The Center for New Revenue

Unable to figure out a transfer price for a Constitutionally permitted 15 percent wholesale tax  when vertical integration forbids the existence of a wholesaler, Colorado has substituted a weight based tax.  Wow.

The excise tax is calculated by multiplying the quantity of retail marijuana product by the average market rate at the time, then multiplying by the 15% (excise tax rate). For example: ABC cultivator transfers 3 pounds of flower, 5 pounds of trim and 8 plants to ABC store. At the time of transfer the average market rates are:

$1,876 for Flower Continue reading “Colorado converts percentage tax base to weight!”

Update June 24, 2014:

Salient taxes are those that taxpayers notice.  Code section 280E’s denial of marketing and other deductions for marijuana businesses could hardly be less salient to consumers.

To retailers, though, it’s highly salient.  That explains the ongoing complaints (Discriminatory!) against 280E.  To be sure, it’s preposterous (and some in the industry agree) to think that Congress (who decides) would repeal 280E and not replace it.  But its replacement (an excise of some sort) would be more salient to consumers – bringing them to the side of industry.

Even considering support of consumers, repeal of 280E might still bring a replacement that brings the industry regrets.  But the industry has no reason to stop complaining about 280E.  The best defense is a good offense.  And 280E is discriminatory.  But we ain’t gonna treat marijuana like milk.

Proposed new Text of 26 U.S.C. § 280E, Expenditures in connection with the illegal sale of drugs:

No deduction or credit other than for cost of goods sold and current employee compensation shall be allowed for, and section 263A shall not apply to, any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law and the law of any State in which such trade or business is conducted. Continue reading “280E Win-Win?”

NYT:  “They charge $199 per person per night — you have to be over 21 — and offer two rooms, 24/7 car service and a hot tub. They can give, rather than sell, their homegrown pot to guests.”  On  November 24, 2013,  I predicted this bundling of service and marijuana where the marijuana was “free” – and free of the percentage based retail tax. Continue reading “Percentage retail marijuana tax fails”

A new and fresh idea came up while talking yesterday with Beau Kilmer of RAND.  (Thanks, Beau.)  In addition to the primary tax on marijuana plant material, maybe based on weight, jurisdictions could add on a little tax calculated on basis of weight-adjusted potency (in terms of THC content) claimed by the seller.

I’ve opposed taxing marijuana plant material on the basis of potency, because potency there can’t be replicably measured.  (Concentrates, unlike unprocessed marijuana plant material, are fungible enough to yield replicable potency testing results.)  Beau is interested in labeling marijuana so consumers have more information, Continue reading “Taxing Stated Marijuana Potency (a Book Income Analogy)”

Lonely old men need a place to congregate?  A McDonald’s kicks them out.  But a NYT op-ed writer offers a solution:  “I can imagine tax breaks for franchises that serve a high proportion of older adults.”  Tax solutions:  No problem too small?

But what David Brockway said about current Joint Tax Committee staff still seems true for me, 25 years after leaving the staff:  We are “likely to be ‘reformers’ at heart, with a very healthy skepticism about preferential tax treatment for any special activity.”  Even welcoming old-timers.  It’s easy to suggest a tax break, but making it actually work (counting the old folks) and keeping a coherent tax system are hard.

Indoor marijuana operations use lots of electricity – for grow lights, ventilation, and so on.  Arcata, California, decided to tax extraordinarily high electricity use as a proxy for taxing marijuana directly – or as an environmental tax.  The tax applied only to users whose electricity bills were six times greater than a standard base.  It turns out that that tax has not produced much cash, but decimates extraordinarily high use of electricity.

When Prohibition of alcohol was repealed in 1933, government studied how to tax it.  The Treasury Department commissioned a study, Report to the Secretary of the Treasury of Recommendations of Informal Interdepartmental Committee Relative to Taxation and Control of Alcoholic Beverages.  Congressional study included extensive hearings, with input from a wide range of interests.  Tax on Intoxicating Liquor, Hearings Before the Committee on Ways and Means, House of Representatives and the Committee on Finance, United States Senate, 73d Congress, Interim, 1st and 2d Sessions.

Those materials were mighty helpful in writing my first article on marijuana taxation.  They are in the public domain in hard copy, but in electronic form they are available only behind pay walls.  I’m looking for a student or anyone to go to a research library, check out a hard copy, and create an electronic file of those materials — 417 pages of them — to post here.  I’m willing to pay 10 cents a page.  Any takers?

Marc Landry sets forth standard arguments for taxation and regulation (and against Prohibition).  North Carolina will not be the first by whom the new is tried.  Nor yet the last to cast the old aside?

