Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Tripp Baltz
States with legalized marijuana are watching for the possible effect on pot tax revenue given the Justice Department’s recent reversal of its “hands-off” approach on state marijuana oversight.
Officials in states with more established marijuana markets—such as Colorado and Washington, where voters legalized recreational marijuana sales in 2012—say they anticipate the negative impact on pot businesses will be small. They point to statements by U.S. Attorneys in their districts as demonstrating federal enforcement and prosecution will continue as before, when the hands-off guidance was in place.
By contrast, states that legalized more recently with licensed businesses that have yet to “go live” might find it harder to get their systems off the ground in the aftermath of a Jan. 4 announcement by Attorney General Jeff Sessions rescinding the 2013 Cole Memorandum and related federal guidance.
The Cole Memorandum, named for the former deputy attorney general who wrote it, represented a “hands-off” approach by the federal government, allowing states to regulate the sale, use, and transfer of marijuana, which remains a Schedule I drug under the federal Controlled Substances Act.
Concerns abound over the possible impact in the six states with recreational marijuana—Alaska, California, Colorado, Nevada, Oregon, and Washington—and two states—Massachusetts and Maine—where voters have legalized pot but where licensed sales haven’t yet begun. There’s also unease in the 21 states that have only legalized medical marijuana.
Vermont Gov. Phil Scott (R) Jan. 22 signed a bill legalizing recreational marijuana use, residential cultivation, and possession. However, the bill doesn’t allow for licensure or taxation of recreational marijuana businesses.
Likewise, voters in Washington, D.C. in 2014 legalized the use and possession of marijuana by adults for recreational purposes, but the ballot measure (Initiative 71) didn’t provide for licensed sales. Medical marijuana has been legal in the nation’s capital for almost 20 years.
Sessions’ move appears designed to slow the growth and expansion of state markets for marijuana, whether medical or recreational, that have grown enormously in recent years, officials said. From 2016 to 2017, the industry grew by more than 25 percent to $6.7 billion—and it’s projected to grow by another 56 percent to $10.4 billion in 2018, according to the Brightfield Group, a Chicago-based analytics firm that studies the marijuana industry.
Sessions’ announcement also seemed timed with the opening of recreational business in the nation’s largest single market, California, where legal adult use began Jan. 1.
“My sense is he was sending a shot across the bow at investors” now that recreational sales have begun in California, “telling them not to take out that second mortgage and start getting into the pot business,” which is a $1.3 billion market in Colorado, Colorado Gov. John Hickenlooper (D) said at a Jan. 4 news conference.
“We don’t see this as having an impact on how we’re operating,” he said. The attorney general “recognizes the limits of the resources of the Justice Department. He won’t take away resources from fighting higher magnitude crimes to address some pot dispensary” in south Denver, Hickenlooper added.
The move by Sessions “has definitely caused some uncertainty,” Joseph Bishop-Henchman, executive vice president of the Tax Foundation, told Bloomberg Tax. “But it’s not like any of the states are rolling back things just yet.”
“When you look at the revenue trends and you see double digit growth year after year, it could be past the point where the Attorney General” can slow the market down, Bishop-Henchman said. However, he added that for states that haven’t yet legalized, “I think this will put a damper on things.”
Amy Margolis, executive director of the Oregon Cannabis Association and partner at Greenspoon Marder LLP in Portland, Ore., told Bloomberg Tax that the rescission of the memo hasn’t impacted the consumer market.
“We have not in Oregon seen an impact on revenues,” she said. “I have clients in California, Colorado, Washington, and Oregon, and that is not something that has been reported by any of our clients, that consumers are reacting poorly.”
However, the end of federal guidance has had “just the smallest impact on investors in both directions,” Margolis said. “Investors who are more risk averse have just started getting more comfortable, and some of those investors are pulling back, wanting additional reassurances. We’ve certainly got a number of phones calls from investors wanting to be reassured.”
Those investors primarily want to be sure “that we haven’t heard of enforcement action against regulated businesses,” she said.
After a period of analysis, there will be enforcement action to stanch supplies from Oregon’s robust black-market marijuana grows, Margolis said. “But I don’t see more enforcement action in the regulated market,’’ she said.
The Oregon Cannabis Association, the California Cannabis Industry Association, and The Cannabis Alliance of Washington have entered into an information sharing and strategic partnership agreement, Margolis said. “We stand united against federal, external, existential threats.”
While the revenue from state marijuana taxes can reach into the hundreds of millions of dollars, it takes a lead time to develop, according to a Tax Foundation brief. Revenue started out slowly in Colorado and Washington as state and local governments built the necessary regulatory framework and consumers became familiar with the new system.
Below is a snapshot of the tax regimes and revenue in the six states already hosting sales of recreational marijuana.
Alaska voters approved Ballot Measure No. 2 in November 2014 to tax and regulate recreational marijuana. The tax is imposed on licensed cultivation facilities when marijuana is sold to a retail marijuana store or a marijuana product manufacturing facility.
The tax is $50 per ounce of marijuana bud and flower. The remainder of the plant is taxed at $15 an ounce. Taxes must be paid monthly.
The state Department of Revenue said that half of the revenue generated goes to a Recidivism Reduction Fund created in 2016, which covers programs aimed at reducing repeat criminal offenders. The state collected $1.75 million in marijuana tax revenue in FY 2017, ending June 30. It’s projected to collect $9.2 million in FY 2018 and $18 million in FY 2019.
