Rich tax pickings in the marijuana industry
Colorado started retail marijuana sales on January 1, 2014 and Washington on June 1, 2014. The tax haul for Washington State in its first year from the sale of recreational weed reached $65 million. In Colorado it was $44 million with a further $76 million from medical marijuana sales tax. The $44 million for recreational sales fell short of the governor´s office estimate by some $56 million. It is estimated that the marijuana industry will inject some $10 billion into local and state economies this year. Sales via medical dispensaries and recreational dispensaries in Colorado will amount to a third of the total. In the next four years these figures are likely to triple at the minimum. So the IRS will be expecting a bumper harvest.
Colorado marijuana tax is structured as a 15 percent excise tax on the “average market rate” of wholesale marijuana, plus a 10 percent state tax on retail marijuana sales, plus the state sales tax of 2.9 percent, plus local sales taxes, plus local marijuana taxes such as a 3.5 percent tax in Denver. This means that in Denver an eigth of an ounce will carry about 29 percent overall tax.
A major problem for legal marijuana dispensaries is that they must pay sales tax on 100% of their gross income. In any other business it is normal to be able to deduct your costs and expenses but tax court ruling on code 280E prevents legal dispensaries from deducting normal business expenses. This problem comes about because marijuana is a federally controlled substance and federal law overrides local state laws. This means that they could be liable for tax evasion if they don´t declare and possibly be open to criminal prosecution if they do. Damned if you do, damned if you don´t.
One way for a Colorado dispensary to get round the problem is to make sure that the area designed for marijuana sales does not occupy 100% of the store. If it offers other products and services which are deductible and small part dedicated to the sale of weed, then a large part of the rental would be deductible. Likewise the grower must report his profit, but this is sometimes difficult to determine. Although code 280E prohibits certain deductions, it does not exclude the cost of the goods sold. Thus the cost of production (machinery, rental, wages, repairs…) would be deductible. Marketing and selling costs would not.
23 States and Washington DC have legalized medical marijuana. As more states do so, the black market economy will dwindle and despite huge tax levies the marijuana industry represents an enormous economic boost for local communities. This is not just in terms of retail sales but also in related sectors including the growers, manufacturers of infused products and paraphernalia, testing labs, pot tourism and more. The topsy turvy nature of the industry and the way it is treated needs urgent attention. Much valuable information is available from the NCIA.
In terms of protecting legitimate marijuana business, banking access and fair tax policies the National Cannabis Industry Association is doing sterling work. Find out more about the NCIA´s campaigns here.