019
Colorado public agencies yesterday produced this news release titled "Colorado marijuana industry continues to grow, revenue surpasses $1 billion to date." Here are excerpts:
Colorado has surpassed $1 billion in marijuana revenue to date since adult-use marijuana sales began in 2014, according to the Colorado Department of Revenue (CDOR)’s monthly reports for marijuana sales and revenue data released today.
“Today’s report continues to show that Colorado’s cannabis industry is thriving, but we can’t rest on our laurels. We can and we must do better in the face of increased national competition. We want Colorado to be the best state for investment, innovation and development for this growing economic sector,” said Governor Polis. “This industry is helping grow our economy by creating jobs and generating valuable revenue that is going towards preventing youth consumption, protecting public health and safety and investing in public school construction.”
To date, marijuana tax, license and fee revenue has reached just over $1.02 billion and marijuana sales to date exceeded $6.56 billion. Currently, Colorado has 2,917 licensed marijuana businesses and 41,076 individuals who are licensed to work in the industry....
Marijuana revenue supports statewide efforts such as licensing and regulation of legal marijuana businesses, youth prevention efforts, behavioral health treatment, protecting public health and safety, and coordination across state agencies.
Marijuana tax revenue funds Colorado Department of Education programs such as the Building Excellent Schools Today (BEST) capital construction assistance fund, as well as the Early Literacy Competitive Grant Program, School Health Professional Grant Program and the School Bullying Prevention and Education Grant Program.
The Colorado Department of Human Services uses marijuana revenue funds to support community behavioral health programs including mental health services for juveniles and adults, crisis services, criminal justice diversion, the Circle Program, substance use disorder and detoxification services. Additionally, funds support Mental Health Institutes at Pueblo and Fort Logan and Tony Grampsas Youth Services Program, which is a collection of community based programs that target youth and their families for prevention and intervention services in the effort to reduce incidents of youth crime and violence, to prevent youth marijuana use, and prevent child abuse and neglect.
Tuesday, May 21, 2019
As detailed in this press release, yesterday "the Center for American Progress released a new issue brief calling for states and the federal government to use marijuana tax revenue to fund the creation of thousands of public sector jobs in low-income communities of color that have been historically deprived of economic opportunity due to discriminatory drug enforcement." Here is more from the release:
The issue brief proposes a tangible way to pay for the creation of jobs in communities that have experienced the heaviest consequences of disparate criminal enforcement of marijuana. The authors calculate that annual tax revenues from the regulated marijuana market in California and Washington state, for example, could create nearly 20,000 jobs. This number is sure to increase as more and more Americans — 68 percent, according to a 2018 CAP/GBAO Strategies poll — favor marijuana legalization and more states consider legalizing the recreational use of marijuana as well as creating a regulated marijuana market.
The proposal is an outgrowth of CAP’s 2018 report, “Blueprint for the 21st Century: A Plan for Better Jobs and Stronger Communities,” which called for a massive investment in public sector job creation and a jobs guarantee for highly distressed communities.
The brief further describes the need to ensure that any marijuana legalization effort leads with provisions that ensure racial equity and correct injustices that have resulted from the war on drugs. Key recommendations include providing automatic and cost-free expungements of marijuana arrest and conviction records; reinvesting in essential services for communities most harmed by the war on drugs; and promoting equitable licensing systems and funding for minority-owned businesses. These measures would greatly help people who face barriers to economic opportunity, employment, and other basic necessities due to the collateral consequences of a marijuana-related conviction.
The full eight-page issue brief is titled “Using Marijuana Revenue to Create Jobs” and is authored by Maritza Perez, Olugbenga Ajilore, and Ed Chung. Here is its conclusion:
Today, states are raking in billion-dollar profits for activity that sent millions of African American and Latinx individuals into the criminal justice system, trapping their families and communities in poverty for generations. The movement to legalize marijuana presents an opportunity both to achieve justice for and to build economic opportunity in these communities. Creating public sector jobs and other policies outlined in this issue brief acknowledge the economic impact that the war on drugs has had on low-income people of color. With these policies, elected leaders can begin to address the structural barriers that states must rupture so that individuals from some of their most vulnerable communities have equal access to economic opportunity.
May 21, 2019 in Business laws and regulatory issues, Federal Marijuana Laws, Policies and Practices, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)
Friday, May 3, 2019
The title of this post is the title of this interesting short piece that is available on SSRN and is a reprint from the Tax Management Real Estate Journal. The piece is authored by Libin Zhang, and here its abstract:
The law formerly known as the Tax Cuts and Jobs Act of 2017 created qualified opportunity zones (QOZs), which are low-income census tracts in which certain investments by qualified opportunity funds (QOFs) are provided tax benefits. The investments generally cannot include any golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises (some practitioners refer to such businesses as "sin businesses," but this article uses the non-judgmental and less anti-golf term of "excluded business.")
