A cynical look at WA’s tax policy on tips

Taxing cannabis based on price, instead of, say, weight, creates a host of problems, like the free-pot-with-pipe deal, and others discussed in this HuffPo piece. But there are more problems.

Ever give the bartender a big tip hoping for a big second drink?  Call me cynical, but now that Washington allows excise-tax-free tipping in cannabis stores (see below), I see tricks coming. Take the case of an owner who is a budtender. It wouldn’t surprise me if an owner-budtender generously reduced a taxed prices — with a hope for a return favor. This sale or next.  Not in a negotiation — just in a friendly gesture.  One good turn might bring about another.

When you tax a percentage of price, you run into trouble. Washington state authorities now don’t worry about this. Having dealt with folks, some of them my good friends, who have shifted $2 trillion of untaxed US profits offshore, I’m nervous. Prices depend on relationships.

The troublesome case is not where tipping is “required or a condition of sale, [or]. . . linked to the price of the product to avoid tax obligations.” [The quid pro quo case is illegal – as it should be. If you can catch it. Good luck with that.]

The troublesome case is where the lower price kind of just happens. And then tipping kind of just happens. Kind of like how our laws are made: Donors don’t get special rules and tax cuts as a condition of making campaign contributions, but . . . What do you know? The folks who make campaign contributions get special rules and tax cuts.

The danger seems especially high with an ad valorem rate as high as Washington’s, which is 37 percent.  This new rule seems naive, but so does a high ad valorem retail tax — that’s the real problem.

Here’s the new Washington rule:

++++

Marijuana Retailers

Bulletin No 16-02

Date:              March 14, 2016

To:                  Industry Members

From:             Deputy Chief Steven D. Johnson, Olympia

Subject:        Receipt of Monetary Tips in Retail Marijuana Stores

The Washington State Liquor and Cannabis Board (LCB) has received several inquiries asking about the practice of bud tender tip jars. In response, the LCB has reviewed their position and this bulletin is to clarify the policy on allowable tipping.

Tipping has not been an allowable practice in a licensed retail marijuana location. This position was adopted based on an interpretation of RCW 69.50.357, and indications that prices of products were being manipulated based on the size of a tip to avoid paying excise tax. However, changes in RCW 69.50.535 established in 2ESHB 2136 (Laws of 2015, 2d Spec. Sess., Ch. 4), modified the tax structure associated with marijuana sales, partially negating the concerns associated with prices being adjusted to avoid taxes. The legislation also prohibited sales of marijuana and marijuana products conditioned on the buyer’s purchase of a service or non-marijuana product. RCW 69.50.380. It placed restrictions on “bundled” transactions as well. RCW 69.50.570. Due to the statutory change, the Board has revisited the policy position, and its interpretation of RCW 69.50.357.

Effective immediately, customer tipping is now an allowable practice in licensed retail marijuana stores. However, tipping cannot be required or a condition of sale, nor can it be linked to the price of the product to avoid tax obligations. If a licensee allows tipping for their staff, licensees are reminded that there may be business or employee taxes associated with tips received.

For more information, please contact your enforcement officer.

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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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