State law fix for 280E problem? Update 13 August 2015

An IRS ruling has changed everything and made most of the post below obsolete. More here or at https://newrevenue.org/2015/08/02/whats-next-for-280e/

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Start here:

“States could unilaterally correct this problem by changing the type of taxes they place on the marijuana industry. IRS treatment of sales taxes depends upon how a state defines the tax. If the state defines the tax as being levied on the seller, the tax is included in gross receipts. On the other hand, if the tax is defined as levied on the buyer, the seller is treated as a mere collector custodian of the state’s revenue and the amount levied is not properly included in gross receipts. For most businesses this is a distinction without a difference; sales taxes levied on a seller can be deducted as an expense. However, for dispensaries denied deductions by § 280E, this distinction could reduce federal tax exposure by huge amounts. Creative legislators could even redefine license fees as custodial sales taxes, by requiring retailers to collect the license fees from consumers instead of charging them directly to retailers.”

New explanation  at  http://taxfoundation.org/blog/one-simple-state-tax-code-tweak-favor-marijuana-taxpayers-over-tax-evaders?mc_cid=a792bd624c&mc_eid=c12785538d

“Such redefinition wouldn’t lower a state’s marijuana tax income, but might instead increase tax revenues by helping to level a playing field artificially tilted toward the tax evading black market alternatives § 280E was intended to punish.”

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Thanks to Chris Law for sending that — author is James W. Kennedy.

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Now for a tacked-together agglomeration of all I could find.  (Notes for an article, maybe.)

The recent WA fix shifting tax burden from seller to buyer is in section 205 on page 8 here, or at http://leg.wa.gov/Senate/Committees/WM/Documents/2136%20AMS%20-%20S-3153%201.pdf.  That’s the buyer pays approach (Nebraska sales tax rule), mentioned at the end. TAM withdrawal is noted below.  280E and canopy taxes are discussed here or at https://newrevenue.org/2015/04/15/280e-and-fees-arkley/.  That this problem exists, and has not been fixed everywhere, shows the primitive state of marijuana tax design.  Not deducting taxes is as primitive and zany as taxing by price, railed at and disparaged here.  I myself let this deductibility issue slip a long time.  It was such a crazy result, I didn’t think it possible.

THE STORY:  Maybe  a quick and tiny tweak to Washington’s state marijuana excise tax statute (and similar statutes in other states) could save businesses a lot of federal income tax under 280E, which lets federally illegal drug sellers deduct only cost of goods old.  Now I kind of like 280E, insofar as it prohibits deductions for advertising, marketing, point-of-sales displays, and the like (disfavoring those activities in a way that does not allow any argument about freedom of speech), but can’t imagine why federal taxpayers shouldn’t be able to deduct state excise taxes.  The industry complains mightily about 280E, but getting Congress to fix tax problems, or to help the marijuana industry, is not the work of a moment.

Luckily for the industry, no federal fix seems needed for this one signficant part of the 280E problem. The Washington Legislature (and Legislatures of other states with the same problem) should be able to make excise taxes federally deductible with the stroke of a pen, I think, and try to explain below.

And maybe a quick fix is possible.  The Legislature has already shown it can act expeditiously to fix the Washington marijuana statute: “During the 2014 Legislative Session, I-502 was amended to explicitly allow the sale of extracts and concentrates.” http://liq.wa.gov/marijuana/faq_rules — that link is busted:  Try http://lcb.wa.gov/mj2015/faqs-rules. Cutting the federal tax bill of a marijuana industry that’s struggling to beat the black market, at zero cost to the state, seems like an easy fix that might sail through on its own – even less controversial than allowing concentrates.

Here’s more:

Continue reading “State law fix for 280E problem? Update 13 August 2015”

State marijuana monopoly? — Updated December 22, 2014

[UPDATE 22 December 2014:  Extension of the Holder memo to Native American territory opens the distinct possibility of monopolies there. And the case of Nebraska v. Colorado gives the Supreme Court a chance to address Legality (of a lesser provocation) and Standing.]

You hear folks say states can’t run a marijuana monopoly because they would be ordering employees to violate federal law.  I’m not so sure. First, a monopoly is not indisputably illegal. Second, no one other than the federal government may have standing to complain.

I. Legality

The CSA’s definition of the term “person” – possible violators – does not include states of the Union. http://www.deadiversion.usdoj.gov/21cfr/21usc/802.htm Continue reading “State marijuana monopoly? — Updated December 22, 2014”

Introduction to Excise Taxes, by Sean Lowry of CRS

Federal Excise Taxes — Lowry is a good introduction to the field.  I learned some things, like this example:

ad valorem taxes imposed at the manufacturer’s level could provide an incentive for value-added options to be ordered further down the supply chain in an attempt to minimize the tax burden. For example, the manufacturer tax on firearms is levied on the assembly of a complete rifle, but any add-ons or modification kits to that rifle are not taxed.

Continue reading “Introduction to Excise Taxes, by Sean Lowry of CRS”

Video of RI panel

A video of the November 18, 2014, Rhode Island panel on marijuana legalization is here: (http://www.rifuture.org/regulate-ris-marijuana-forum-packed-with-information.html). In the second panel, the lower video, I come in at about the 18’20” mark with comments about how collapsing pre-tax prices might create problems.  Other panelists are Michelle McKenzie, Senator Josh Miller, and Mason Tvert.  Jared Moffatt moderates.

