Ads and 280E

I’m giving a marijuana tax design talk to a Law School class at a major university on April 9.  One point I plan to make is that Tax Code section 280E, which makes marijuana advertising and marketing expenses nondeductible, is a good idea.  Ads enjoy protection under the commercial free speech doctrine, so states can’t ban them, but states, like the federal government, can make them nondeductible.  The professor saw some slides I put together, and didn’t think these were a useful part of an academic discussion.

 

CNR Vermont memo on 280E conformity

To:                   S.54 Conference Committee

From:             Pat Oglesby, Center for New Revenue

Re:                   Effectively Restricting Cannabis Advertisements via Tax Policy

Date:                March 11, 2020

Current Law

Current Vermont tax law follows Federal Internal Revenue Code §280E, allowing sellers of cannabis (whether or not licensed by the state) to deduct only their “cost of goods sold” – that is, the cost of producing or buying the cannabis they sell.

Under 280E, growers can deduct almost everything.  Nearly all their costs, such as salaries, rent, and electricity are treated as “cost of goods sold,” because they are inputs to producing cannabis.

Retailers, however, can typically only deduct only what they pay for the product itself.  They cannot deduct salaries, for instance, because that is an expense of selling cannabis, not of producing or buying it.  Similarly, 280E prohibits the deduction of advertisement costs.

As it looks at legalization, Vermont can consider carefully, ahead of the federal government, what to do about marijuana advertising.

 

Possible Options:

The House’s version of S.54 seeks to repeal 280E “conformity” for Vermont, and allow all selling expenses to be deducted for state income tax purposes.  This treats cannabis like every other business, which certainly seems an equitable approach – but it also would make advertising expenses tax deductible.  This would effectively create a state subsidy of cannabis advertising.

By adopting an amendment sponsored by Rep. Donahue, the House chose to completely ban cannabis advertising.  Such a blanket ban may be an unconstitutional infringement on “commercial free speech” – the case law is unsettled on the question. It may be that such a ban is permissible under Vermont’s Constitution, and that Federal courts would not take up such a case while Federal prohibition remains in place – but query how long Federal prohibition will last.  If Vermont’s blanket ban on advertisements is ultimately struck down, there will be no restriction on cannabis advertisements.

Alternative 1: Say what’s NOT deductible.

Denying deductions for advertising is a place to start.  Listing other non-deductible selling expenses like excessive salaries stifles potential constitutional challenges.

Alternative 2:  Say what IS deductible.

A more nuanced approach would be to only re-allow certain 280E-disallowed expenses, keeping all others (including advertising expenses) non-deductible.  The Legislature could be guided by broadly acceptable social goals – allowing, for example, deductions for W-2 employee pay and benefits, maybe up to a cap (say, $100,000 per person per year).  A limited list of deductions could favor labor over capital, and small businesses over large ones (“mom and pop” shops use word of mouth and the personal touch to attract customers, not capital).

Possible additional allowable deductions include 1099 “gig” workers, and service providers like lawyers.  Charitable contributions sound nice, but are often disguised promotions. Real estate interests would push hard for rent to be deductible, but parents like to keep retail spaces non-glitzy and unappealing.

Conclusion:

A blanket ban on advertisement is likely to encounter Federal and State Constitutional challenges.  If such a ban is enacted, and then overturned, the State would not have any effective retractions on cannabis advertisements on the books, and the Legislature would have to scramble to enact them, over the objections of an industry that is likely to have more lobbying clout in the future than it has now.

By reverting to the restrictions on advertisements in the pre-Donahue House version of S.54 (i.e., audience restrictions, requiring pre-approval of all marketing materials, along with payment of a material review fee, etc.), and ensuring that cannabis advertisements are not inadvertently subsidized by allowing their costs to be deducted for state income tax purposes, S.54 would better protect Vermonters from the dangers of widespread advertisements intended to increase potentially problematic use.

 

 

My proudest accomplishment — threatened by the corona virus

The 2017 Tax Act stopped carrybacks of losses generally, primarily as a revenue raising ploy.  Now in a mad dash to Do Something about the corona virus, Congress is going to allow carrybacks so corporations can get cash.