Some commentators have stirred the pot by questioning the extent that QOFs can be involved in marijuana businesses. While the QOZ rules have their hazy areas, the excluded businesses should not include marijuana activities.
However, section 280E may disallow deductions for taxpayers that buy and sell marijuana. QOFs should ensure that they deal with marijuana in a different capacity, such as in a real estate rental business, in order to ensure that their deductions do not go up in smoke.
Tuesday, April 9, 2019
The title of this post is the title of a presentation to be made by one of my students in my Marijuana Law, Policy & Reform seminar this coming week. Here is part of his explanation of his topic and links to some background reading:
State legalization of marijuana, and the rising prevalence of marijuana businesses, has continually thrust Internal Revenue Code (IRC) § 280E into the spotlight. Many scholars have argued for the provision’s abolishment, but the IRS’s staunch stance remains unyielding. The literature seems to suggest a tacit assumption that IRC § 280E will remain a hurdle if/until marijuana is removed from Schedule I. Although IRC § 280E is a hurdle, other mechanisms are shifting to allow marijuana businesses to be successful despite this tax provision.
For example, in many cases, the Tax Cuts and Jobs Act of 2017 did more for marijuana businesses than a repeal of IRC § 280E would have. Yes, marijuana businesses are still worse off than other businesses from a tax perspective, but marijuana’s competition is not necessarily other sectors, it is the black market. There is something to be said for the fact that the marijuana industry continues to grow, despite claims of IRC § 280E making growth “impossible.” However, the primary focus of this paper is not to explain why IRC § 280E predictions were incorrect, it is to look forward at why and how the industry can continue to succeed regardless of IRC § 280E.
April 2015 white paper by the National Cannabis Industry Association, "Internal Revenue Code 280E: Creating An Impossible Situation For Legitimate Businesses": Download 2015-280E-White-Paper
Fortune article, "The Marijuana Industry’s Battle Against the IRS"
Cannabis Business Times article, "Tax Court Reinforces IRS Code 280E in Harborside Ruling"
Memo from Rosenberg Martin Greenberg law firm, "Are Owners of Cannabusinesses Eligible for the Qualified Business Income Deduction Under Section 199A?"
Tuesday, January 1, 2019
There has been some real impact since recreational marijuana showed up:
- Dozens of new roofs for crumbling schools across the state.
- Sprinklers in buildings built decades before they existed.
- Security systems in an age of concern for student safety.
- Additional classrooms to alleviate relentless overcrowding.
- New gyms to replace dilapidated ones.
- New schools because older ones are unsafe to enter.
But there have also been dozens of other similar projects statewide that have gone unfunded because not enough dollars are allocated to handle them all.
While the public’s attention has focused on the roughly quarter-billion dollars a year in marijuana-related revenue that flows into state coffers, the burgeoning marijuana business also has brought a bonanza in tax revenue for dozens of municipal and county governments.
Nobody comprehensively tracks the local figures, but as Colorado marks the five-year anniversary of legalization a Denver Post analysis fleshed out a large part of the picture based on available data: In 2017, at least $71 million was collected from recreational marijuana via local taxes and the “share-backs” provided by the state, which now returns a tenth of the total raised by its own 15 percent special marijuana sales tax.
Marijuana Tax Cash Fund ... is the largest pool of marijuana tax revenue in the state. Colorado collected $251 million during fiscal year 2017-2018, and 49 percent of that went into the Marijuana Cash Tax Fund. Three funds that support K-12 education received a collective $98 million, $16.7 million went to local governments and $12.4 million went into the general fund.
State law technically allows the General Assembly to appropriate its tax fund money for any purpose, but state legislators created a set of “allowable purposes” such as mental health treatment, marijuana research and law enforcement training and to provide services to school-age children. Each year, lawmakers tinker with the cash fund by running bills to create new grants and by adjusting how much marijuana money, if any, goes into programs they created in previous years.
Monday, December 24, 2018
The title of this post is the headline of this notable new New York Times piece by Ginia Bellafante. Here are excerpts:
Gov. Andrew M. Cuomo announced that he would push to make pot smoking — for fun — legal in New York State. It was quite a statement for a governor who had repeatedly questioned the wisdom before, calling it an enabler of more pernicious habits. The “facts have changed,” he had said several months before, meaning really that the polling had changed — in October of 2017, support for the legalization of marijuana reached its highest point in five decades with nearly two-thirds of Americans surveyed by Gallup expressing enthusiasm for the revision.
The governor made his argument deploying the progressive rhetoric he has turned to increasingly as his neoliberal leanings have become less politically expedient. That rhetoric rightly maintains that legalization of the drug is essential to redressing injustices in a criminal justice system that has overwhelmingly penalized young men of color for carrying or smoking pot.
