Marijuana legalization in the United States is a controversial issue touching on countless contentious aspects of government, including federalism, personal liberty and the imposition of taxes. Eight states have legalized recreational marijuana sales—and the taxation of those sales—despite marijuana remaining a Schedule I drug.
Some states may be comfortable legalizing marijuana and implementing a regulatory framework for the industry because the August 2013 “Cole Memo,” issued by James Cole (Deputy Attorney General from December 2010–January 2015), essentially suggests that as long as states have valid regulatory and enforcement schemes surrounding the industry, the federal government does not intend to interfere with those businesses.
However, even though the Cole Memo provides some reassurance for those in the marijuana industry, it is important to note that the memo is not binding on the Department of Justice—or anyone else, for that matter. Because of this, the development of state-level marijuana industries has always contained a large elephant in the room.
With the new administration taking over in 2017, the elephant is becoming even more unavoidable.
Due to the persistent—and frequently confusing—commentary concerning marijuana in all facets of the news, this blog post serves as a short primer on the status of state recreational marijuana taxation in four West Coast states.
California voters approved Proposition 64 last November. While some provisions impacting marijuana legalization took effect immediately, retail sales of marijuana in California are not scheduled to begin until Jan. 1, 2018.
The start date may be pushed back until later in the year, however. The L.A. Weekly reports that Dale Gieringer—director of California NORML—believes retail sales may be pushed back because “‘it’s taking so long to get the draft regulations out there.’”
The Sacramento Bee also recently reported that State Sen. Mike McGuire (D), the chair of California’s Senate Governance and Finance Committee, stated, “‘Being blunt, there is no way the state of California can meet all of the deadlines before we go live on January 1, 2018.’”
While the timing of the state’s retail market is still very much up for debate, the tax implications are more definite: marijuana cultivators will be liable for a tax of $9.25 per dry-weight ounce for marijuana flowers and $2.75 per dry-weight ounce for marijuana leaves. Marijuana sales will be subject to a 15 percent excise tax. California’s Legislative Analyst’s Office estimates the state’s tax revenues stemming from retail sales of marijuana will range from “high hundreds of millions of dollars to over $1 billion annually.”
Localities within California will also have the option to levy taxes on marijuana or, alternatively, ban sales of marijuana within their jurisdictions.
Similar to California, the possession and use of marijuana in Nevada became legal immediately upon the passage of Question 2 in November, while retail sales are delayed pending regulations.
The timeline for retail sales in Nevada is noticeably different from California, however. Deonne Contine, Director of Nevada’s Department of Taxation, aims to begin recreational sales of marijuana by July 1, 2017, the Las Vegas Sun reports.
The state’s main source of revenue will come from a 15 percent excise tax on marijuana cultivators.
While Nevada’s Department of Taxation could not determine the financial impact of Question 2 prior to its passage, RCG Economics—a Las Vegas-based company with a focus on macroeconomic forecasts—published a study in July 2016 estimating that between 2018 and 2024, sales of marijuana in Nevada will raise over $257 million from sales and use taxes, over $147 million from excise taxes and over $47 million from licensing fees.
Oregon began legal sales in July 2015, and took an interesting approach to getting its recreational market up and running. Beginning Oct. 1, 2015, Oregon permitted medical marijuana dispensaries to sell recreational marijuana for a limited time while the Oregon Liquor Control Commission worked to issue licenses to retailers. Oregon did not impose a tax on those sales until Jan. 3, 2016, when the state began imposing a temporary rate of 25 percent.
The 25 percent rate continued until Dec. 31, 2016, when the temporary dispensary sales program ended and the full recreational program began.
On Jan. 1, 2017, licensed retailers became the sole entity permitted to sell recreational marijuana and sales became subject to the permanent tax rate of 17 percent (with localities permitted to add on a 3 percent maximum tax with voter approval).
The revenue results from the 15 months of legal sales, including the temporary dispensary sales period, have been surprising.
In May 2016, the Oregon Legislative Revenue Office (LRO) released a report modifying its estimates based on changes in state law and surprisingly strong sales data. The new report shows an updated estimate of $59.17 million in net tax revenue for the 2017–2019 biennium—a 44.67 percent increase compared to the LRO’s initial report from September 2014 that estimated only $40.9 million in net revenue for the state.
Washington also took an interesting approach to taxing marijuana when it began legal sales in July 2014 by imposing a multi-tiered taxing scheme
The state initially imposed a 25 percent excise tax on sales between marijuana producers and marijuana processors, a 25 percent tax on sales of between marijuana processors and marijuana retailers, and a final 25 percent tax on retail sales of marijuana.
On July 1, 2015, however, Washington changed its scheme to a straightforward 37 percent tax on retail sales of marijuana.
Sales of recreational marijuana in Washington have steadily increased, totaling roughly $260 million in Fiscal Year 2015 (FY2015) and over $972 million in FY 2016. Fiscal year 2017 sales estimates total over $1.14 billion.
Resulting state tax revenues have increased proportionally, as FY2015 netted a total of roughly $65 million, FY2016 netted $185 million, with revenue estimates for FY2017 topping $213 million.
While these tax revenues have been a boon for Washington—and for many other states—government officials and industry employees cannot help but wonder: how large can the elephant in the room grow before things come to a head? How long can states continue legalizing, regulating and taxing marijuana before the federal government acts?
We will continue our coverage on recreational and medical marijuana throughout the United States on BNA’s SALT Talk Blog.
In the meantime, continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should states prepare for potential conflicts with the federal government over marijuana legalization and taxation?
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