This looks at 280E marijuana tax revenue. Policy problems with 280E are discussed at the link.
There’s a lot more income tax compliance, regardless of 280E, from legal businesses than from illegal businesses.
For 280E, there’s a ton of guesswork, but a conservative answer is that 280E should be bringing in at least about $180 million this year. Less conservatively, double that.
There are two pieces of the puzzle:
- How much tax does 280E bring in on a typical sale?
- How big is the market? That is, what is the dollar value of sales?
- 280E might bring in at least 6 percent of sales
The 6 percent is a guess, but a conservative one, I think.
At the low end, the National Cannabis Industry Association presents an example where 280E increases taxes by 6 percent of sales ($60,000 extra tax on sales of $1 million). https://thecannabisindustry.org/uploads/2015-280E-White-Paper.pdf.
They should know.
Left number column is Non-Cannabis Business Right col. is Cannabis Business
| Gross Revenue | $1,000,000 | $1,000,000 |
| Cost of Goods Sold | $650,000 | $650,000 |
| Gross Income | $350,000 | $350,000 |
| Deductible Business Expenses | $200,000 | $0 |
| Taxable Income | $150,000 | $350,000 |
| Tax (30%) | $45,000 | $105,000 |
| Effective Tax Rate | 30% | 70% |
So there is $60,000 extra tax on sales of $1 million.
Is that 6 percent number typical? The industry has an incentive to make the cost of 280E to a taxpayer look high. That might make the industry’s case more sympathetic. But overstating the cost makes repeal of 280E more of a budget-buster, and might hurt the industry’s cause. So the incentives cut both ways. [UPDATE 11 December 2017: Here’s an example where the tax hit was around 11 percent of sales one year, and 5 percent of sales the next: https://www.newcannabisventures.com/terra-tech-acquisition-of-blum-reveals-unfair-280e-tax-burden-for-cannabis-companies/.]
There’s reason to think 6 percent might be far too low. Indeed, that NCIA paper supplying the 6 percent example presents three other examples, where the 280E tax hit ranges from 6 to 30 percent of gross revenue.
| From https://thecannabisindustry.org/uploads/2015-280E-White-Paper.pdf | |||
| Figure 1 | Figure 2 | Figure 3 | |
| Receipts | 776,772 | 154,469 | 876,420 |
| Cost of goods sold | 435,819 | not stated | 319,386 |
| Selling expenses & other 280E expenses | 153,806 | 101,100 | 867,863 |
| Income ignoring 280E | 187,147 | 53,369 | -310,829 |
| Taxable income taking account of 280E | 340,953 | 154,469 | 557,034 |
| Top tax rate | 0.35 | 0.35 | 0.35 |
| Extra inclusion because of 280E | 153,806 | 101,100 | 867,863 |
| Possible tax hit from 280E | 53,832 | 35,385 | 303,752 |
| Percentage hit: extra 280E tax / receipts | 6.9% | 22.9% | 34.7% |
I hesitate to rely on Figure 2, in particular, which doesn’t even separately state cost of goods sold.
That 30 percent tax rate is below the top 35 percent corporate rate, and wouldn’t apply down in the brackets.
But looking at those examples, a 10 percent rate would not seem crazy.
Now any single business’s number may not cover the impact of 280E on product it sells, because that product often flows through several businesses. If the business is a dispensary, it takes a tax hit from 280E. The grower it bought from might have a small hit from 280E, also, for the same million dollars of final sales to the consumer. But growers’ selling expenses are typically negligible compared to retailers’ or dispensaries’.
- Figuring the size of the legal market is not easy.
Here are calculations using estimates of legal market size made before California (and the other 2016 states) legalized.
But here are range estimates from https://mjbizdaily.com/wp-content/uploads/2016/03/Factbook2016ExecutiveSummary.pdf, and I exaggerate the lowness by picking 6 percent and the lowest point in the range provided:
2015: $3.0 billion, so 280E revenue of $180 million
2016: $3.5 billion, so 280E revenue of $210 million
2020: $6.1 billion, so 280E revenue of $366 billion
Using 10 percent and the lowest point in the range provided:
2015: $3.0 billion, so 280E revenue of $300 million
2016: $3.5 billion, so 280E revenue of $350 million
2020: $6.1 billion, so 280E revenue of $610 million
Here are point estimates from ArcView, an outfit that would tend to like rosy forecasts, found in http://fortune.com/2016/02/01/marijuana-sales-legal/. I figure they’re on the high side, so I use only the 6 percent figure:
2015: $5.4 billion, so 280E revenue of $324 million
2016: $6.7 billion, so 280E revenue of $402 million
2020: $21.8 billion, so 280E revenue of $1.308 billion
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Now marijuana sellers even in states where the product is illegal are supposed to pay tax, and to comply with 280E. If they don’t, the IRS might find them – that’s how Al Capone ended up behind bars. My co-authors of the RAND report I worked on came up with a total market estimate of $40 billion, but that’s legal and illegal. But I wouldn’t assign much revenue from 280E to illegal sellers. They need to pay enough tax to avoid being questioned about where the funds came from to fund their spending or assets. Too much spending can show up on random audit – or by taxpayers getting turned in by enemies.
If the tax examiner doesn’t figure out the taxpayer is in the cannabis business, 280E won’t come up.
Again, extra income tax compliance, regardless of 280E, can be expected from businesses than come out of the shadows. That makes the 280E numbers above a solid base, I think.
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An estimate of payroll might be 15 percent of sales: http://smallbusiness.chron.com/good-payroll-percentage-retail-store-78565.html
Here’s more data I don’t rely on much:
“For Canadian retailers with annual revenues under $5 million in 2013, the cost of goods sold typically accounted for around 65% of sales, according to data from Innovation, Science and Economic Development Canada.”
The largest operating cost in a retail business is usually employees, which in Canada typically represents about 13% of all costs for small retailers.
Other expenses follow, led by administrative costs (buying trips, payroll services and the like) at 4.9%, rent at about 4.4% and marketing at 1.4%.
Canadian retailers in 2015 had an average profit margin of just 2.3%, according to the Conference Board of Canada.
[Where are other expenses, then? Those numbers don’t add up to 100%. They add up to only 91%. PO.]
http://smallbusiness.chron.com/good-payroll-percentage-retail-store-78565.html
The Center for New Revenue 