I played such a small part on the BOTEC team consulting on marijuana legalization in Washington State that I just ran across this BOTEC document:  “Recognize the high GHG [greenhouse gas] intensity of indoor growing with a differential tax”:

A simple recognition of the distinctive climate effects of indoor growing would be to increase the producer tax on indoor marijuana by an amount that reflected (approximately) its respective carbon foot-print. At $30/tonne of CO Continue reading “Math of environmental tax on indoor marijuana”

Freezing marijuana tax rates until 2022, as the proposed  “Control, Regulate, and Tax Marijuana Act” in California would do, strikes me as a risky gamble.  Flexibility on taxes is needed.  One expert puts it this way:

“There is stuff we’re going to get wrong – whether it’s tax rates, enforcement, the relationship [between recreational and] medical marijuana,” says law professor Sam Kamin at the University of Denver, who served on a task force that recommended regulations for Colorado’s marijuana industry. Continue reading “Expert calls for flexible marijuana taxes”

I write that a California proposal freezing marijuana tax rates until 2022 is not a good idea.  http://www.huffingtonpost.com/pat-oglesby/marijuana-tax-colorado_b_4525238.html or here

As marijuana turned legal in Colorado on January 1, the N.Y. Times says buyers

were paying high prices for new recreational marijuana — $50 to $60 for an eighth of an ounce, nearly double the price of medical marijuana — but said it was worthwhile to avoid the risk.” Continue reading “Paying a premium for taxed, legal product”

UPDATED April 20, 2016:  Code section 280E supposedly requires disallowance of all expenses other than cost of goods sold, but “[c]urrently, some IRS agents are accepting 280E allocations that disallow 20% to 25% of the expenses (other than Cost of Goods Sold).”   Continue reading “280E — Not Strictly Enforced”

Any commercial legalization of marijuana will face the issue of vertical integration.  The law can require it (as Colorado does in most cases), ban it (as Washington state does for producers and retailers), or tilt toward it or against it. Continue reading “Marijuana taxes: Vertical integration and transfer pricing”

Trying to figure out why one little federal excise “sin” tax is not based solely on weight, volume, or potency (alcohol content), I’ve been stumped. And I still am.  It’s the tax on large cigars — 52.75% of sales price but not to exceed $402.60 per 1,000.  The key advantage for expensive cigars is not the percentage base, but the 40-cent per unit cap — regardless of weight.  Meanwhile, it turns out that makers of small cigars, taxed, like cigarettes, at $1.01 per pack of 20, have deliberately increased their size to cross over into the “large cigar” category – and pay only the ad valorem tax.  To be sure, the excise tax on firearms in section 4181 is imposed by percentage of price — how could it not be?  (Note that one other federal excise tax, the 12% retail tax on heavy trucks, is collected at retail, unlike the standard sin taxes.  Code section 4051.  Here’s more on the collection point, from A.I.:

Major Retail-Level Federal Excise Taxes

1. Retail tax on heavy vehicles — A 12% excise tax applies to the first retail sale of truck, trailer, and semitrailer chassis and bodies, and highway tractors with a gross vehicle weight of 33,000 pounds or more. The tax includes the total sale price, including trade-ins, and is reported on IRS Form 720 under IRS No. 33.​

2. Indoor tanning services — The 10% federal excise tax on indoor tanning applies directly to the consumer, collected by the salon at the point of sale and remitted by the service provider on Form 720.​

3. Retail sales of firearms and certain hunting gear (under special circumstances) — If a manufacturer sells directly to consumers (e.g., at retail or in non-arm’s-length transactions), the federal excise tax on firearms, ammunition, and bows applies at the retail level rather than wholesale. This is determined under Internal Revenue Code §4216(b) and the Pittman–Robertson Wildlife Restoration Act.​

4. Airline tickets — Although technically collected by airlines rather than retailers, the federal passenger ticket tax functions as a retail-level excise: it is included in the price paid by the traveler and remitted by the airline on Form 720.​)

Why do we have this unique tax base?   Continue reading “Large cigars: A rare federal ad valorem “sin” tax”

Though leading drug policy scholars argue for nimble tax rules in the face of an unknowable future,  “The Control, Regulate and Tax Marijuana Act,”  Continue reading “California Marijuana Initiative Freezes Tax Rates Too Long”

Here’s an update about NYT story on Colorado bundling.

++++++++++

Salient taxes — obvious to the consumer — cut marijuana consumption. Hidden taxes, by contrast, boost revenue. — NPR.

A sales tax added on at the end tends to get ignored by consumers, so it increases revenue.  Fine.  Let the economists say how stupid people are.  I’m sticking with my story.  Being a fan of the administrative efficiency that early collection at a choke point provides, I tend to overlook the biases that different tax structures bring to the consumer’s mind.

Significant retail taxes are crazy.  They allow pilferage and shoplifting (and Oops! Our truck got hijacked).  And bundling — hotel room $200 with open smoking downstairs.  What’s the tax there?