taxes Archives - Green Market Report

Jack SmithJack SmithAugust 8, 2018
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4min12790

Despite the overwhelming majority of Californians being happy with the legal cannabis market, there is still a significant percentage of residents who buy marijuana illegally, due in large part to high taxes on the substance.

A new report from Eaze Insights shows that 84 percent of Californians are “satisfied” with the legal marijuana market, but approximately 20 percent have purchased illegal or illicit marijuana in the past three months. Concerning to regulators and the state’s finances is that 84 percent of that segment of the population is “highly likely to repeat that behavior in the future due to the illicit market having cheaper products and no tax.”

Part of the concern is that although consumers would like to purchase marijuana legally if, given the option, the taxes are a major concern for many consumers. According to the California Department of Tax and Fee Administration, marijuana has a 15 percent excise tax, though recent reports have suggested the state is looking at cutting taxes as a way of driving legal means of consumption.

Approximately 85 percent of Californians have purchased cannabis from “unlicensed sources,” but most of them cited factors such as lower prices and a lack of taxes for the reasons those purchases were made.

Other consumers say they have purchased from illegal marijuana vendors because it’s “hard and time-consuming” to find legal businesses. Approximately 1 in 7 respondents said it was “not easy to identify licensed cannabis businesses.”

Although the picture has been painted with some negative brushes, there are changes that can be made that will positively affect California’s burgeoning weed economy.

If taxes were decreased by 5 percent, that could drive much of the illegal market into the legal market, Eaze notes. The town of Berkley took that initiative early on when it lowered its city tax on cannabis from 10% to 5%.

“A 5% decrease in the overall tax rate in CA could bring twice as many CA consumers to only purchase cannabis from licensed businesses (from 16% to 32%),” Eaze wrote in an email obtained by Green Market Report. “Conversely, a 5% increase in the overall tax rate in CA would drive twice as many CA consumers to only purchase from unlicensed businesses (12% to 23%).”

Use cases in the state include wellness (treating or coping with illnesses such as cancer) and consumers are increasingly becoming more sophisticated in the types of cannabis they consume.

“They care the most about consistent product quality,  fair pricing, packaging, safe access and a great customer experience, the same way they care about those things for more traditional consumer products,” the email obtained by GMR said.


Peggi CloughPeggi CloughAugust 3, 2018
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4min16702

New data released by Flowhub finds the price of an eighth of cannabis in U.S. cities can vary by as much as 15 percent after taxes have been applied. Now that cannabis is being regulated by cities and states with complicated tax codes, consumers can pay 20 to 40 percent tax on their purchases.

The cities included in the data were Boston, Denver, Las Vegas, Los Angeles, Portland, San Diego, San Francisco and Seattle—the top eight major urban cannabis markets. In order to determine which city had the highest priced eighth of an ounce of flower, Flowhub started by assuming the price of each eight was $35 and then added on the taxes associated with that location. Prices do not reflect the actual cost of an eighth in those cities.

Most expensive was Seattle, with a cost of $51.49. Seattle was first place in price on the list because it also has the highest tax rate at 37 percent.

Second place Los Angeles came in at $48.48. The 35 percent taxes include excise, sales, and business-REC taxes. Taxes in California are calculated against the subtotal and applied taxes. For example, in San Francisco, the state sales tax is 8.5 percent of the subtotal plus the excise tax.

Interestingly, prices in the three California cities differ by quite a bit. Eighths in San Diego and San Francisco cost $45.54 and $43.67, respectively. That’s almost $5.00 less than the price in Los Angeles. San Diego taxes at 27.75 percent and San Francisco, 23.5 percent—a big difference from LA’s 35 percent.

Denver places the largest number of taxes on cannabis of any of the cities on the list. The 26.15 percent taxes include a state cannabis retail tax, state and municipal sales taxes, a Denver retail marijuana tax, an RTD tax, and a cultural tax. Still, with all these taxes, Denver was 5th in price, at $43.14.