Two days after Mr. Cuomo made his commitments known, in fact, Brooklyn’s district attorney, Eric Gonzalez, asked a judge to obliterate more than two dozen past marijuana convictions; his office vacated open warrants for more than 1,400 people who had missed court dates for possession cases. In the absence of such erasures on a broad scale, merely legalizing the drug would do nothing to remediate the damage inflicted on thousands of people ensnared in a legal universe that so severely handicaps them for doing what white people pull off with impunity. This is why mayor Bill de Blasio followed the governor’s announcement with his own endorsements of legalization — this too a reversal — recommending that convictions for marijuana-related crimes be expunged automatically.
In previous eras, decriminalization had been championed largely by libertarians, who saw a lot of government waste in a system that needlessly locked people up, and by hippies, who just wanted to be left alone to get stoned. It is only recently that pot has been widely imagined as an almost holy vessel of redemption, a cure-all for a full range of 21st century maladies — social division, chronic pain, chronic distraction, chronic boredom. Leafly, a journal of cannabis news, describes Cinex, a particular weed strain as providing a “wired euphoria that feeds creativity” while making daily chores less of a “drag.”
Of course, lawmakers in New York are not primarily motivated by the desire to make our daily chores less of a drag. They quickly suggested that taxing marijuana could fix the transit system, in need of $60 billion worth of repairs. They invited us to envision a world in which pot really was a gateway — to more efficient infrastructure!
Leaving aside for a moment whether these ambitions are all too utopian, it is easy to see what is problematic about legislators relying on our escapist pleasures to perform some of the most necessary functions of government. In 1951, for example, the federal excise tax on cigarettes was raised to help finance the Korean War. Given that the previous year had produced five separate epidemiological studies confirming the growing suspicion that smokers were more likely to contract lung cancer than nonsmokers, 1951 might have been a good time to mandate warning labels on cigarette packaging but, as it happened, that would take another 14 years to accomplish.
The enthusiasm for revising the legal status of pot around the country has for the most part obscured any debate about consequences to public health. That pot is regarded as relatively harmless is troubling, because much of what we know about it is based on studies conducted nearly 50 years ago at a time when what was consumed was much less potent than it is now.
Within the academic community, Jonathan P. Caulkins, a professor of public policy at Carnegie Mellon, has been a leading voice warning of marijuana’s attendant dangers. As he has put it, beyond the fact that pot use has been correlated with a wide variety of negative outcomes in terms of physical and mental health, the real issue is that more than half of marijuana is consumed by people who are high more than half of all their waking hours. Pot shouldn’t be dismissed simply because it won’t kill you.
Mr. Caulkins’s research also shows us who is likely to bear these health burdens to a disproportionate degree — and it is not snowboarders in Vail. Looking at a decade’s worth of federal surveys on drug use, he and a partner determined that Americans with a household income of less than $20,000 accounted for close to 30 percent of all marijuana use, even though they make up less than 20 percent of the population.
One fantasy that advocates of legalization have is that changes in the law will energize a redistribution of wealth, not only because tax revenue from pot sales can be funneled to various worthy causes but also because the poor will reap new entrepreneurial opportunities — in every neighborhood a Stringer Bell....
I asked Mark Kleiman, of the Marron Institute at New York University and one of the most sought-after experts on drug policy in the country, what the future looked like. He foresaw a world in which pot, legal in ever more states and eventually at the national level, will get cheaper and cheaper. The expected tax windfalls would become less likely, unless pot is taxed at the level of potency rather than sale price. The trend toward vaping means there will be greater demand for oil, and if you can melt everything down for oil, pot will be less expensive to produce, because at that point you can grow it like corn.
“You can produce all the intoxicant used in a year on 40,000 acres,” Mr. Kleiman said. “That’s 20 family farms in Iowa.” Eventually a joint could cost a nickel; Nabisco will take over edibles. “You will have pot grown in Iowa, processed by Cargill and sold by Amazon,” Mr. Kleiman said. “No one will make money except Jeff Bezos, who always makes money.”
December 24, 2018 in Criminal justice developments and reforms, History of Marijuana Laws in the United States, Recreational Marijuana Commentary and Debate, Taxation information and issues , Who decides | Permalink | Comments (0)
Thursday, December 6, 2018
New York City Comptroller Scott M. Stringer first caught my attention six months ago when he produced this notable report titled "Estimated Tax Revenues from Marijuana Legalization in New York." Today, Comptroller Stringer has my attention again with this notable new 15-page report titled "Addressing the Harms of Prohibition: What NYC Can do to Support an Equitable Cannabis Industry." I recommend the document in full, and here is part of its introductory section:
Over the last several decades, the prohibition of cannabis has had devastating impacts on communities in New York City, extending beyond incarceration to often long-lasting economic insecurity: damaged credit, loss of employment, housing, student loans, and more. Today, thousands of New Yorkers, overwhelmingly Black and Latinx, continue to endure the untold financial and social costs of marijuana-related enforcement, despite steps to decriminalize.
As New York joins neighboring jurisdictions in moving closer to legalizing cannabis for adult use, the State and the City must take action to ensure that the communities who have been most harmed by policies of the past are able to access the revenue, jobs, and opportunities that a regulated adultuse marijuana program would inevitably generate.