That brings to mind filling out a form last year, in connection with my 50thcollege reunion, that describes my proudest accomplishment.  That was dreaming up Sec. 172(b)(1)(D), the so-called corporate equity reduction transaction rule, preventing the “carryback of excess interest losses attributable to corporate equity reduction transactions.”

Here’s the story.  At the height of the Leveraged Buy Out (LBO) craze in the late 1980s, Senator Bentsen asked staff (me) to Do Something about LBOs, which were making headlines and out of favor.  But I had to be sure not to Spook the Markets.  I was reading Forbes or Fortune in my office one day when a transaction caught my eye.  An LBO artist bought a profitable company in a merger transaction that incurred huge debt.  The debt created huge interest expenses.  Those deductible interest expenses were sot big that the new operation had losses.  Those losses were carried back to the profitable years of the profitable company, creating a TAX REFUND.  That looked like the Code was subsidizing LBOs.  That didn’t sound right, so we drafted up something that Senator Bentsen introduced; Mr. Rostenkowski put it in the House bill and it sailed into the law without any opposition rearing its head. The rule was estimated as picking up $2.2 billion in revenue over five years.

A side note:  To make sure we didn’t Spook the Markets, Senator Bentsen had me hold a Staff Briefing to float the notion.  Famous journalist Jeff Birnbaum, with the WSJ then, left the briefing in the middle once he understood the plan.  The Markets were Not Spooked, and the provision stayed in the Code until it got subsumed into a broader rule in the 2017 Tax Act.  I hope it comes back.

 

 

 

 

Experience in Colorado; Naivete in California

Localities in Colorado, which has been allowing local marijuana taxation for years, are figuring it out.  In California, which legalized six years later, they are still stumbling:

Here is a nuanced and thoughtful proposal from Aurora, about to increase retail sales taxes.

COFFMAN: A hike in marijuana tax can save critical Aurora services – Sentinel Colorado; https://sentinelcolorado.com/opinion/coffman-a-hike-in-marijuana-tax-can-save-critical-aurora-services/

“Under Lawson’s proposal, there would be a 25% tax increase on the local sales tax rate on recreational marijuana raising the tax rate from 4% to 5%.  This increase would still allow our 24 recreational marijuana stores to keep a competitive tax rate.  For example, even with the increase, Denver would still be half a percent higher than Aurora at 5.5%.

“The proceeds from the marijuana tax increase is estimated to be around $1 million in the first year replacing the $1 million lost revenue from the photo red light program to fully restore the funding shortfall for these critical Nexus programs.

“As Aurora’s new Mayor, I strongly support Council Member Lawson’s proposal and I will encourage our City Council to pass it.”

Mike Coffman is mayor of Aurora.

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In California, meanwhile, a blunt approach in Costa Mesa doesn’t distinguish among retail, growing, and testing taxes: https://www.latimes.com/socal/daily-pilot/news/story/2020-02-29/costa-mesa-city-council-will-consider-lowering-tax-for-marijuana-companies

Look, there is some room for local retail taxation in any locality.  Consumers aren’t totally mobile in the long run.  Prohibitionists say there are negative externalities with consumption, and they can’t be persuaded.

Processing and distribution are different.  They create jobs, with no negative externalities (right?), and they will drift to low- or zero-tax jurisdictions.

And here’s the thing:  A tax on testing (also mobile in the long run) is a sure sign that lawmakers don’t have the long-term best interests of the community in mind.  Testing is the kind of enterprise most localities want – clean, high-paying jobs.  Those are positive externalities.  Taxing testing is both primitive and unprincipled.

Tax growing?  That’s pretty mobile, too.  Is there a negative externality?  Smell?  Some people like the smell.

 

More at How tax competition can threaten marijuana revenue; https://thehill.com/opinion/finance/372396-how-tax-competition-can-threaten-marijuana-revenue

 

Continue reading Experience in Colorado; Naivete in California

$100 prize for guessing Colorado weed flower tax AMR for Q1 2021

What will Colrado’s Average Market Rate for flower be as of January 1, 2021?  It’s $1,316 today.  Best guess wins $100.  Enter at CO2021@newrevenue.org.

