Extras on Excise: Marijuana Legalization—Coming to a State Near You?

Marijuana legalization has spread across the country this year, as Colorado and Washington began the retail sale of marijuana for recreational use, three states enacted medical marijuana program legislation and 11 states enacted laws permitting the limited medical use of a marijuana extract.

Newly enacted taxes on marijuana have generated additional revenues for states looking to fill budget shortfalls and provide funding for state programs. But legalization is not all high times. Along with legalization comes the struggle against conflicting federal law that has kept legal marijuana business “cash-only.”

Currently, more than half of the states in the U.S. have legalized marijuana in some form. Colorado and Washington have legalized the retail sale of marijuana for recreational use. Maryland, Minnesota and New York legalized the use of medical marijuana this year, bringing the total number of jurisdictions with a comprehensive medical marijuana program up to 24. In addition, 11 states legalized the use of cannabidiol oil, a marijuana extract, to treat seizures.

The trend towards legalization continues this fall as Alaska, the District of Columbia, Florida and Oregon have initiatives on the November ballot, leaving the decision of whether to legalize marijuana up to voters. Citizens of Alaska, D.C. and Oregon will vote on whether to legalize the retail sale of marijuana. Floridians will vote on whether to legalize medical marijuana.

Marijuana legalization presents both positive and negative aspects for states.

One positive aspect is that states can enact taxes on marijuana. Both Colorado and Washington impose excise taxes on retail marijuana. Colorado levies a 15 percent excise tax on the average market rate of wholesale marijuana and a 10 percent excise tax on retail marijuana sales. Sales tax also applies. Washington imposes a 25 percent excise tax on producers, retailers and customers, in addition to applicable sales tax and the business and occupation tax.

Alaska, D.C. and Oregon are following their examples and have tax provisions tied to legalization.

Alaska’s Measure 2 would require every marijuana cultivation facility to pay a $50 per-ounce excise tax on marijuana sold or transferred to a retail marijuana store or marijuana product manufacturing facility.

Oregon’s Measure 91 would also implement excise taxes on marijuana producers as follows:

  • $35 per ounce on all marijuana flowers;
  • $10 per ounce on all marijuana leaves; and
  • $5 per immature marijuana plant.

D.C.’s Initiative 71 does not directly address the taxation of retail marijuana. Instead, B20-0466, currently under review by the D.C. Council, would impose a 6 percent tax on the gross receipts from the sale of medical marijuana and a 15 percent tax on the gross receipts from the sale of marijuana for all other purposes.  A hearing about the bill is scheduled for Oct. 30. Once passed, all bills in D.C. are subject to a 30-day Congressional review period and must be approved before going into effect.

Florida’s Amendment 2 does not impose excise taxes on medical marijuana. Most states do not impose excise taxes on medical marijuana. Only Illinois’, Nevada's and New York’s medical marijuana programs impose excise taxes, although all three states’ programs are in the early stages and tax collections have not begun yet.

One negative aspect of marijuana legalization is the struggle against conflicting federal law. States that have legalized marijuana, for medical or recreational use, are struggling with allowing businesses to operate legally under state law while complying with federal regulations. Marijuana remains a Schedule I controlled substance under federal law and is illegal. That means that it is illegal for banks and other financial institutions to participate in activities involving marijuana, even if that business involves a banking relationship with a legal marijuana business under state law.

Guidelines from the Financial Crimes Enforcement Network (FinCEN) and the Justice Department were meant to enhance the availability of financial services for and transparency of marijuana-related businesses, but financial institutions remain reluctant to have business relationships with marijuana businesses when they may still be subject to prosecution for participating in illegal activity at the federal level.

Marijuana businesses in New Mexico, which has legalized medical marijuana, have found out firsthand how difficult working with traditional financial institutions can be. In September, several credit unions sent letters to their licensed medical marijuana customers saying that they will no longer accept their business and will be closing their accounts. The credit unions cited the difficulty in complying with federal guidelines as one reason for the closures.

Colorado attempted to create a legal avenue for marijuana businesses to access the financial marketplace by enacting the Marijuana Financial Services Cooperative Act in May, allowing the creation of "cannabis co-ops," which operate similarly to other financial institutions. However, there has been little activity regarding these co-ops since the bill’s passage and no one has applied to create a co-op yet.

Allowing marijuana-related businesses to do business with financial institutions legally would allow more transparency for states, allowing them to better track and independently verify the accounting of such businesses, which means verifying that marijuana-related businesses are paying the correct amount of taxes. And marijuana businesses would not be penalized for paying state or federal taxes in cash.

But despite these difficulties, legalization may be coming to your state next if the November ballot initiatives are successful.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should marijuana be legalized for recreational use or should it remain an illegal controlled substance?

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