tax Archives - Green Market Report

Sean HockingSean HockingMarch 12, 2019
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12min1330

If you wish to re-publish this story please do so with following accreditation
AUTHOR: “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s”
PUBLISHER:  CANNABIS LAW REPORT

 

Back to the BRC – while 2015 seems like ancient history, however, that was when then Lt. Gov. Gavin Newsome’s Blue Ribbon Commission published “Pathways Report – Policy Options For Regulating Marijuana in California” which contained a detailed analysis of the policy choices that were to be considered in what gave California Proposition 64 and subsequently SB 94 which led to the system of regulation for the legal cannabis industry that exists in California today.

While we could devote a book length article to a present day critique of that report we are going to limit our thoughts to a review of the Tax Policy component of the report which appears on pages 48 through 56. The section, “Taxing Marijuana” begins by noting

 

“The ability to tax cannabis is one of the main political reasons given to support recreational legalization. A successful tax system will need to raise money to pay for increased education, public health and enforcement costs associated with marijuana cultivation and use.”

 

California will have to wrestle with when and, how to tax marijuana. Each decision has trade-offs that must be considered by policymakers. Yet it still remains that a logical and effective taxation system can help establish effective broader public policy. Regulators and decision makers should consider how to set up a tax scheme that will help them achieve the core goals of legalization policy that have been stated earlier in this report.

 

In drafting any taxation scheme, it is important to devise a plan that can be administered and enforced effectively. Tax policy can be the driving force for public policy only if it is effectively enforced, and effective enforcement will result only from systems that can be properly administered. Tax and regulatory compliance should be simple to execute and formulated in a way that makes compliance desirable to market participants.”[1]

 

If we were to just STOP AND REFLECT after only having gone that far, the admonishment couldn’t have been more profound. The greatest challenges that highly regulated system which was initiated by the California Legislature and embellished by the regulatory and tax agencies they created are principally burdened by excessive complexity and difficult in both participant compliance and agency administration. We have commented at length in recent articles with our suggestions to correct both aspects.

 

The BRC considered the triumvirate of Price vs. Weight vs THC and ultimately adopted Price for the Cannabis Excise Tax [“CET”] and Weight for the Cannabis Cultivation Tax [“CCT”]. We are going to expressly reserve comment on the THC choice which is CLEARLY the appropriate choice for applying tax to the product of manufacturing [eg. extraction for the production of vaping cartridges and edibles].

 

Taxing by percentage of sale price seems easy and quick. But calculating marijuana taxes as a percentage of price creates the danger that taxes will be, at first, too high, and then later too low. Initial business start-up costs and possible shortages in supply can drive up the retail cannabis cost in the beginning, artificially creating more tax revenue. But then as businesses and the market mature and production costs go down, tax revenue will decrease.

 

Taxes that are too high make prices for the legal market unattractive to consumers relative to the prices for the untaxed illicit market. This results in two negative effects:

 

  • lower actual tax collections,
  • and a continued illicit market.

 

The BRC Report continues with a comment about initial experience in Colorado

 

“That’s why Colorado’s original 15% price-based producer tax was converted to a weight base—so the state has something it can measure.   In many cases, there is no actual producer price to tax. Colorado originally required producers to sell directly to consumers (forced vertical integration). When the producer is not a separate entity from the retailer, there is no “arm’s-length,” or actual, producer price.   The absence of an arm’s-length market price caused the state to estimate an “average market rate” which it uses to compute a weight-based tax. This average market rate, adjusted every six months, applies even to sales between unrelated parties.”[2]

 

We see the consequences of this approach, particularly the imputation of an arbitrary rate of mark-up in the CET. The alternative “weight-based” approach was utilized in the CCT.

 

The BRC notes

“A weight-based excise tax has the advantage of creating a kind of price floor under the market and guaranteeing at least some government revenue even in the event of a marijuana price collapse. Assessing tax on the basis of the weight sold raises potential arguments about when the weight should be assessed (e.g., at the farm gate, at the processor, at the retail outlet) and how to account for the fact that, as a harvested plant, marijuana will change in weight as it loses moisture.