In case of tie, earliest sent message wins.  (Hint:  All AMRs have been whole dollar figures so far – no pennies.) Entries close when Colorado releases the price, at which time winner will be announced and check for $100 issued.  One guess per entrant, for now.  Employees of the State of Colorado are ineligible.

Here’s some background: Continue reading $100 prize for guessing Colorado weed flower tax AMR for Q1 2021

California Marijuana Weight Taxes as of January 2020 — and Alaska, Maine, Colorado and Nevada

For the record, here are weight tax rates for cannabis in U.S. states as far as I know.  I’m preserving the documents here, since the rates will change.

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California adjusts its marijuana tax rates for inflation. Here is a copy of the rates as of early 2020.

Flower, $9.65 per ounce; leaves, $2.87 per ounce; and fresh cannabis plant, $1.35 per ounce.[1] New categories can be created by regulation as needed.

[1] https://www.cdtfa.ca.gov/industry/cannabis.htm#Overview; copied at https://newrevenue.org/2020/02/19/california-marijuana-tax-rates-as-of-january-2020/.

https://www.cdtfa.ca.gov/industry/cannabis.htm#Overview

2020 January Tax Guide for Cannabis Businesses

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Here are Alaska’s rates, from http://tax.alaska.gov/programs/programs/help/faq/faq.aspx?60000, Average Market Rate for Unprocessed Retail Marijuana | Department of Revenue – Taxation:

“Effective January 1, 2019, sales and transfers of marijuana are subject to new tax rates. Mature bud/flower are taxed at $50 per ounces and trim is taxed at $15 per ounce. A new rate has been added at $25 per ounces for bud/flower that is considered immature or abnormal. This is bud/flower that did not fully mature or develop, contains seeds, or failed testing. Clones are taxed at a flat rate of $1 per clone and not on the estimated weight.”

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Here are Maine’s rates, from https://legislature.maine.gov/statutes/36/title36sec4923.html:

(Title 36, §4923: Excise tax imposed has a copy.)

1.  Excise tax on marijuana flower and mature marijuana plants.   A cultivation facility licensee shall pay an excise tax of $335 per pound or fraction thereof of marijuana flower or mature marijuana plants sold to other licensees in the State.

[PL 2019, c. 231, Pt. B, §7 (NEW).]

2.  Excise tax on marijuana trim.   A cultivation facility licensee shall pay an excise tax of $94 per pound or fraction thereof of marijuana trim sold to other licensees in the State.

[PL 2019, c. 231, Pt. B, §7 (NEW).]

3.  Excise tax on immature marijuana plants and seedlings.   A cultivation facility licensee shall pay an excise tax of $1.50 per immature marijuana plant or seedling sold to other licensees in the State.

[PL 2019, c. 231, Pt. B, §7 (NEW).]

4.  Excise tax on marijuana seeds.   A cultivation facility licensee shall pay an excise tax of 30¢ per marijuana seed sold to other licensees in the State.

 

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Here are Nevada’s, with fair market value to be multiplied by 15 percent:

As of 1-1-2019:

https://tax.nv.gov/uploadedFiles/taxnvgov/Content/Forms/Marijuana-Fair-Market-Value-Jan-1-2019.pdf

Marijuana-Fair-Market-Value-Jan-1-2019

Here are newer rates:  https://tax.nv.gov/uploadedFiles/taxnvgov/Content/Home/Features/Fair%20Market%20Value%20at%20Wholesale%20Summary%20Jan%2020%20(Final%20Draft).pdf

Fair Market Value at Wholesale Summary Jan 20 (Final Draft).

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Here are Colorado’s — 15 percent of the numbers below:

https://www.colorado.gov/pacific/tax/marijuana-AMR

Average Market Rate for Unprocessed Retail Marijuana | Department of Revenue – Taxation

Period Rate: January 1 to March 31, 2020

 Retail Bud Rate  $1,316 per pound
 Retail Trim Rate  $350 per pound
 Retail Immature Plant Rate  $9 per plant
 Wet Whole Plant Rate  $191 per pound
 Seed Rate  $5 per seed
 Trim Allocated for Extraction Rate  $247 per pound
 Bud Allocated for Extraction Rate  $299 per pound