Eighths in Boston and Portland are taxed at 20 percent and both have a cost of $42.00. Boston places excise, state sales and local municipal business taxes on cannabis, while Portland has two taxes: OLCC state and Portland city.

Las Vegas came in the lowest priced at $41.39. Taxes there run 18.25 percent and consist of a state recreational cannabis tax and sales tax.

Smaller dispensaries and entrepreneurs are fearful that high taxes will force them out of the market, so Flowhub has some advice for them. It includes understanding local laws, keeping detailed records, setting an order of operations for tax calculations and being upfront with consumers. They also suggest fighting for fairness by lobbying lawmakers for responsible regulations in the cannabis market.


William SumnerWilliam SumnerFebruary 26, 2018
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7min6700

Part Three of a Four-part series.

California’s cannabis market is on the verge of a crisis, according to a new report released by the California Growers Association (CGA), which represents more than 1,100 small and independent cannabis businesses.

According to the report, less than one percent of California’s cannabis cultivators are licensed by the state; leading many to ask: Why? What is it that is keeping cannabis cultivators out of California’s legal cannabis market? In part three of this four-part series, Green Market Report will examine the cultural and financial barriers that are keeping cultivators out of the market, as outlined by the recent CGA report.

If you’ve missed the previous parts, you can click here to view Part One and Part Two and get caught up.

Financial

The cannabis industry’s lack of adequate banking services has been well reported on. But what has slipped through the cracks are the other financial barriers that keep small to midsize cannabis cultivators out of the legal market; such as the lack of small business loans.

The single greatest barrier keeping cultivators out of the legal market, according to a survey of CGA members, is taxation. Due to the federal status of cannabis, most cannabis businesses cannot take standard deductions for business expenses like other industries have.

In many cases, this has the effect of creating an unreasonable tax burden on small to midsize cultivators; with some paying an effective federal tax rate as high as 60%. Additionally, state and local taxes have also proved to be burdensome for small-scale operators.

Many local governments have passed “gross receipt taxes” which are assessed at each step in the supply chain. More often than naught, theses taxes compound each other; turning a modest 5% into a cumulative 25% by the time it reaches the supply chain.

The CGA estimates that the effective tax rate for cannabis cultivators in California can range between 40%-60%, compared to states like Oregon where the effective tax rate is 18%. While larger operators can bear the brunt of this tax rate, many small businesses cannot.

Additionally, inefficiencies in tax collection can incur more unnecessary costs. Once a harvest leaves the cannabis producer, the cultivation tax is required to follow the harvest throughout the supply chain. In situations where a cultivator is directly supplying a retailer, this is not a problem.

However, this is often not the reality. Typically a harvest will pass through multiple points in the supply chain before reaching retailers. If the cannabis industry was not a cash-only business, this would not be a problem, but it’s not. Because of federal, cannabis businesses must physically move the cultivation tax through each point in the supply chain; creating a logistical and security nightmare.

Furthermore, cannabis cultivators must pay taxes on their harvest as soon as it moves through the supply chain; without any consideration of whether it will actually reach the market. The end result is cannabis cultivators having to pay their taxes before the even receive that money that’s actually being taxed.

Another financial burden is the lack of access to small business loans. While large-scale operations with deep-pocketed investors can get by without access to business, small-scale cultivators cannot.

Culture

Another barrier contributing to the small number of licensed cannabis cultivators is the culture in California. Approximately 20% of CGA members have been growing for more than two decades and well before medical cannabis was legal in California. These former outlaws have a deep seeded mistrust of the state and federal government and are reluctant to embrace state regulations. Conversely, many in state and local governments operate under incorrect assumptions and stereotypes about cannabis and consequently legislate accordingly.

The CGA also estimates that approximately 30% of the state’s cannabis cultivators operated “off the grid,” where electricity and broadband access is limited. The end result is that many cannabis cultivators that want to come into compliance simply can’t because they lack these basic resources.

While not necessarily an institutional barrier, some cannabis cultivators are simply not good at business. With a gossamer of state and local regulations, many small to midsize cannabis cultivators become overwhelmed by all of it and simply need more time to absorb the new rules.

