Culture: Let's Talk (Cannabis) Taxes

Culture: Let’s Talk (Cannabis) Taxes . . .

By Sean Donahoe

8/6/2015

To many voters, acceptance of cannabis policy reform rests on an assumption that money grows on trees, that untold revenues can be magically conjured into existence by simply imposing heavy taxes on medical and (soon) retail cannabis sales here in California. But it’s just not that simple.

To begin, simply raising taxes will likely shift commercial activity away from the regulated sector and (deeper) into the illicit economy. Other states that have moved cigarette taxes up have seen increases in counterfeit or smuggled cigarettes being peddled on the streets by informal vendors. With legal cannabis, we’ve already seen consumers in the recreational states of Washington and Colorado avoid high taxes by either continuing to buy off the street or continuing to buy through the existing medical system. In both cases, taxes have been simplified since legalization occurred, with Washington recently modifying their elaborate three-tier taxation system to a simple point of sale tax and Colorado already deciding to reduce their retail tax percentage. Looking at the rollout of Oregon’s recreational system, there already seems to be a process under way to modify what the voters passed (in this case raising taxes above what the voters approved—but let’s watch if they see the error in their ways and reduce taxes over time).

In California, sales of medical cannabis have been considered a taxable transaction by the Board of Equalization (BOE) since 2007, and every collective requires both a sellers permit (like any other business) as well taking on the responsibility for collecting the appropriate sales tax and any additional taxes due at the time of sale. (Of course, from the perspective of patients, collectives often fold taxes into the posted retail price of the medicine, and it’s difficult for the patient to know the amount of taxes being paid for each transaction). Many localities that issue licenses to collectives have also asked their voters for an additional tax, ranging from 2 percent to 10 percent and these help incentivize cities, keeping collectives open within their cities. The best example are the cities of Oakland and Berkeley backing the embattled collectives Harborside and Berkeley Patients Group in federal court, knowing that their local cannabis-loving voters, patients in need, and annual budgets are all threatened by a potential closure of one of their licensed collectives.

On the subject of the federal government, there’s a whole other tax conundrum as the dreaded Section 280E of the Internal Revenue Code disallows normal business deductions from state-authorized cannabis related businesses. Oddly enough, collectives are allowed to write off the cost of goods sold prior to federal taxes being assessed. Yes, collectives can legally deduct the cost of their federally-illegal cannabis from their federal taxes, but not their employee nor facilities costs, according to the federal tax code. While that makes very little sense, I suggest that everything in the realm of taxes and cannabis is wrong-headed.

Back to the subject of hungry voters and needy cities, it’s often assumed that taxes can be jacked up, that our broke governments in California can simply tax medical cannabis as much as they want, and patients won’t suffer, and the illicit economy won’t entice those counting pennies. It’s often mistakenly assumed that legalizing and taxing cannabis will solve all of California’s budget problems, but we don’t expect our budgets to balance based on taxes on tomatoes or booze—why should we expect that taxed cannabis will be different?

Taxes need to be paid, there’s no getting around it. Taxes also need to be reasonable, there’s no getting away from that. But taxes due on cannabis first need to be understood, by both the taxed in the industry and the taxers in government. With recent visits by BOE members Fiona Ma and George Runner up to Humboldt and with an amnesty program being rolled out by Chair Jerome Horton, and with Assembly Bill 266 empowering the Board of Equalization as the statewide licensing and enforcement body for medical cannabis, I think we’re going to make a lot of progress in the next few months . . . here’s to keeping it reasonable.