Sales of recreational marijuana went live in California Jan. 1, the same day that two new marijuana taxes started. The first is a 15 percent excise tax imposed at the point of sale, to be collected by retailers of marijuana and marijuana products and paid to the retailers’ distributors for remittance to the state.
The second is a cultivation tax on all harvested marijuana—based on weight and type of plant material—that enters the commercial market. The state sales tax is also due on recreational marijuana purchases. As of Nov. 9, 2016, the state stopped collecting sales taxes on medical marijuana.
The market is expected to develop slowly in FY 2017-2018 as licenses are issued, with medical sales of 0.21 million pounds generating $118 million in tax revenue and recreational sales of 0.05 million pounds raising $57 million in tax revenue, according to a budget cannabis revenue estimate by Gov. Jerry Brown’s (D) office.
However, the office projected total FY 2018-2019 excise and cultivation tax revenue of $643 million on recreational and medical sales of $3.4 billion and nearly 1 million pounds, respectively. Tax revenue could be as high as $1 billion on sales of $5.1 billion and 1.7 million pounds by FY 2020-2021, the office projected. Sales tax revenue is expected to be $63 million in FY 2018-2019.
On Jan. 1, 2014, Colorado became the first state to have licensed sales of recreational marijuana. The state reached $1.3 billion in sales in 2016, representing roughly 20 percent of the state-legal market in the U.S., according to the National Conference of State Legislatures.
In 2017, the state enacted ( S.B. 267), which represented a significant change in its marijuana tax structure. For fiscal year 2017-2018 and thereafter, Colorado exempted recreational marijuana from the 2.9 percent sales tax, but bumped the special sales tax rate from 10 percent to 15 percent, according to the governor’s Office of State Planning and Budgeting.
Only the 2.9 percent state sales tax is collected on sales of medical marijuana. Non-marijuana products sold in marijuana retail stores remain subject to the 2.9 percent sales tax rate, the office said.
In FY 2016-2017, sales of recreational marijuana were taxed at the state sales tax rate of 2.9 percent, plus the 10 percent special sales tax and a 15 percent excise tax at the wholesale level for a total tax of 27.9 percent. Actual taxes from the recreational marijuana industry generated about $198 million.
Taxes on medical marijuana totaled $12.4 million in actual revenue, the office said. Total recreational and medical marijuana tax revenue in FY 2017-2018 are projected to be $262.9 million, $284.9 in FY 2018-2019 and $307 million in FY 2019-2020.
Sales of recreational marijuana began in Nevada on July 1, 2017. Voters legalized medical marijuana in 2000.
Actual tax revenue from July through October 2017 were more than $19 million—$6.48 million from the wholesale excise tax on medical and recreational marijuana, and $12.63 million from the retail sales tax on recreational marijuana, according to the Nevada Department of Taxation.
The department projects the 15 percent wholesale tax will bring in $56.2 million in the fiscal biennium running from July 2017 to June 2019. The state’s 10 percent retail tax on recreational marijuana is projected to raise $63.5 million in the same time frame.
The state is moving forward with new rules for the industry, which faces uncertainty from a lawsuit against the state over who can distribute the substance, as well as changes in the federal enforcement policy. The proposed regulations include requirements for businesses reporting and paying taxes.
Deonne Contine, department executive director, said the nearly 260 pages of regulations—approved by the Nevada Tax Commission Jan. 16 but still pending final approval—will replace temporary ones that expire at the end of February.
Oregon began issuing licenses to recreational marijuana retailers in October 2016. The state tax rate on recreational marijuana is 17 percent.
Over the next several years, the state is projected to generate marijuana tax revenue totaling: $159.9 million in the 2017-2019 biennium; $215.3 million from 2019-2021; $244 million from 2021-2023; $268.6 million from 2023-2025; and $293.8 million from 2025-2027.
Municipalities can enact an additional tax of up to 3 percent, with voter approval, according to the state Department of Revenue.
Retailers must have a license from the Oregon Liquor Control Commission to sell recreational marijuana. Retailers can keep 2 percent of the state tax to cover administrative costs.
According to the DOR, marijuana tax revenue, minus administrative costs, are distributed quarterly as follows:
Legal recreational sales began in Washington in July 2014, after Washington voters approved legal recreational sales and possession in the 2012 election.
The state’s Liquor and Cannabis Board approves, regulates, and enforces marijuana licenses, and also collects the 37 percent marijuana excise tax—the highest tax imposed on marijuana sales in any state.
Ninety-nine percent of total revenue from marijuana comes from taxes. The remaining 1 percent comes from license fees. In FY 2017, the state collected $300.6 million in taxes and fees. Future projections are: $361.9 million in FY 2018; $378.8 million in FY 2019; $390.2 million in FY 2020; and $402.1 million in FY 2021.
With assistance from Brenna Goth in Phoenix, Laura Mahoney in Sacramento, Aaron Nicodemus in Boston, and Paul Shukovsky in Seattle
To contact the reporter on this story: Tripp Baltz in Denver at firstname.lastname@example.org
To contact the editor responsible for this story: Ryan C. Tuck at email@example.com
Copyright © 2018 Tax Management Inc. All Rights Reserved.
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