Colorado taxes by weight

My friends and Jon Caulkins and Beau Kilmer (and co-authors with me of the RAND Report, Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions, http://www.rand.org/pubs/research_reports/RR864.html) fail to mention that Colorado taxes marijuana by weight. This is not an error, just an omission.

They have this statement: “Oregon joins Colorado and Washington in assessing taxes as a percentage of value.” (Paywall.)

That’s true, but Colorado taxes by weight, too, as well as by percentage of value. That point is often overlooked, and it’s explained more legibly on pages 79 and 80 of the RAND Report, Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions, http://www.rand.org/pubs/research_reports/RR864.html, pasted crudely here:

Colorado side-stepped its constitutional authorization of a 15-percent “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” (Constitution of the State of Colorado, Art. XVIII, section 16) and ended up taxing something it could measure, so it taxed bud at $0.62 per gram, trim at $0.10 per gram, and seedlings at $1.35 each.

The problem arises when the cultivation facility does not sell marijuana to anyone and transfers it only to itself.8 That is standard in Colorado, where, most of the time, marijuana is not “sold or transferred” before retail. That is because Colorado once required all marijuana businesses to be vertically integrated. Vertical integration means that only one company handles marijuana from farm to market—all the way from seedling to retail sale, with no sellers in between. Vertically integrated companies still dominate the market in Colorado—with no sale from a producer to a manufacturer or retailer. So there is no market-based or arm’s-length price to tax at 15 percent. There is no sale of any kind, not even a related-party sale, just an intracompany transfer.

So Colorado had to alter tactics and tax not a price, but “fifteen percent of the average market rate” (AMR) of a producer’s marijuana (Colorado Revised Statutes section 39-28.8- 302, 2014). That rate is supposed to reflect the value of marijuana as it leaves the producer’s hands (“Average Market Rate,” undated). The Colorado Department of Revenue (CDOR) is in charge of finding that AMR. For 2014, it found the AMR of bud, the potent flower of the plant, to be $1,876 per pound, so it imposed on bud a tax of $281.40 per pound, or approximately $0.62 per gram (CDOR, date unknown). Finding immature plants to have an AMR of $9, it imposed a tax of $1.35 on each. Finding the AMR of trim (i.e., everything else) to be $296 per pound, it imposed a tax of $44.40 per pound, or approximately $0.10 per gram, on trim.

These rates apply, surprisingly, to sales even to unrelated parties, for which there is an actual arm’s-length price. So Colorado essentially could not make its price-based tax on producers work and has de facto completely converted that price base to a weight base.

++

Those tax rates have change a bit since the RAND report went final.  Here are new rates: https://newrevenue.org/2015/12/31/no-drop-yet/

Here are details on how the weight base works:  https://newrevenue.org/2015/05/06/how-colorados-weight-base-works/

+++

Now for what is being publicized in Vermont, from https://newrevenue.org/2016/02/05/4499/:

Don’t be misled: Colorado still taxes cultivators by weight

February 5, 2016 § Leave a comment

A document submitted to Vermont’s Senate Finance Committee misleadingly says “Colorado began with a cultivator tax, which was eliminated on September 16, 2015.” Yes, it was eliminated —  but only for that one day, as part of Colorado’s strange marijuana tax holiday, mandated by the state’s Taxpayer Bill of Rights. The cultivator tax came back — on September 17.  It’s working.

And that tax is in fact imposed on weight, not percentage of price.

Here’s how Colorado implements its marijuana tax based on weight.  Many, many growers have to pay that tax, so it needs to be simple — and to be verifiable.

Before a license is issued, inspectors check the grower’s scale. Growers can’t send product out without a “manifest,” a piece of paper that lists who is driving, what kind of car, and what packages are on board the transporting vehicle. There’s a form for that. All product is sealed in tamper proof containers with zip-ties.  No container can hold more than a pound.

The Department of Revenue threatens spot inspections of scales, too.  And the Department reacts if it gets a lead about questionable business.

Yes, Colorado’s Constitution calls for a 15-percent producer tax, but they couldn’t make that work with vertically integrated producers, so they collect tax by weight – even for arm’s-length sales!  More here.

Here’s the whole quote from that submission:

“The black market should be suppressed as wholesale costs per pound for cultivators should not exceed $1200. Colorado began with a cultivator tax, which was eliminated on September 16, 2015. Colorado taxes marijuana on the retail level at 15% and allows local municipalities to collect an additional 2.9%.”

 

 

 

 

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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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