The final and some would say most regrettable barrier to bringing cultivators into the market is that they simply don’t want to.

Some cultivators may be operating on public lands while others just have a general disrespect for the law. The side effect of this disregard for the law is that those that interested in becoming compliant are treated the same as those that don’t, and the CGA encourages the state to do all it can in provide a path to legality for cultivators acting in good faith.

Stay Tuned for Part 4

The greater question remains of how to address all of the other institutional, financial, and cultural barriers preventing cultivators from entering the market. Where do we go from here? What should be done? In the fourth and final part of our series, Green Market Report will examine the solutions put forward by the CGA to fix this emerging crisis.


Jack SmithJack SmithFebruary 23, 2018
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5min8270

If you can’t beat ’em, join ’em. And if you can’t tax ’em, smoke ’em.

Just weeks after marijuana became legal for retail sale in the state of California, there has already been a tax cut, with the city of Berkeley cutting its tax to 5% from 10% of gross receipts. Credit rating firm Fitch said it’s due in part to high levels of both state and local taxes on cannabis, but also because illegal sales of cannabis are impacting legal sales, forcing legal dispensaries to compete on price.

The move comes after advocates in the Bay Area said taxes on marijuana were too high.

Steve DeAngelo, the co-founder, and CEO of Harborside in Oakland said in January that the tax rate for cannabis was nearly 35%, including state and local taxes, up from 15% prior. Included in that rate is the regular 6% sales tax, 3.25% sales tax for Alameda County, a 15% state tax on marijuana and a 10 percent Oakland tax on recreational marijuana.

“That is a huge hit. And it’s going to mean that a significant number of people, less affluent consumers, are going to turn to the lower prices of the underground market,” DeAngelo said in an interview with CBS SFBayArea.

DeAngelo added that people might turn to the black market because of the high taxes, but that his dispensary had a variety of different products, in addition to being tested.

“All of our medicine is tested in a laboratory,” DeAngelo said. “It’s evaluated both for safety, for things like pesticides and pathogenic molds, and it’s also evaluated for potency.”

Aside from the aforementioned tax rates in Oakland, tax rates throughout the state vary greatly and can add as much as 10% or 20% of the cost, just because of local taxes. There is also a $9.25 per ounce state tax on cultivation, as well as a 15% state excise tax and state and local sales taxes as high as 10.25%.

The added tax revenue was a factor in the state passing a law to allow recreational cannabis sales. A November 2017 Fortune article cited data that the state could generate as much as $1 billion in added tax revenue, but some people in the cannabis industry said the high tax rates could allow for illicit or black market sales to gain an unfair advantage.

Fitch estimates that tax collections have “far exceeded initial estimates” in both Colorado and Washington, which began collecting taxes on legal sales in 2014. The rating firm added that while it is still too early to know if California will generate the same levels of revenue that Colorado and Washington have, high taxes are going to be an issue.

“[C]omparatively high taxes on legal cannabis will likely continue to divert sales to illegal markets, reducing potential tax collections despite actions such as Berkeley’s,” the firm said in an email obtained by Green Market Report.

The way the legal and regulatory framework was set up in California, it allows local jurisdictions to ban sales of non-medical cannabis entirely. Despite that, illegal sales have continued, flooding the market and negatively impacting the sales potential for legal goods.

The city of Berkeley and mayor Jesse Arreguín hope that the tax cut will improve its competitive position; the tax cut may also be a sign of things to come in a state where 67 cities and counties have taxes on legal cannabis sales.


Andy WilliamsAndy WilliamsDecember 1, 2017
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9min47527

When a U.S. Congressman recently told me that getting rid of Section 280E of the Internal Revenue Code “would amount to a tax cut for pot growers,” I was caught off guard by his twisted interpretation of this tax policy.

It was a huge reminder of how much more work organizations like the New Federalism Fund, of which I am a proud member, have left to do in our efforts to secure fair tax policy for the legal cannabis industry. Widespread misconceptions persist even at the highest levels of our government, with many continuing to regard our industry as an easy way to strike it rich in the new American “green rush.” But the truth is, there are still major hurdles that make it particularly hard for businesses to actually profit in the new marijuana sector.

