Colorado’s Marijuana Tax: 62 Cents per Gram of Flowers

Here’s how Colorado’s 15-percent wholesale level marijuana tax is actually a tax of 62 cents a gram for flowers and 10 cents a gram for trim.

Colorado’s Constitution allows a 15-percent wholesale level marijuana tax. [1] And Colorado voters agreed to impose that tax last November 5,[2] by taxing wholesale marijuana sales at 15 percent[3] – when no wholesaler exists.

That is, Colorado now requires, in most cases, vertical integration of marijuana businesses. At least temporarily, at least 70 percent of Colorado adult-use[4] marijuana sales must go directly from producer to consumer with no wholesaling allowed. Colorado’s 2012 initiative did not require, forbid, or address vertical integration[5] at all. But in 2013, the Colorado Legislature required, at least at first, a large measure of vertical integration of marijuana businesses: “[A] retail marijuana store may purchase not more than thirty percent of its total on-hand inventory of retail marijuana from another licensed retail marijuana establishment not owned by the retail marijuana store. A retail marijuana store or another retail marijuana cultivation facility may sell no more than thirty percent of its total on-hand inventory to another Colorado licensed retail marijuana establishment.”[6]

So, in the vast majority of cases, there is no market based, arm’s-length wholesale price as a measure for the 15 percent wholesale tax allowed by the Colorado Constitution.

This combination of vertical integration and percentage based wholesale tax makes for uncertainty if not chaos in tax administration – as would even permissive vertical integration, combined with a wholesale level percentage tax.

A price-based, wholesale level tax was locked into place by the Colorado Constitution as a result of voter approval of Colorado’s 2012 marijuana legalization initiative. The Constitution says the tax is to apply only upon sale or transfer “by a marijuana cultivation facility to a marijuana product manufacturing facility or to a retail marijuana store.” [7]

So how do you apply a percentage-based wholesale level tax when no wholesaler exists? With great difficulty. Colorado regulatory authorities are struggling for answers.[8]

When vertical integration forbids the existence of a wholesaler, Colorado has substituted a weight based tax.

Here’s official text:

The excise tax is calculated by multiplying the quantity of retail marijuana product by the average market rate at the time, then multiplying by the 15% (excise tax rate). For example: ABC cultivator transfers 3 pounds of flower, 5 pounds of trim and 8 plants to ABC store. At the time of transfer the average market rates are:

$1,876 for Flower

$296 for Trim

$9 per Immature plant

3 lbs. of flower x $1,876 = $5,628

5 lbs. of trim     x $296  = $1,480

8 plants             x $9      =    $72

   $7,180 x .015 = $1,077 in retail marijuana excise tax due[9]

That works out to a de facto weight tax of 62 cents per gram ($281 per pound) of potent flowers and 10 cents per gram ($44 per pound) of less intoxicating and less valuable trim. Regulators will restate those rates every six months to reflect ongoing market prices. Whether that work-around satisfies the Constitutional 15-percent limit is not clear. Maybe on average it will. But maybe not in every case.

 

[1]http://ballotpedia.org/wiki/index.php/Colorado_Marijuana_Legalization_Initiative,_Amendment_64_(2012).

[2] Election Results, http://ballotpedia.org/wiki/index.php/Colorado_Proposition_AA,_Taxes_on_the_Sale_of_Marijuana_(2013)#Election_results. They also agreed as part of that vote to allow retail level taxes of 10 percent, which the Legislature may increase to 15 percent without further voter approval.

[3] Colorado Proposition AA, http://ballotpedia.org/wiki/index.php/Colorado_Proposition_AA,_Taxes_on_the_Sale_of_Marijuana_(2013)

[4] Colorado also allows sales of medical marijuana, upon recommendation of a physician. Colorado Medical Marijuana Code, Colorado Revised Statues sec. 12-43.3-101 et seq.,

http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheadername1=Content-Disposition&blobheadername2=Content-Type&blobheadervalue1=inline%3B+filename%3D%22Colorado+Revised+Statutes+18-18-406.3.pdf%22&blobheadervalue2=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251816967542&ssbinary=true

[5] Vertical integration is not unusual in commerce. An example occurs when a wine company owns land, vines, and a winery, and sells to consumers only at its own outlet store. The Colorado marijuana model in effect substitutes “marijuana grow area” for land and vines, “marijuana production facility” for winery, and “marijuana retailer” for outlet store.

[6] Colorado Revised Statutes section 12-43.4-40(c)(2),http://tornado.state.co.us/gov_dir/leg_dir/olls/sl2013a/sl_329.htm. This rule is subject to exceptions, and sunsets at the beginning of 2015. At that point, vertical integration will be neither required nor forbidden.

[7] Colo. Const. Art. XVIII, Section 16(5)(d):“The general assembly shall enact an excise tax to be levied upon marijuana sold or otherwise transferred by a marijuana cultivation facility to a marijuana product manufacturing facility or to a retail marijuana store at a rate not to exceed fifteen percent prior to January 1, 2017 and at a rate to be determined by the general assembly thereafter.” The general assembly followed through. http://tornado.state.co.us/gov_dir/leg_dir/olls/sl2013a/sl_330.htm. And voters approved the ballot question. Note 2, supra.

[8] Colorado Department of Revenue, Division of Taxation, Rulemaking workshop for Taxation of Retail Marijuana, Article 28.8 of Title 39, scheduled for October 23, 2013, http://www.colorado.gov/cs/Satellite?blobcol=urldata&blobheader=application%2Fpdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1251900119430&ssbinary=true. This is not the only problem with Colorado’s new tax. Floor stocks of medical producers were transferred tax-free to the adult use sector, bypassing the 15 percent excise tax totally. Cite. Maybe that is good policy – keeping the tax burden down at first, as demand – and prices – soared. Low taxes keep the bootlegger at bay.

[9] Colorado Department of Revenue, Information for Cultivators,http://www.colorado.gov/cs/Satellite/Revenue/REVX/1251649610680 (last visited March 24, 2014).

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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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