A further challenge of a weight-based tax is that it could incentivize producers to make extremely high-potency products so as to reduce the amount of tax per unit of THC sold.”[3]

 

Targeting a tax directly at intoxication might seem a theoretical best practice. Some have suggested taxing THC, the primary intoxicant, directly—or adjusting the tax down for the presence of CBD, which may have a mitigating effect on THC. Indeed, measuring THC in homogeneous concentrates, before incorporation into edibles and other products, might yield reliable and replicable results. But measuring THC in raw plant material, like dried flower, is more problematic.

 

These products are not homogeneous. Broad-brush test results, accurate enough to warn or inform consumers, may not be accurate enough for taxation.

 

Our financial modelling of California’s cannabis taxes raises a couple of additional factors that have had a significant impact on behavior by participants in the cannabis supply chain. The levels of mark-up and profits sought by Cultivators vs. Distributors vs. Dispensaries have significant impact on the market. The instances of integration such as Cultivators owning distribution and manufacturing entities through Cannabis Cooperative Associations [“CCA’s] could become significant “disruptors” to the vertically integrated, larger players such as Flow Kana which have recently emerged.

 

There are several points in the supply chain where cannabis taxes can be assessed cultivation and at the retail level. The may be additional points for assessment of tax if manufacturing or distribution components are involved in the process. We have observed that each of the state with legal cannabis has adopted a combination of the methods in different configurations. Each of the methods has advantages and disadvantges that need to be evaluated in the context of both revenue and policy objectives. .

 

Also, because marijuana prices and marijuana consumption will change over time, certain types of taxes may offer more stable tax revenue and consistent after-tax prices than others.

 

Finally, the BRC notes

 

If we put aside the risks of leakage and tax evasion, late collection has certain apparent advantages – despite the “collect early” guideline. With any chosen ad valorem tax percentage on price, imposing it as late as possible gives the state more revenue, since the price of any product ordinarily rises as it passes through the supply chain. For instance, a 20% retail tax will collect more revenue than a 20% production tax, since the retail price is normally higher than the production prices. If, instead of a particular percentage, the state seeks a specific dollar amount of revenue, taxing later in the supply chain usually results in lower consumer prices, since retailers tend to add a percentage of profit margin based on their costs, including the cost of taxes.”[4]

 

We have no illusions [or delusions] that our thoughts will become the basis for the California regulatory and tax agencies to make change in tax rates or policy. However, what we do know is that unlike many that merely speculate about forces that impacted the highly regulated cannabis market, we have derived substantial insight by “pushing the numbers” and observing relationships between both the cost components, and the behavior of the market participants.

 

We hope our readers are developing a sense of those relationships as well.

 

[1]Pathways Report – Policy Options For Regulating Marijuana in California” at Page 48

[2] Page 49

[3] Page 50

[4] Page 53

 

20150721-brc_pathways_report


William SumnerWilliam SumnerMay 16, 2018
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5min5350

As the debate to legalize cannabis in the state of New York rages on, one report offers to shed some light on the financial incentives that come with legalization. On May 15, 2018, New York City Comptroller Scott Stringer published a report estimating the potential size of the state’s legal cannabis market and how much tax revenue it would generate for both the city and the state.

According to the report, the New York state cannabis market could see up to $3.1 billion in annual sales, with up to $1.1 billion being generated in New York City alone. In terms of tax revenue, legal cannabis could generate up to $436 million for New York state and $336 for New York City.

In order to estimate both market size and potential tax revenue, Stringer used several different data points. First Stringer used data from a 2012 survey conducted by the New York City Comptroller’s Office, which estimated the size of New York City’s cannabis market to be approximately $1.65 billion.

Stringer then used aggregate data on marijuana sales in both Washington and Colorado to help improve estimates. Although both New York City and state have larger populations that Washington and Colorado, Stringer estimates that a smaller segment of the New York population uses cannabis.