While the creation of a legal market brings the promise of new wealth, the uneven enforcement of marijuana policies in New York specifically and the lack of diversity in the cannabis industry generally foreshadow potential inequities in who will benefit — and, indeed, who will profit — from a legal adult-use cannabis industry. In anticipation of future legalization, this report, by New York City Comptroller Scott M. Stringer, offers a new neighborhood-by-neighborhood look at cannabis enforcement and charts a roadmap for building equity into the industry....
Together, the report findings show that the neighborhoods most impacted by prohibition are among the most economically insecure and disenfranchised in the city. It is precisely these New Yorkers then — those to whom the benefits of legalization should be targeted — who are most likely to face barriers to accessing opportunities in the industry, in particular financing. In addition to reinvesting tax revenue from legalization in these disproportionally impacted communities, steps should therefore be taken to equip those impacted by prohibition to secure the funding and other resources needed to become cannabis licensees. This report recommends that the City, in partnership with the State, develop a robust cannabis equity program to direct capital and technical assistance to impacted communities interested in participating in the adult-use industry.
December 6, 2018 in Business laws and regulatory issues, Campaigns, elections and public officials concerning reforms, Criminal justice developments and reforms, History of Marijuana Laws in the United States, Race, Gender and Class Issues, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)
Wednesday, December 5, 2018
The title of this post is the title of this notable report authored by the Rudin Center for Transportation Policy and Management at NYU. Here is part of its introduction:
The centrality of the subways to the life of New York is the very reason why the public is alarmed about the condition of mass transit. The Citizens Budget Commission has systematically analyzed the failure of the Metropolitan Transportation Authority (MTA) to maintain a state of good repair and the need for fundamental reform of the MTA’s capital spending processes. A new plan, “Fast Forward,” has been proposed to improve accessibility, deploy new technologies, update signals, and acquire 21st century subway cars.
Clearly, increased fares and congestion pricing are insufficient to deal with the long-term financial needs of the subway system. This report argues that the subways need a dedicated revenue source with the potential for growth in future decades — one that does not divert funds from other public services, and that has yet to be tapped by the state and local government. The legalization of recreational cannabis offers New York State a unique opportunity to generate a new revenue stream dedicated to mass transit.
Monday, November 19, 2018
The Centennial Institute at Colorado Christian University, a think tank which has given considerable attention to marijuana issues. Its latest policy brief runs nearly 100 pages and is titled "Economic and Social Costs of Legalized Marijuana." Jeff Hunt, Director of the Centennial Institute, provides a summary of sorts at the start of the report and it begins this way:
The Centennial Institute at Colorado Christian University commissioned this study to better understand the economic and social costs of legalized marijuana. While much has been written about the tax revenue and total sales generated from commercial marijuana, there has been little research to understand how Coloradans are paying to mitigate the consequences of commercial marijuana.
No matter where you stand in the marijuana legalization debate, having more information is critical to making the best decisions for the future of Colorado and our nation. This report is an important first step in giving researchers and policymakers a sense of the breadth of costs associated with commercial marijuana. Furthermore, it is clear from the report that much more information is needed to fully understand the social costs associated with commercial marijuana.
The bad news is that the costs associated with commercial marijuana are only going to go up as the long-term health consequences have not been fully determined. Like tobacco, commercial marijuana is likely to have health consequences that we won’t be able to determine for decades. Those costs are not configured in this report.
This report is fair in presenting the economic benefits of commercial marijuana to Colorado including reporting tax revenue, jobs, and overall sales. It is contrasted with the economic and social costs of commercial marijuana, which took a very cautious approach in determining costs. Bottom line, the economic and social costs in this report are intentionally low and the comprehensive costs are likely much higher.
Here are the important findings from this report:
- For every dollar gained in tax revenue, Coloradans spent approximately $4.50 to mitigate the effects of legalization
- Costs related to the healthcare system and from high school drop-outs are the largest cost contributors
- While people who attended college and use marijuana has grown since legalization, marijuana use remains more prevalent in the population with less education
- Research shows a connection between marijuana use and the use of alcohol and other substances
- Calls to Poison Control related to marijuana increased dramatically since legalization of medical marijuana and legalization of recreational marijuana
- About 15 people are severely burned as a result of marijuana use per year
- People who use marijuana more frequently tend to be less physically active, and a sedentary or inactive lifestyle is associated with increased medical costs
- Adult marijuana users generally have lower educational attainment than non-users
- Research does suggest that long-term marijuana use may lead to reduced cognitive ability, particularly in people who begin using it before they turn 18
- Yearly cost-estimates for marijuana users: $2,200 for heavy users, $1,250 for moderate users, $650 for light users
- 69% of marijuana users say they have driven under the influence of marijuana at least once, and 27% admit to driving under the influence on a daily basis
- The estimated costs of DUIs for people who tested positive for marijuana only in 2016 approaches $25 million
- The marijuana industry used enough electricity to power 32,355 homes in 2016
- In 2016, the marijuana industry was responsible for approximately 393,053 pounds of CO2 emissions
- Marijuana packaging yielded over 18.78 million pieces of plastic
I sense many of the numbers in this report are contestable, especially given that the executive summary notes that "costs related to the healthcare system and from high school drop-outs are the largest cost contributors." Quantifying marijuana's exact impact on the healthcare system and high school drop-outs strikes me as an inherently inexact science. But it is still interesting to see this accounting effort and see who might engage with these numbers. It is also notable that a ratio of tax revenue to costs is here for marijuana "only" 1 to 4.5 given that I have seen studies showing that that ratio of tax revenue to costs for alcohol runs roughly 1 to 10.