Section 280E, which prevents state-legal marijuana companies from deducting otherwise ordinary business expenses from their total income, is one of the biggest obstacles cannabis entrepreneurs run up against. To many, this may seem like a mere inconvenience or minor setback. But I can assure you, it is not.

While most companies in the U.S. pay a standard corporate tax rate of 35 percent, cannabis businesses, thanks to 280E, often face effective tax burdens of 70 percent or more.

But there is hope on the horizon. Just this week, Sen. Cory Gardner’s press secretary said the senator “plans to file an amendment” to the sweeping Senate tax overhaul bill that would reform 280E so it no longer applies to marijuana businesses operating in accordance with state and local laws, according to a Forbes report.

Gardner, a Colorado Republican, also cosponsored a standalone bill to reform this tax measure earlier this month.

“Our current tax code puts thousands of legal marijuana businesses throughout Colorado at a disadvantage by treating them differently than other businesses across the state,” Gardner said in a press release. “Coloradans made their voices heard in 2012 when they legalized marijuana and it’s time for the federal government to allow Colorado businesses to compete.”

What is 280E and why does it matter?

The heart of Section 280E centers around how federal tax law deals with businesses that are associated with “trafficking” substances that are listed in Schedule I or Schedule II of the Controlled Substance Act. Since cannabis remains listed as a Schedule I substance at the federal level, the Internal Revenue Service applies Section 280E to most state-legal marijuana companies, preventing them from deducting normal business expenses from their total income.

The measure was originally passed in response to a 1982 U.S. Tax Court case in which a cocaine dealer successfully defended tax deductions relating to his illegal drug business. Congress enacted 280E to prevent other drug dealers from following suit and trying to deduct business expenses relating to their illegal activities.

Although it stems from the case of someone who was operating clearly outside the bounds of all state and federal laws, the IRS has subsequently determined Section 280E also applies to licensed, regulated marijuana businesses acting in full compliance with state cannabis laws and federal guidelines.

Most businesses in the United States are only required to pay taxes on their taxable income, which is calculated by subtracting business expenses from total income. But cannabis businesses can only deduct the cost of goods sold on their taxes – that is, the direct costs of the materials used in creating goods along with the direct labor costs used to produce those goods.

We cannot deduct operating expenses like payroll, rent, electricity, and advertising, or the high costs of obtaining a state marijuana license. Together, these non-deductible costs account for a substantial portion of the total costs associated with running a business.

As a result, state-legal marijuana companies are taxed at roughly double the rate of businesses in other sectors. Our tax burden is downright prohibitive, and it has nothing to do with the original intent of 280E to penalize illegal drug dealers.

280E undermines fundamental American values

On a very basic level, federal taxes represent a contract of sorts between private entities and the U.S. government. We pay taxes so that our government can collect the money it needs to fund vital services and programs that help citizens fulfill the classic American ideals of “life, liberty and the pursuit of happiness.”

For corporate entities, tax contributions help ensure a system of law and order exists in which they can confidently conduct legitimate business operations. But the federal tax contributions of state-legal cannabis companies often serve the opposite purpose, hobbling an industry seeking to legitimize itself, rather than giving it basic survival tools afforded to every other legal industry.

The federal government collects disproportionately large amounts of tax money from an industry it still won’t recognize in full, then turns around and uses that money to enforce policies that further stifle the industry’s growth. This double-whammy is a gross manipulation of the basic principles on which the American tax system was built.

Despite numerous federal memos and other directives explicitly giving state-legal cannabis businesses the ability to operate, the IRS still treats us like we’re convicted criminals undeserving of fair and equitable tax laws.

It should be noted that Section 280E also penalizes states that have made the thoughtful decision to have cannabis sold by regulated businesses instead of criminals. By over-taxing these state-licensed businesses, the provision literally takes tens of millions of dollars out of state and local economies and gives it to the federal government.

Where do we go from here?