It is estimated that only 8-10% of New Yorkers use cannabis on a monthly basis; compared to the 17% of Colorado adults and 11% of Washington adults. With the estimated rates, Stringer was able to determine that approximately 1.5 million New York residents use cannabis, of which an estimated 550,000 live in New York City. These estimates do not include the nearly 1 million individuals that work in New York City but commute from out of state, nor does it account for out of state and international tourists.

To estimate tax revenue, Stringer devised a tax structure based off of what other states with legal adult cannabis sales have. Under this theoretical tax structure, state-wide cannabis sales would carry a 10% excise tax on top of the normal 4% state sales tax. Like many other states, cities and municipalities would be free to levy local cannabis taxes up to a certain percent; in this case 25% would be the ceiling.

Assuming both New York City and state were to implement this tax structure, legal adult cannabis sales would generate $336 million and $436 million in tax revenue, respectively. In a statement, Stringer said that aside from the tax revenue generated by cannabis, legalization would also go a long way towards reducing public safety costs and reducing “a source of harm that has afflicted communities of color for so long.”

“This is not just about dollars – it’s about justice. Not only is marijuana an untapped revenue source for the City and the State, but the prosecution of marijuana-related crimes has had a devastating and disproportionate impact on Black and Hispanic communities for far too long,” said New York City Comptroller Scott M. Stringer. “There is simply no reason for New York to be stuck in the dark ages. This new analysis shows just how much New York City and State stand to benefit by moving toward legalization.”

Stringer went on to note that a legalization bill has already been submitted to the state legislature by Sen. Liz Krueger and Assemblywoman Crystal D. Peoples-Stokes, which is called the Marijuana Regulation and Taxation Act.

Separately, New York City’s Mayor Bill DeBasio called for the New York Police Department to overhaul its marijuana enforcement policies within the next 30 days. The New York Times recently published a story about racial disparity and marijuana arrests. It turns out that 86 percent of those arrested for low-level marijuana possession were either black or Hispanic.


Debra BorchardtDebra BorchardtDecember 13, 2017
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4min8440

The state of Colorado is now releasing sales data on marijuana transactions. Previously, the state only posted tax revenues, leaving researchers and journalists with guesswork as to how that translated into sales. So far, total sales through October have increased 42% year-over-year and tax revenues through November have increased 16%.

On Wednesday, the state released medical and retail sales data going back to January 2014, even though sales began prior to this date. Going forward, monthly reports will be published on the seventh business day of each month. The data is self-reported by the businesses and aren’t audited or use the Metrc tracking system.

“We know this information is highly desired by the general public, media, and researchers,” said Mike Hartman, executive director of the Colorado Department of Revenue (CDOR). “To that end, in our efforts to be as transparent as possible, we will now provide aggregate sales data. That, coupled with state tax revenue data already provided, will give an accurate picture of the financial footprint of this burgeoning industry.”

Marijuana Sales Reports

Calendar Year Total Marijuana Sales Total to Date
2014 $683,523,739 $683,523,739
2015 $995,591,255 $1,679,114,994
2016 $1,307,203,473 $2,986,318,467
2017 (Jan – Oct) $1,259,861,988 $4,246,180,455

Updated December 2017

Calendar year is defined as January 1 – December 31

 

The Department of Revenue also stated that the Office of Research and Analysis would produce monthly reports that would show the total sales for retail and medical marijuana by county. Plus, the ORA will calculate a cumulative total of actual sales figures from year-to-date and total sales per year. The sales reports will be posted on the same day as the tax reports.

Colorado changed its marijuana sales tax on July 1, 2017. Retail sales taxes rose from 10% to 15%. Retail products were exempt from sales tax on personal property. So far in 2017, the state has collected $226 million in total marijuana tax, license and fee revenues.

Marijuana Taxes, License, and Fee Revenue

Calendar Year Total Revenue
2014 $67,594,323
2015 $130,411,173
2016 $193,604,810
2017 (Jan-Nov) $226,157,028

Updated December 2017

Calendar year is defined as January 1 – December 31

 



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