Colorado marijuana taxes — Don’t extrapolate

The amount of marijuana tax that Colorado collects for the first month of legalization, to be reported in early March, is unlikely to be a good proxy for a twelfth of a full year’s tax.

For one thing, Colorado’s 15 percent “wholesale” tax will start very slowly in the first few months and then gain steam.  This slow start is due to a “one-time transfer” exception to the wholesale tax:  Product originally owned by a medical marijuana business and then transferred to a recreational business during the startup of legalization will completely avoid the 15-percent wholesale excise tax forever.  (This was a drafting glitch, maybe . . .)  This legal avoidance of the first tier of tax will play out in a couple of months, when transferred inventory is exhausted.  In technical terms, this lack of tax results from failure to tax “floor stocks ” — a failure the federal government made in the 1800s while raising the liquor tax rate.

Will the 10 percent retail tax and 15 percent wholesale tax be separately stated?  (I assume so.)  If so, it will be interesting to compare the ratio of those taxes collected to the state’s official estimate, which reflects a retail tax to wholesale tax ratio of 1.43 to 1.  (That estimate is at http://www.leg.state.co.us/clics/clics2013a/csl.nsf/fsbillcont3/31D153749B49700187257B2F00580E15?Open&file=HB1318_f1.pdf, clickable here.)  (Wholesale sales for the first six months are officially estimated at $91,766,823, bearing tax at 15 percent of $13,765,023; retail sales for the first six months are estimated at $197,298,760, bearing tax at 10 percent of $19,729,876, for a total tax of $33,494,899 (full year figures are twice those six-month figures).)  I imagine the first month’s ratio will be higher than 1.43 to 1, on account of the one-time transfer.  But the ratio is highly sensitive to markups.  (The wholesale tax, rather than 15 percent called for in the Constitution, turns out to be weight-based, on the basis of “average market” prices, and results in a tax rate of 62 cents per gram of flowers and 10 cents per gram of “trim.”)

The new official estimate does in fact show the ratio of retail tax collections to wholesale tax collections growing over time, as it should.  http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251943287907&ssbinary=true

But there are other reasons – beyond the one-time transfer — we can’t extrapolate the first month’s figures into six-month or full year figures.  Those reasons include:

  • Lack of supply at first as suppliers gear up (pushing early prices up but restraining early unit sales)
  • A spike in demand at first on account of novelty (pushing early prices and sales up)
  • Future entrants into the market ((driving later prices down and unit sales up)
  • Economies of scale kicking in (driving later price per unit down but unit sales up)
  • Amortization of startup costs (legal and licensing fees, cost of raising capital, etc. – driving later prices down).

We might think that retail tax would be collected later as product moves through the supply chain – but in the case of vertical integration, the norm in Colorado, those taxes should usually be paid at the same time.

Those are preliminary thoughts about Colorado from a perch in North Carolina.  We’ll see how this plays out.

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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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