Many of my friends who support marijuana legalization analytically point with satisfaction to taxes that marijuana brings in. Maybe my scheme to beat Colorado’s new marijuana producer tax procedure doesn’t work. I don’t condone or encourage cheating — au contraire. But I would be nervous that Colorado’s tax is beatable around the edges — not to let people pay zero tax, just to pay less than they owe.
Colorado taxes marijuana sales at 15 percent of the retail price. https://www.colorado.gov/pacific/sites/default/files/Sales93.pdf. It also taxes producer sales, and that’s what this blog post is about.
Here’s the new rule: (ephemeral state site: https://www.colorado.gov/pacific/tax/marijuana-taxes-file; saved version: Copy of Regs on unaffiliated sales in CO 2017 SB192): “Effective August 9, 2017, . . . unaffiliated retail marijuana business will calculate their excise tax at 15% of the contract rate.” See also Fact Sheet saved at CO unaffiliated tax Aug 2017. The contract rate is the price, so they will pay a price-based tax. That covers everyone except “affiliated businesses,” which “are owned or controlled by the same or related interests, where ‘related interests’ includes individuals who are related by blood or marriage or entities that are directly or indirectly controlled by an entity or individual or related individuals,” and who will pay by the gram.
So here’s the scheme: Take hypothetical Albert and Betsy (a nod to women in the cannabis industry), unrelated businesspeople, who both produce cannabis and sell it at retail.
Albert has a special strain that he and Betsy know is worth $1,000 a pound at wholesale, and Besty has a special strain that she and Albert know is worth $1,000 a pound at wholesale. They agree secretly to sell each other those pounds for only $600 each. Instead of Colorado collecting $150 from each sale, it collects only $90 from each.
Now if the state can prove conspiracy and collusion and cheating, it can collect the tax. That kind of proof seems pretty hard to get. Maybe researching the track and trace system will reveal that Albert and Betsy make huge, suspicious, unsupportable retail margins selling one another’s products. But that kind of research will take lots of work.
Or maybe there’s a definition of “controlled” that reaches this case. But that seems like a stretch. The “controlled” language seems aimed at corporations and partnerships.
Revenue from a marijuana tax calculated as a percentage of price is undependable. That kind of tax may be understandable as a quick first step, but it’s unlikely to stand to test of time, except as a minor piece of the marijuana tax puzzle. That’s why virtually all alcohol taxes are based on something that can’t be manipulated, like volume or alcohol content.
Before August 9, Colorado is collecting a per-gram tax for every sale. The state taxed “fifteen percent of the average market rate” (AMR) of a producer’s marijuana (Colorado Revised Statutes section 39-28.8- 302, 2014). Recently, Colorado’s marijuana producer tax hit an all-time historically low rate of 43 cents per gram on flowers (bud). The AMR for flower recently was $1298 per pound, or $2.86 per gram. Fifteen percent of that yields 43 cents per gram tax.
So no cross-selling shenanigan like the Albert and Betsy case could beat Colorado’s old per-gram system – which continues to tax by the gram when parties are “affiliated.”
The Tax Foundation says marijuana taxes not based on price are “untenable.” That’s just backwards. Colorado has been merrily collecting millions on a de facto weight-based tax from Day 1 of legal marijuana sales. And it’s systems based solely on price-based taxes that are untenable.
Nevada taxes marijuana like Colorado pre-August 9, with no opportunity for Alberts and Betsys to beat the system.
https://www.leg.state.nv.us/App/NELIS/REL/79th2017/Bill/5688/Text.
“The Fair Market Value at Wholesale is utilized by the Department in levying the wholesale excise tax imposed pursuant to NRS 453D.500 on the sale of marijuana by a marijuana cultivation facility.” https://tax.nv.gov/uploadedFiles/taxnvgov/Content/FAQs/Fair%20Market%20Value%20at%20Wholesale_July_1_2017.pdf
“The Department determined that the excise tax upon wholesale sales of retail marijuana can effectively be levied upon seven product categories:
- Flower
- Small Bud
- Trim
- Wet Whole Plants
- Immature Plants
- Pre-Rolls
- Seeds.”
The prices to be multiplied by the 15-percent rate include $2,145 per pound for flower and $631 per pound for trim. So the tax per gram is 70 cents for flower and 21 cents for trim. The chart, with several more categories, is at https://tax.nv.gov/uploadedFiles/taxnvgov/Content/FAQs/Fair%20Market%20Value%20at%20Wholesale_July_1_2017.pdf.
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There are arguments against taxing by weight. A weight-based tax may incentivize potent product. A weight-based tax gets tricky as categories proliferate (bud vs. trim, wet vs. dry). In the long run, taxing concentrates by THC and bud by weight solves a lot of that problem. A tax based on weight is hard to set up – compared to slapping on a percentage of price.
The main problem with taxing by price is not cheating – it’s that that kind of tax will yield less revenue as pre-tax prices go down, leaving the public with a shrinking revenue source. Collapsing after-tax prices will worry public health advocates who point out that kids are especially price-sensitive.
A detailed explanation of Colorado’s per-gram tax is on pages 79 and 80 of the RAND Report, Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions.
The Center for New Revenue 