Colorado’s Marijuana Regulations — Comments Submitted: Tiny Packages

Dear Members of the Amendment 64 Implementation Task Force:

My best wishes to all of you as you undertake a task no one has tried before.

“Tiny packages”:  that summarizes this submission.  As you work on marijuana rules, you may want to consider a maximum package size less than the one ounce adults may possess legally.  (Maybe this suggestion suits the circumstances, maybe not.  The situation is so new.)

Requiring all sales of marijuana – from the producer level throughout the supply chain — to be carried out in packages holding no more than, say, a quarter or even an eighth of an ounce could provide several advantages.

I.  Prevent Tax Evasion

Small packages would work against tax evaders.  Bootleggers holding bulk product would have some explaining to do.  To defeat bootlegging of liquor, shortly after the repeal of Prohibition, the federal government banned transportation of liquor in containers holding more than one gallon.[1]  In 1980, that limit shrank to 1.75 liters, less than half a gallon.[2]

Bootlegging of marijuana threatens to be a serious problem, more serious than for liquor.  For four reasons, marijuana is harder to tax than liquor.[3]  First, marijuana is lighter and more compact by value.

Second, it’s harder to transport a liquid rather than a solid.

Third, processing raw materials for alcohol takes longer than for marijuana.  Illegal distillation of spirits (which requires observable heat), fermentation of wine, and brewing of beer require hiding the time-consuming transformation of other liquids into alcohol.  Marijuana processing is simpler.

Fourth, consumers understand that store-bought liquor is not poisonous but that moonshine liquor can kill them on the spot; bootlegged marijuana may contain more mold and pesticides than the regulated kind, but it shouldn’t bring on instant death.  That makes bootlegged marijuana more marketable than bootlegged liquor.

A rule allowing marijuana to be sold and transported only in packages of a quarter ounce of less would be parallel to the federal liquor bottle rule:  anyone may possess large quantities of liquor, but not in bottles holding more than 1.75 liters.  A tiny packages rule won’t solve the bootlegging problem, but it might help.

A rule requiring tiny packages could be supplemented by whatever advanced stamp technology is the most advanced today.  Already, sophisticated markers, like high-technology stamps,[4] can identify tax-paid cigarettes.  “Currently, 47 states require proof—via marking the cigarette packages with stamps—that state cigarette taxes have been paid.”[5]  In Canada, monitoring of tear tape, “the pressure-sensitive plastic ribbon that is wrapped around a package of cigarettes to facilitate the opening of the cellophane wrapping that encloses the package,” also aims to prevent evasion.[6]  The U.S. Treasury has proposed a “track and trace” system, using bar codes or the like, for cigarettes.[7]  Knowing of technology used to enforce the California cigarette tax, staff of the state’s Board of Equalization investigated stamps for identification of tax-paid marijuana in case Proposition 19 passed.[8]  Making tiny packages tamper proof would go right along with high-tech identification.

Any tiny packages rule would not apply to home growers, but it could help stop any grey market sales by home growers to other consumers.

II. Maintaining Price

Small packages would add to costs, which might be a positive feature in light of this potential problem: “[H]ow do you prevent neighboring states, if not the entire country, from getting buried under mountains of cheap Colorado weed?  If the state looks like becoming the nation’s grow house, the feds will probably land hard.”[9]  If this concern of low price is real for you, small packages could help address it.

(A more obvious way to increase costs is to increase taxes, but that way seems difficult.  Amendment 64 Constitutionally caps percentage-based taxes at 15 percent, and even that level of taxation needs to be enacted.  Nothing seems to prevent the legislature from adding a different tax, like a weight-based one, by simple majority for voter approval under Colorado’s Taxpayer Bill of Rights, Colo. Const., Article X, section 20.  Voter approval could come any November.  Id. subsection 3(a).  But a new, added tax would be controversial.)

Requiring small packages could add to costs, but that requirement alone would not solve the problem of low costs – if that is a problem.  Small packages are just one piece in that puzzle.

III.  Boosting the Local Economy

Packaging is a relatively local activity – at least the last step, insertion of the product into the package, would have to take place in Colorado – since only locally grown marijuana will be legal.  That activity would add value, money, and work to the local economy.  Artistic packaging might add value to the product.

Marijuana businesses have a tax incentive to add value for the customer as part of packaging costs (rather than as non-deductible costs).  I’ve just started thinking about cost of goods sold, but one way to shift costs might be to put information or messages that might ordinarily be used in advertising on the packaging.  The information can be about anything, but it can’t be branded and it can’t go on the web.  (Put it on the web, too, and there is cost splitting that could lead to an audit and even a lawsuit.)

To plan with this rule, from now on, maybe a taxpayer could collect information for customers, to put it not on the web but on the package.  Would the research costs of gathering that information go into packaging, and thus cost of goods sold?  Testing of the product can go into cost of goods sold, I would think, so packaging could go so far as to describe the contents of each package offered for sale.  (That creates jobs.).

IV.  Addressing the Federal Tax Problem

A list of problems facing the medical marijuana industry starts with this:  “#1. The federal tax situation is the biggest threat to MMJ businesses and could push the entire industry underground.” https://mmjbusinessdaily.com/2012/11/15/marijuana-business-conference-wrapup-36-tips-lessons-take-aways-for-the-cannabis-industry/

That federal tax situation is Internal Revenue Code section 280E, which now denies all deductions (other than cost of goods sold) for the state-legal marijuana trade, medical or recreational.  Packaging is part of cost of goods sold, so the expense of packaging will be deductible for Federal income tax purposes.

Many other forms of regulation will result in expenses that are not deductible.

+++++

My best wishes to you all.  I would be happy to try to address any questions you may have.  But I am afraid I will have no certain answers.

Pat Oglesby