 

 

State marijuana monopolies: I take it back

Oops.  The detailed analysis of the economics of a federal marijuana tax by the Congressional Research Service (Gravelle and Lowry) cites an article of mine for the proposition that “state monopolies for marijuana production or distribution cannot occur while it is still illegal at the federal level because state governments cannot force the employees of such hypothetical operations to engage in the marketing of a drug that is illegal at the federal level. See Pat Oglesby, ‘States May Be Stuck with Second-Best Marijuana Taxes,’ State Tax Notes, June 2, 2014, pp. 539-544.”

I wrote that, but I now see a possible path to state marijuana monopoly. The doctrine of judicial standing means that if you violate federal law, I probably can’t sue you (and I can’t sue the federal government either). So if you are not paying your taxes, or if you are falsely claiming disability benefits, I can’t take you to court. I can turn you in, or tell the press. It’s up to the federal government to enforce the law.

Substitute “a state” for “you” in that thinking and you kind of get the doctrine of standing. A state that violates a federal law is not subject to Citizen’s Arrest. If the federal government lets the violation go, the courts probably will, too.

A difficult path.  More to come.

 

CRS on Marijuana Tax Economics

Jane Gravelle, whom I remember from the 1980s as a true tax professional, and a colleague named Sean Lowry have issued a report on marijuana taxation here (http://fas.org/sgp/crs/misc/R43785.pdf),  It’s more economics than law, and I don’t agree with some of it, but I feel like the field of folks looking at the minutiae of marijuana tax design has expanded.  I think that’s good for America.

Religion remains established for lack of standing

If the government wrote a check to every church’s minister, that would be Establishment of Religion, right?  Then what about tax breaks for every minister?  Code section 107 gives tax breaks for housing to any “minister of the gospel” (expanded in Regs to cover rabbis, imams, etc.).  If that’s not the kind of caught-red-handed establishment of religion the Founders forbade in the 1st Amendment, what is?

But the Seventh Circuit found yesterday that plaintiffs challenging the tax break for “ministers of the gospel” in Code section 107 lacked standing to sue. No particular personal injury Continue reading “Religion remains established for lack of standing”

Trusting Marijuana Sellers

This blog is very skeptical of the ability to measure THC accurately enough to tax it.  Here is an argument that testing is accurate enough: “Skeptics say it is too difficult to measure THC, but that’s not very convincing when High Times magazine offers the same kind of product specs you’d find in an issue of Stereophile or Car and Driver Magazine.”

But even claims of horsepower have been found inaccurate. And nobody taxes horsepower. The sampling of bud leaves the door open to manipulation and abuse – by taxpayers or government.

Accuracy for taxation is not the same as accuracy for journalism — or advertising.  And if the incentive shifts to make low THC claims profitable, I would not count on taking those low claims to the bank, either.  That’s where I look to a stated THC tax as an option, as suggested by Beau Kilmer and David Ball, described here at page 541 note 17.  Remember what happened to statements of tar and nicotine content on cigarette packs:  they are not there any more.

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Forbes attacks marijuana taxation

Lots to argue with in a Forbes article here  that attacks marijuana taxation:

1. “It’s a basic principle of sound tax policy that the code should not pick winners and losers or disproportionately target certain industries or groups of taxpayers.” There’s a grain of truth there, but pushed to this extreme, it leads to taxing whiskey like wheat, and marijuana like milk.

2. “Because marijuana can be purchased as a cigarette, an edible, a liquid, or vapor, all with a wide variety of concentrations, a specific excise tax is untenable.” That’s a complete red herring. No one else suggests taxing weight or potency at the product level. That would be like taxing rum punch like vodka shots. Just as you tax the rum in rum punch, not the punch product, you would tax the marijuana that goes into edibles and so on, not the final product.

3. “There is no reason why the tax code should deny ordinary and necessary business expenses to legitimate businesses established under state law.” Well, you might think advertising and marketing of marijuana might be (a) unwelcome on policy grounds and (b) protected under some reading of free speech. Denying deductions for those expenses might be the best you can do. More here.

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We Are Better Than This — Kleinbard

Ed Kleinbard’s book starts with a free-market slant (much of the following is paraphrased):

 Private enterprise ≈ path to greater national wealth and is conducive to the preservation of personal liberties.

And doesn’t oppose regressive taxes:

 Surprisingly, the progressivity of tax rates is negatively correlated with the reduction in inequality a country achieves.

But moves on to blast anti-tax hysteria: Continue reading “We Are Better Than This — Kleinbard”

Rose Habib on the Bud-Trim Line

Rosemary Habib is the author, along with Reuben Finighan and Steven Davenport, of “Testing for Psychoactive Agents,” BOTEC Analysis Corp., http://liq.wa.gov/publications/Marijuana/BOTEC%20reports/1c-Testing-for-Psychoactive-Agents-Final.pdf (Aug. 24, 2013), which seems to me by far the leading analysis of that topic done to date. She graciously agreed to let me print her thoughts about the bud-trim line for a marijuana tax.

My question:  

Updating https://newrevenue.org/2014/05/12/can-the-bud-trim-line-hold/:  Let’s say there’s a huge tax on bud and a small tax on trim.  Would that give producers an incentive to cheat – to shift bud, at the margin, just a little, into the trim category and then use it to make concentrates?

Might not a tax-evader deliberately characterize bud as trim to boost the THC content – and thus value – of concentrates?  That evasion depends on the purchaser believing that he is getting a better, more valuable product — edible, vaporizer cartridge, or whatever.  And that belief would need to come from THC labeling (however inaccurate) or some other claim or experience or report.

Rose Habib’s response:

My first impression is, yes it could be more economical to move lesser buds over into the trim pile.  A lot of that depends on the market.  Continue reading “Rose Habib on the Bud-Trim Line”