Sunday, October 28, 2018
The folks at PoliFact have this lengthy new piece under the headline "Marijuana legalization in 5 charts: A 2018 midterm report" that is worth reading in full. This infographic under the title "Potential $7 Billion Recreational Marijuana Tax Revenue, By State," highlighting revenue from marijuana reform is alone worth the click-through, and here are excerpts from the piece providing a glimpse at what the "5 charts" cover:
About two in three Americans now favor marijuana legalization, a record-high measure of public support for a drug the federal government still puts in the same category as LSD and heroin.
With a majority of states now permitting legal use in some form, and several states poised to relax their laws this November, we decided to take a graphical look at the country’s most popular illicit drug.
Experts pointed to a number of reasons to explain the dramatic shift in Americans’ opinion of marijuana legalization over a relatively short timespan....
State marijuana laws
American laws around marijuana are complicated....
State tax revenue
Taxing marijuana can yield a large pot of money for states. The data is still somewhat scarce given that legalization is still in its infancy....
The country’s decades-long crackdown on drugs has had a disproportionate impact on minorities....
Some experts said the pros of legalization far outweighed the cons, while others said it’s too early to tell....
October 28, 2018 in Criminal justice developments and reforms, History of Marijuana Laws in the United States, Polling data and results, Recreational Marijuana Data and Research, Taxation information and issues | Permalink | Comments (0)
Wednesday, October 3, 2018
Prediction of hundreds of millions in tax revenues for Michigan if citizens vote for marijuana legalization
This local article, headlined "Estimated tax haul from marijuana sales would grow to $134 million per year," reports on a report on tax revenues being predicted if Michigan were this fall to become the 10th in the United States to legalize recreational marijuana. Here are some details:
By the time Michigan’s recreational marijuana market is fully fleshed out, $134.5 million in tax revenues will be flowing into the state’s coffers annually. But there’s a big caveat: Michigan voters will first have to pass a ballot proposal on Nov. 6 to legalize marijuana for adult recreational use.
The figures for state tax revenues — from the 6-percent sales tax and a 10-percent excise tax — come from VS Strategies, a Colorado-based cannabis consulting firm hired by the Coalition to Regulate Marijuana Like Alcohol, which is spearheading the campaign to legalize pot in Michigan. “We’re estimating $520 million in taxes from 2020-24,” said Andrew Livingston, a policy analyst with VS Strategies. “By 2023, Michigan will reach maturity with sales of just under $1.5 billion (for both medical and recreational marijuana).”
The revenues from recreational use will grow from $53.7 million in the first year to $134 million by the time the market matures, he said. When you add in the 6 percent sales tax and 3 percent excise tax on medical marijuana sales, the tax revenues jump another $40 million, according to the VS estimates.
The numbers are based on estimates of nearly 1 million Michiganders who have said that they’ve used marijuana in the past month and who could be expected to buy marijuana on a regular basis. Another 3.5 million people in Michigan have said they have used marijuana in their lifetime. The total number of marijuana users includes 300,000 people who are registered as medical marijuana users, Livingston said. Michigan’s tax rate is far lower than many of the other nine states that have legalized pot for recreational use... Michigan’s proposed rate is lower than other states in order to be more competitive and to attract more people to the state’s budding marijuana market, coalition spokesman Josh Hovey said.
The first $20 million in tax revenues for each of the first two years would go to research into the effects of marijuana use on different health ailments, including PTSD in veterans. Of the remainder, 35 percent would go toward roads, 35 percent to schools and 30 percent to the counties and communities that allowed marijuana businesses in their towns.
But the projected tax revenues, even when the market is fully established, fall well below the taxes generated in Colorado, the first state to legalize marijuana for recreational use, which collected $247.3 million in taxes in 2017.
Livingston said the Western states have higher numbers of users and he doesn’t expect Michigan to exceed those numbers. According to the annual National Survey on Drug Use and Health done for the U.S. Department of Health and Human Services in 2016, about 14.4 percent of Colorado’s population, or 727,000 people, used marijuana in the past month while 8.9 percent of Michigan’s population, or 886,000 people, used marijuana in the past month. “Mountain states have always led the rates of past-month consumption,” he said.
