SALES TAX SLICE: THE GREEN GOLD RUSH – IS D.C. MISSING OUT?

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Business-savvy D.C. folks with unrelenting entrepreneurial spirit have found a way to sell pot, without really “selling pot.” As most D.C. residents know, Washington D.C. decriminalized possession of small amounts of marijuana for personal use under Initiative 71. Some might argue that this is one of the more significant breakthroughs in the quest for marijuana legalization considering that, unlike other states, Washington D.C. is a federal district under the exclusive jurisdiction of Congress. This means that the District local government can enact legislation, but Congress can easily reject it and shut things down. 

So far, Congress hasn’t stepped in, and this is likely because the District’s laws still prohibit sales of marijuana, whereas those of other states that decriminalized possession do not. Nevertheless, it seems a few business owners have found a loophole that allows them to share the wealth (without remuneration) along with the sale of other products or services.

Take, for example, High Speed, a cannabis and cold pressed juiced company offering to deliver juice, coffee, food and a free side of “love” to your door at top speed—up to one hour. The company likely generates considerable revenue providing these products and services and has managed to remain in compliance with D.C.’s initiative since it is actually selling juice and not cannabis. But the real question here is whether D.C. is missing out on the tax revenue that other states have generated where cannabis sales are legal and taxable.

The answer is somewhat unclear.  As companies like High Speed continue to pop up around the District, the goods and services they sell may be subject to sales tax. Using High Speed as an example, its sales of all juice, food and coffee will be taxable because these items are considered foods that are prepared for immediate consumption. That means if you choose to spend $55 on High Speed’s cold pressed ginger lemonade, you will pay the District’s 6 percent sales tax, and, whether you choose to believe you are paying for lemonade or not, the sale generates much-needed sales tax revenue for D.C. That said, by prohibiting cannabis sales, the District still seems to be missing out on an opportunity to generate additional sales tax revenue. Colorado is currently collecting a 10 percent[1] retail sales tax on sales of marijuana. That’s in addition to other state taxes on the substance. The state of Washington has also imposed a tax on retail sales under the retail classification of its business and occupation tax. The Tax Foundation reported that both states have been able to generate considerable tax revenue from their sales of marijuana. In fact, the Foundation reported that Colorado generated approximately $113 million on retail marijuana sales in 2015.

Although companies such as High Speed are likely to generate sales tax revenue for D.C., these sales taxes probably don’t account for the amount of tax revenue that the District loses as a result of black market sales occurring due to prohibition on cannabis sales. After Sept. 30, 2016, we may see a shift in the District’s marijuana tax with the expiration of an appropriations rider that “blocked the [D.C. C]ouncil from making any improvements to D.C.’s marijuana policies” according to the Marijuana Policy Project.  

If the D.C. Council plans to address its marijuana tax policies, with respect to sales tax in particular, it appears that the biggest hurdle will be overcoming the Federal Government’s classification of cannabis among Schedule I drugs. Without a change this classification is likely prevent the District from allowing the green gold to be sold.  

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should Washington D.C. lift its prohibition on marijuana sales in order to increase tax revenue?

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[1] The tax on retail sales of Cannabis is expected to drop to 8 percent next year, according to the Tax Foundation.