Cannabis companies have created tens of thousands of new jobs in this country, and it’s time for federal tax policies to start acknowledging the very real contributions this industry is making toward the overall health of the American labor economy. The legal marijuana industry generated nearly $7 billion in sales in 2016, and market reports project that number to reach $50 billion by 2026.

While getting rid of 280E won’t erase every legal obstacle cannabis businesses face, it would at least set their tax burdens on equal footing with other legal industries. And that notion of equal footing is key. Cannabis businesses aren’t asking for tax breaks or special treatment, they’re just asking for the same financial opportunities given to every other legitimate business in this country. What could be more American than creating an equitable tax environment for all?


Paula CollinsPaula CollinsSeptember 5, 2017
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7min7150

Soon after your opening launch celebrations, you face the grim realities of your first tax return as a Cannabis business owner. (Cue Death Star music.)

Section 280E of the tax code states that “No deduction or credit shall be allowed” for businesses that are prohibited by Federal law. Section 280E explicitly mentions businesses that deal in “trafficking” substances that fall under Schedule I and Schedule II of the Controlled Substances Act.

This is potentially devastating for cannabis businesses, and raises the effective tax rate of a retail or production business to 70%, up from what should be in the neighborhood of 30%. That’s based on a business with $1,000,000 gross receipts, cost of goods sold (COGS) of $650,000, with as much as $200,000 in allowable deductions for a non-cannabis business and $0 allowable deduction for the cannabis business. In that scenario, the non-cannabis business will pay tax on $150,000 of income after deductions, while the cannabis business will pay tax on $350,000 of income after deductions, despite the fact that their COGS were the same, dollar-for-dollar.

Four Easy Ways to Save 40% on Your Tax Bill Every Quarter

  1. Establish a second business for every operation that is not directly related to your cannabis inventory. Name it and claim it. Have one business that is just the cannabis business. If you are a retail cannabis business, the only activity in that business will be the buying and selling of your product. If you are a production business (grower or producer), keep at least one other item in your line that is not cannabis related so that you can handle the tax consequences of §280E. Keep inventory lists separate, according to the differentiated revenue streams. In a retail operation, branded items, other health or wellness products, accessories, and accoutrements — these can be inventoried and their associated costs can be deductible. For example, if you have a dispensary, but you also sell glassware or cleaning products, keep those in a separate business. Voila! You now have deductions that you can claim! Most of your rent, utilities, and marketing of anything not expressly cannabis – entirely legal deductions.
  2. Document each and every item separately. Many cannabis businesses make the mistake of thinking, “What’s the use of keeping books if I can’t claim deductions?” Big mistake! If you receive goods from a supplier, make sure you have them ship the cannabis products separate from any other goods you may acquire from them. Doing so will create a fool-proof way to trace expenses that are solely related to cannabis, and help your other deductions survive the scrutiny of an audit.
  3. Micro-manage the tasks that your staff performs while on the clock. If you are a producer, your employee spends a great deal of time with tasks such as checking timers on lights, running water lines, locking and unlocking cabinets, running spreadsheets, cleaning work tables. If, out of one hour, that employee spends 45 minutes with hands off of the cannabis products and you can document it, you have just found a way to claim 45 minutes of that employee’s time on your taxes. Document these tasks, minute-by-minute. Score! You’ve just made the majority of your employees’ wages deductible. Now take it one step further and cut checks from two separate businesses each pay period for your employees. They will still be making the same hourly wage, but it will come from two separate business entities.
  4. Pay yourself a bigger salary in your non-cannabis business than in your cannabis business. You ARE paying yourself, through your business, right? Being in business is a big time commitment; avoid burnout and personal detriment by paying yourself a sustainable salary. As CEO, Manager, Founder, or whatever your title might be, cut yourself a bigger check from the non-cannabis business than you do from the cannabis business. Go ahead. Be aggressive with this. If you have structured the two businesses so that the cannabis-inventory-based business is only 10-20% of the total enterprise activity, you can get away with paying yourself 80-90% of your salary from the non-cannabis business, and the remaining 10-20% of your salary from the cannabis business.


About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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