Michiganders shouldn’t just look at the tax revenues coming in from marijuana legalization, said Scott Greenlee, director of Healthy and Productive Michigan, a group opposing the ballot proposal. “What impact would it have in Michigan with a $57-billion budget? It’s just not that significant,” he said. “And then we have to deal with the unintended consequences of fighting increased addiction. I wonder if there would be anything left for Michigan other than a bad policy that will affect the state for decades to come.”
He said the 35 percent of tax revenues that would go toward improving Michigan’s roads would be a drop in the bucket for the state’s 120,000 miles of roads. “According to MDOT, the cost to improve roads is about $1 million per lane,” Greenlee said. “In their best case scenario, 35 miles of one lane of roads would be improved thanks to this new tax.”
Hovey said the coalition never promised that the marijuana tax revenues would be a cure-all for Michigan’s budget woes. “This will help fund the state’s most important needs. And we’ll be saving millions in wasted costs of continuing to enforce the prohibition of marijuana laws,” he said. “And I think the majority of the state’s residents would agree that our roads need more revenue.”
October 3, 2018 in Initiative reforms in states, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues , Who decides | Permalink | Comments (0)
Thursday, September 27, 2018
Notable groups set forth notable set of principles for marijuana reform as New Jersey debates legalization
The on-going debate over potential marijuana reform in New Jersey is continuing to generate lots of interesting and thoughtful discussion concerning just how states ought to approach legalizing and regulating marijuana. In that vein, I was interested to see this recent press release from Americans for Prosperity – New Jersey titled "AFP-NJ Supports Principles for Safe and Responsible Marijuana Reform" in conjunction with this document titled "Seven Principles To Guide A Successful And Well-Regulated Marijuana Market." Here are parts of the press release:
Americans for Prosperity – New Jersey (AFP-NJ) ... announced that it has co-signed a set of principles with the Reason Foundation’s Drug Policy Project regarding the state’s effort to legalize marijuana. If passed, S- 2703, the New Jersey Marijuana Legalization Act would legalize possession and personal use of marijuana for New Jerseyans over the age of 21 and would create the Division of Marijuana Enforcement and licensing structure.
Erica Jedynak, State Director of Americans for Prosperity – New Jersey issued the following statement in support of components of S- 2703:
“For too long, New Jerseyans have had their lives upended due to non-violent offenses like the recreational use of marijuana. In partnership with the Reason Foundation’s Drug Policy Project, we encourage lawmakers to follow the policy principles outlined for a successful and well-regulated marijuana market. These principles will help our state exercise its constitutional right to create a safely regulated marijuana market that spares generations of New Jerseyans from getting trapped in an endless and senseless cycle of incarceration. While S-2703 is not perfect in its current form, it makes good strides toward reshaping our criminal justice system and bringing it into the 21st century. Eventually, AFP-NJ hopes that a fully-realized effort to legalize recreational marijuana enhances public safety, provides second chances, and is free of cronyism and overregulation.”
Dr. Adrian Moore of Reason issued the following statement in support of components of S- 2703:
“As states move to legalize medical and adult use marijuana, it is vital that sensibly regulated free and competitive legal markets emerge to entirely replace black markets and all their ills. We are focused on helping to learn and adopt best practices and informed understanding of how markets work to the legislative and regulatory process of legalizing marijuana.”
The articulation of "Seven Principles To Guide A Successful And Well-Regulated Marijuana Market" makes for an interesting short read, and here are the listed "principles" without the accompanying paragraph of explanation:
1. Recognize There Is A Limit To The Tax Burden The Industry Can Bear.
2. Do Not Place Unnecessary Limits On The Number Of Licenses.
3. Award Licenses Based On Competency And Business Acumen.
4. Allow Business Owners To Operate Within A Scale And Structure They Can Manage.
5. Establish Parameters For Local Governments.
6. Regulations Based On Evidence And Allowing Alternative Approaches.
7. Do Not Penalize People For Acts That Are No Longer Crimes.
September 27, 2018 in Business laws and regulatory issues, Political perspective on reforms, Recreational Marijuana Commentary and Debate, Recreational Marijuana State Laws and Reforms, Taxation information and issues | Permalink | Comments (0)
Sunday, September 23, 2018
the title of this post is the title of this new paper now available via SSRN authored by Brett Hollenbeck and Kosuke Uetake. Here is its abstract:
In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Eight other states have subsequently followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana consumption. We use a unique dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results.
We document that overall demand is relatively inelastic, that restrictions on entry result in retailers with significant market power, and that cost shocks are more than fully passed through from retailers to consumers. We combine these empirical estimates to calculate the relationship between revenue and the tax rate, the dead-weight loss of taxation and the share of the tax burden that falls on consumers and producers, each of which are significantly effect by imperfect competition.
We find that despite having the nation's highest tax rate, Washington still has significant scope to increase revenues by raising the tax rate on retail marijuana sales. That is, they are still on the upward sloping portion of the laffer curve. The amount of revenue generated by a given tax increase is also significantly larger due to retailer market power than it would be under perfect competition. We also find significant social costs of taxation, roughly 2 dollars are lost to consumers and producers for every dollar of tax revenue generated.
