Colorado marijuana taxes keep dropping

Colorado’s marijuana producer tax has hit an all-time historically low rate of 43 cents per gram on flowers (bud).

For vertically integrated companies, that 43-cent rate is arrived at by taking the statutory tax rate of 15 percent and multiplying it by per-gram Average Market Rates (AMRs) – market prices. So the nominal percentage-of-price tax is de facto based on weight.  Since market prices keep dropping, taxes do, too.  Which is primitive.

The rate of 14 cents per gram for trim or leaves is coming down, but not to record lows.

On the official Colorado web site, https://www.colorado.gov/pacific/sites/default/files/AverageMarketRateFactSheet.pdf, we see the Average Market Rates (AMRs) that the 15-percent tax applies to. They are pasted at the bottom.

Colorado periodically calculates AMRs based on actual market conditions, then notionally applies a 15-percent ad valorem tax to those AMRs.  That means that Colorado’s de facto wholesale per-gram marijuana taxes have just gone down, to an all-time low of 43 cents for potent bud, or flowers. (You multiply $1298 on the chart at the end by .15 to get the rate per pound, which is $195, and divide by 453, the number of grams in a pound.)

I have been predicting that marijuana prices will fall. Here’s the point: The prohibition premium – the extra amount illegal sellers charge to compensate for risk of getting caught – will disappear. Then, as efficiency, amortization of startup costs, and economies of scale drive pre-tax prices down, price-based taxes will shrink proportionately. A percentage base may turn out to haunt drug policy uniquely. Low prices create availability of intoxicant that drug policy experts disfavor, at least for youth and for problem users.

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This weight-based tax is in addition to Colorado’s retail price-based tax, which started at 10 percent of price, but just recently got raised, sensibly, to 15 percent.  That 15 percent is in addition to the standard state sales tax of 2.9 percent.  Local taxes may apply, too.

The price for trim is holding steadier than that for smokeable bud, so the market seems to value concentrates, which typically use trim, more these days. Or maybe something else is changing.   In particular, there is an incentive to put bud into the trim pile, as explained here:  https://newrevenue.org/2014/09/22/rose-habib-on-the-bud-trim-line/.

Many observers overlook Colorado’s weight based tax.  The nominally nonpartisan Tax Foundation has gone so far as to say a weight based tax is “untenable.”  https://taxfoundation.org/marijuana-taxes-lessons-colorado-washington/.  That canard is refuted at  https://newrevenue.org/2016/08/27/4914/.

Colorado’s overlooked weight-based tax is explained 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, and somewhat outdated:

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 [early on] it taxed bud at $0.62 per gram, trim at $0.10 per gram, and seedlings at $1.35 each.  [The rate hit $0.66 per gram at one point, when the AMR was $2007 per pound.]

The problem arises when the cultivation facility does not sell marijuana to anyone and transfers it only to itself. 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 [at first] appl[ied], 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.

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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.

Now for current rates:

AMR as of January 1, 2015 AMR as of July 1, 2015 AMR as of January 1, 2016 AMR as of July 1, 2016 AMR as of January 1, 2017 AMR that will be effective July 1, 2017
Flower Rate ($/lb) $2007 $1868 $1948 $1816 $1471 $1298
Trim Rate ($/lb) $364 $370 $464 $505 $499 $426
Immature Plant Rate ($/EA) $9 $8 $9 $10 $10 $4
Wet Whole Plant Rate ($/lb) N/A N/A N/A $209 $223 $227
Seed Rate ($/seed) N/A N/A N/A $2 $6 $3

Colorado no longer posts pre-2015 data, but here is some:  https://newrevenue.org/2015/12/31/no-drop-yet/.

 

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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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