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Let’s Talk (Cannabis) Taxes . . .

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 o

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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.

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