Sunday, September 2, 2018
Though regular readers might be a bit tired of my eagerness to reference my recent extended article, "Leveraging Marijuana Reform to Enhance Expungement Practices," I am not at all tired of the idea that marijuana reform should always focus on criminal justice concerns and that new revenues emerging from the new marijuana industry out to be committed to criminal justice needed. So I was very pleased to have had the opportunity to develop this Issue Brief through the Scholars Strategy Network to stress key parts of my longer work under the headlined "How States Can Ensure That Today's Marijuana Reforms Also Ameliorate Harms Inflicted On Past Offenders." Here is an excerpt from this short commentary:
A new criminal justice institution could be funded by the taxes, fees, and other revenues generated by marijuana reforms and assigned the mission of developing policies and practices to minimize the economic and social burdens that persist for those previously convicted of marijuana offenses.
Ex-offenders are often saddled with collateral sanctions at the local, state, and federal levels and have to deal with the widespread availability of their criminal records. These challenges justify the establishment of a permanent restorative institution in every jurisdiction, funded by fractions of the new resources generated by the legal marijuana industry and associated taxes.
A new Commission on Justice Restoration could be a public agency mandated to address the cumulative undue harms of prior convictions. The Commission could provide a much-needed clearinghouse and site for analyzing hard-to-collect data about the collateral consequences of convictions, and provide a centralized and impartial forum for statewide policymaking to redress these collateral consequences, to conduct and disseminate research on the fiscal and social costs of these collateral consequences, and to advocate for steps that can be taken to reduce long- term harms.
Thursday, August 23, 2018
The title of this post is the title of this new paper authored by Daniel Rowe now available via SSRN. Here is its abstract:
As states legalize marijuana and cannabis-derived products, both for medical and recreational use, the punitive federal tax effect of section 280E makes it economically impossible for many marijuana-related businesses to function profitably. By disallowing the deduction of otherwise legitimate business expenditures, the Internal Revenue Code places such businesses in a situation where they are potentially paying federal income tax on their gross receipts despite netting much less in actual income. This article explores the disproportionate tax burden on marijuana sellers and the growing tension between current federal tax law and states’ legalization of marijuana.
This article recommends the amendment of section 280E to eliminate this burden. It is structured in four parts. Part II discusses the history and legislative intent behind section 280E. It delves into the differing tax treatment for illegal drug traffickers versus that of other illegal activities. Part III describes the effects of section 280E, both intended and unintended, on state-legal marijuana sellers as well as on the overall marijuana industry. It explains how the original intent of section 280E, specifically as it relates to marijuana sellers, has been undermined by the changing public attitude towards marijuana and the rise of legal medical and recreational marijuana facilities. This part also considers the onerous tax regime placed on state-legal marijuana businesses due to the inability to deduct ordinary expenses, and how this regime could be counter-productive to overall tax policy. Part IV describes several alternative solutions to eliminate the reach of section 280E to state-legal marijuana businesses. It concludes with the recommendation to amend section 280E to make it inapplicable to activities that are statutorily legal in the states in which they are conducted.
Monday, July 23, 2018
Late last week the Auditor General of Pennsylvania released this notable report on “Regulating and Taxing Marijuana” that reads a bit more like an advocacy group's document than something that would emerge from a state government office. But, as this press release about the report reveals, the Auditor General of PA seems real eager to have access to a new revenue source:
Auditor General Eugene DePasquale today said Pennsylvania is missing out on $581 million per year in revenue by not regulating and taxing marijuana — money that could fund critical initiatives that affect Pennsylvanians’ lives. “Repeated polls have shown that a majority of Americans now believe marijuana should be legalized. In Pennsylvania, it’s 56 percent,” DePasquale said during a news conference with Pittsburgh Mayor William Peduto.
“Today, I’m releasing a special report that shows the staggering amount the state could reap in tax revenue if legislators simply did what their constituents want them to do: regulate and tax marijuana for adult use.”
The 14-page special report, “Regulating and Taxing Marijuana,” compiles national research data, which show that an average of 8.38 percent of the commonwealth’s adults (21 and older) currently use marijuana at least monthly — a total of 798,556 adults. In Colorado and Washington, where marijuana has been legal since 2012, adult users spend an average of $2,080 annually. If Pennsylvania’s 798,556 adult users spent the same amount, they would create a $1.66 billion retail industry.
Assuming Pennsylvania taxed the growth, cultivation and sale of marijuana at 35 percent, the state would collect roughly $581 million in tax revenue annually. If Allegheny and Philadelphia counties were allowed to add 1-2 percent local tax, they could collect an additional $3.8 million and $6.9 million, respectively. “Imagine what that $581 million could mean for Pennsylvanians,” DePasquale said. “Not only would it help balance the state budget, but it would also mean increases to initiatives that affect Pennsylvanians’ lives, such as greater access to opioid treatment and better health care access for veterans and children.”
