Tax marijuana: raw by weight, processed by potency?

There are two kinds of commercial marijuana:  raw, and processed.  Processed is more powerful.  We can tax the raw stuff like beer, and the processed stuff like liquor.

That is, the base of a marijuana tax would be weight for raw — smokable product; and potency for brownies, tinctures, and everything else – potency by THC content, maybe with a CBD factor – and maybe further refinements as we learn more.

A pure percentage tax like ALL MARIJUANA TAXES SO FAR makes me nervous.  The reason is that NO OTHER “SIN” TAX works off pure percentage of price so far as I know.  Probably I’m missing some jurisdiction somewhere.

There are some hybrids, like European cigarette taxes, which use weight and price (and then, by the way, add Value Added Tax): http://ec.europa.eu/taxation_customs/resources/documents/taxation/excise_duties/tobacco_products/rates/excise_duties-part_iii_tobacco_en.pdf.  And there’s the tax on liquor in the Philippines:  “Come Jan. 1, 2015, the specific tax will be P20 per proof liter plus 20 percent of net retail price.”  http://newsinfo.inquirer.net/327633/2-laws-2-gifts-for-filipinos.  A weight and price hybrid is the most bulletproof approach, but for the marijuana community to suggest it would be like a boxer leading with his chin.

So why is it that every taxing jurisdiction uses weight or potency?  Even if I didn’t have a clue, I’d be nervous, on the theory that if I don’t know why, there’s a reason I don’t know about.

But I have a clue.

Maybe no jurisdiction uses price only because price is trickable or arguable or dicsussable, but weight isn’t.  Intercompany pricing is the reason our international tax system is a joke:  if there is vertical integration, we don’t know, really, how much the retailing part of the company “paid” to the growing part for the product.  The Blumenauer bill, http://beta.congress.gov/113/bills/hr501/113hr501ih.pdf, goes on and on about figuring what price actually is.  Good luck with that.

But the problem goes deeper.  WHENEVER a company offers multiple products that are taxed at different rates, there’s opportunity for mischief.  At a bar, if drinks are taxed, and a cover charge isn’t, lo and behold, drinks would get cheap, and the cover charge would go up.  (With a volume- (weight-) or proof-based tax, of the kind that every jurisdiction uses, the drinks are already taxed, so no problem.  There’s no gimmicking today.)  The entrepreneurial spirit will come up with a way to get around a percentage tax –that’s my worry from a tax authority’s perspective.

And companies – retailers at least — will have an incentive to offer multiple products and services, thanks to 280E, that allows deductions for federal income tax purposes for non-marijuana expenses.

Another thought I’m about to develop: wax or BHO is fungible enough to tax by potency.  https://newrevenue.org/2013/03/22/tax-marijuana-by-potency-in-one-case-maybe/  (Right?)

Conclusion:   If we (meaning the public at large) want to tax potency as the measure of intoxication, price is a better proxy than weight.  (Is that right?  Do prices REALLY depend on measured THC content?  If not, then weight is just as good as price.)

But weight is a lot simpler.  No gimmicks.  And there’s the argument that high potency smokable product is better, since it introduces fewer potentially bad byproducts into the lungs, and since users measure their intoxication — titrate.

Maybe a way to consider is a two track system:

1.  Smokeable: “Useable marijuana” means dried marijuana flowers.

The term “useable marijuana” does not include marijuana-infused

products. (WA statute):  Use weight.

2.  Other “Marijuana-infused products” means products that contain

marijuana or marijuana extracts and are intended for human use. The

term “marijuana-infused products” does not include useable marijuana. (WA statute):  Tax on the basis of the potency of the extract put into the product.  That avoids the problem of an inappropriately high tax on residue which is heavy but impotent, so the residue that gets put into sodas and cookies is taxed ONLY on measured THC content (since the marijuana is liquefied before incorporation).  That approach avoids conflating the value of the cookie with the value of the intoxicant.

Not sure I have all the facts about how growing and the industry operate. . . .

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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