(Draft statutory language is at the bottom.)
“Hemp-derived consumables” in HB563, https://www.ncleg.gov/Sessions/2023/Bills/House/PDF/H563v5.pdf
– contain THC, the intoxicant in marijuana, which creates externalities.
– will cost money to regulate.
– are federally legal only because of loopholes in the Farm Bill.
We can and should tax these hemp products.
– Louisiana, Tennessee, West Virginia, and other jurisdictions tax hemp now.
– SB3 would tax medical cannabis (used by certified patients only).
Taxing by percentage of price is weak.
– Prices will go down over time as industry matures; taxes shouldn’t.
– Prices may reflect frills, premium marketing, quantity discounts, and employee discounts rather than externalities.
Taxing by weight of THC is better than taxing by price.
– A THC tax aims straight at the intoxicant — the right target.
– Connecticut, Illinois, and Canada already tax legalized cannabis by the THC it contains.
But you can tax too much – as other states have learned the hard way. If you tax too heavily,
– Illicit sellers will bypass not just taxes, but also all regulations.
– Revenue will evaporate.
Suggested statutory language is below.
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Statutory Draft
Amending the bill as reported by the Senate Judiciary Committee, https://www.ncleg.gov/Sessions/2023/Bills/House/PDF/H563v5.pdf:
on page 7, lines 31, by rewriting the line to read: “§ 18D-302. Fees and Taxes.”
On page 8, by adding the following after line 22:
(d) Taxes
(1) An excise tax of [$0.0xx] per milligram of the amount of total THC, as reflected on the product label, is levied on the sale of all hemp-derived consumable products sold at retail within the State of North Carolina. This tax is in addition to state and local sales and use tax or any other tax.
(2) “Total THC” means the sum of weight tetrahydrocannabinolic acid, multiplied by .877, plus the percentage of weight of all forms of tetrahydrocannabinol, including but not limited to delta-7, delta-8 ,delta-9, and delta-10.
(3) The excise taxes on total THC are payable to the Secretary of Revenue by the retailer, including the remote retailer who ships products to consumers in this State.
(4) The tax on total THC shall be reported monthly by the seller on forms prescribed by the Secretary of Revenue and paid by the seller on or before the twentieth day of the month following the month to which the tax is applicable.
(5) The tax on total THC is effective for sales and importation to consumers occurring on or after July 1, 2025. For transactions occurring before July 1, 2027, the tax rate shall be one-half the rate described in subsection (1) of this section. This amount shall be indexed on January 1 of 2028 and each year thereafter by the cost-of-living adjustment described in G.S. 105-277.1.
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Notes
Target: Total THC reaches all “delta” forms of THC (tetrahydrocannabinol) such as delta-9 and delta-8; it reaches THCA (tetrahydrocannabinolic acid), as well, with a fractional reduction reflecting the weaker intoxicating power of THCA. Total THC excludes, for instance, CBD. This calculation comes from the Connecticut statute: https://www.cga.ct.gov/current/pub/chap_420b.htm#sec_21a-240 section 60.
Rate: How high should the tax be? A 1-cent per milligram tax would be about 8% of retail price for these products produced in North Carolina: https://www.southernease.com/collections/new-delta-9-thc-gummies. Connecticut taxes marijuana edibles at 2.75 cents per milligram; Canada taxes marijuana products at one Canadian cent per milligram.
West Virginia’s ad valorem rate is 11%; Tennessee’s is 6%; Minnesota’s, 10%, Louisiana’s, 3% — all plus applicable sales taxes.
Phase-in: The tax rate could be set deliberately low for the first few years as industry matures, and indexed thereafter. If there are concerns about implementing a THC tax, the State could adopt a percentage tax for an interim period while preparing to tax by THC.
Collection: The seller would be bound to pay tax according to the amounts of THC listed on required packaging labels. For brick and mortar stores, Point Of Sale collection might involve QR codes at the checkout register. For online sales, collection would require extra information on forms now used to collect sales tax.
Beyond tax: Synthetic cannabinoids, “Frankenhemp” or unnatural intoxicants like THC-O, not found in the plant at all, are reportedly extra risky. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5999798/. In allowing unlimited quantities of “any synthetic cannabinoid derived from hemp and contained in a hemp-derived consumable product,” the bill apparently opens the door to these substances, in the last sentence of (6) on page 2 of https://www.ncleg.gov/Sessions/2023/Bills/House/PDF/H563v5.pdf.
Next steps: This approach would benefit from technical revision by the Legislative Drafting Division. For instance, there should be conforming amendments to require listing of the amount by milligrams of each hemp-derived cannabinoid in proposed G.S. 18D-105 — not just aggregate amounts of all of them.
The Center for New Revenue 