DePasquale became the first statewide elected official to endorse regulating and taxing marijuana in March 2017. “With our neighboring states all looking at legalizing marijuana, now is the time for Pennsylvania to do the same,” DePasquale continued. “Legislators must act now so that we can be competitive and not lose potential revenue to other states.”
July 23, 2018 in Campaigns, elections and public officials concerning reforms, Recreational Marijuana Commentary and Debate, Recreational Marijuana Data and Research, Recreational Marijuana State Laws and Reforms, Taxation information and issues , Who decides | Permalink | Comments (0)
Saturday, June 30, 2018
The title of this post is the title of this short new paper authored by Pat Oglesby now available via SSRN. Here is its abstract:
Beyond the ever-present illegal market, a more subtle threat to marijuana revenue lurks: Tax competitors (think: tax havens) threaten subnational jurisdictions that can’t or don’t control their borders.
This article presents a framework for looking at threats to marijuana revenue:
1. The illegal market can be marginalized by law enforcement or low taxes.
2. Only low taxes can defeat legal tax competitors.
3. Tax competition threatens local retail taxes more than state retail taxes.
4. Tax competition threatens local producer taxes much more than state producer taxes.
5. Federal legalization would ipso facto expose state taxes to daunting competition.
Monday, June 25, 2018
"IRS cracks down with §280E": Reviewing the latest major US Tax Court court ruling highlighting burdens for marijuana businesses
Chris Nani, a student in my Marijuana Law & Policy seminar last year, has already had articles published at the Cannabis Law Report discussing federal tax treatment of cannabis businesses (see prior posts here and here). Thus I was not surprised to hear from Chris in the wake of a significant US Tax Court ruling earlier this month, and I imposed upon him to author a review of the decision for the blog. He titled his review ""IRS cracks down with §280E," and here is the account:
Altermeds, LLC, a medical marijuana dispensary near Boulder, Colorado, recently experienced the effects of § 280E after a tax audit found they had under-reported their taxes. The ruling from the US Tax Court in Alterman v. Commisioner, TC Memo 2018-83, is already being widely discussed in the marijuana industry.
In 2010 and 2011, Altermeds filed its taxes and applied normal tax deductions to its business. The IRS audited Altermeds and found a deficiency of $157,821 in 2010 and $233,421 in 2011 holding Altermeds was not eligible for business expense deductions. Additionally, the Internal Revenue Code (IRC) provides for a tax penalty of 20% the portion of the underpayment for under-reporting taxes.
280E states: "No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
Essentially, § 280E provides no cannabis business (because cannabis is a Schedule I drug) will receive deductions or credits for any of their business related activates. Normally, businesses can deduct their ordinary business expenses under § 162 of the IRC. However, § 280E limits § 162 and theoretically was meant to deter drug dealers from writing off their business expenses. (The opposite may have occurred by giving drug dealers even less incentive to report their income.)
The origins of § 280E are slightly comical. In 1982, Jeffrey Edmondson, a drug dealer, was able to write off his business expenses under § 162. Edmondson wrote off traveling, his scale he used to measure drugs, and his rent. When Congress found out Edmondson was writing off his drug dealing expenses, they enacted § 280E.
The majority of businesses know when entering into the state legalized cannabis market they will still pay federal taxes without being able to deduce business expenses. Non-cannabis related expenses such as the sale of t-shirts are eligible for § 162 tax deductions even while selling cannabis, cannabis-infused edibles, or pipes are not deductible because of their relation with cannabis. The tax court is more likely to permit deductions the clearer the line is between a cannabis and non-cannabis business.
When Altermeds was audited, they claimed they had multiple businesses. One of their businesses sold their non-cannabis merchandise, but the tax court did not find the business to be distinct enough from their cannabis dispensary. To prove a business is distinct, Altermeds would have to show there is a separate bank account and business. The tax court held that the non-cannabis products sold by Altermeds (pipes and other cannabis paraphernalia) were sold to complement selling cannabis and were not eligible for any deductions. Lastly, the court was willing to deduct the amount for the non-cannabis business as well, but Altermeds’ brief failed to follow the court rules and the court was precluded from even contemplating the deductions.
The tax court did allow for the cost-of-goods-sold allowances that the IRS had stipulated prior in the litigation, but Altermeds was still forced to pay its overdue taxes along with the 20% penalty. With this most recent tax decision taking a hard line approach to deductions associated with cannabis businesses, participants in the industry need to be careful about, and cognizant of the tax consequences that can result from, intermingling cannabis and non-cannabis products.
UPDATE: I just noticed that Bryan Camp over at TaxProf Blog has this long posting on the Altermeds decision under the heading "Lesson From The Tax Court: Into The Weeds on COGS." Here is his concluding "Lesson" concerning the case: "Get your accounting straight and be sure to hire tax counsel who have the specialized knowledge needed for the job of representing you before both the IRS and Tax Court."