Unique insight into the current tax laws affecting the costs of retail Cannabis.
What is the percentage of tax paid on marijuana store business? Is this a net or gross profits tax?
In Washington marijuana products are taxed at a multiple compound rate: That is 25% from the grower to processor, plus 25% from the processor to the retailer, plus 25% from the retailer to the customer [each of these levels of tax pay tax on the previous tax], plus another 10% of regular sales tax, city tax, and B&O [which includes taxation of the excise tax itself]; then there is an additional Federal tax of another 25% [that is a fed 35% tax on the ~70% gross profit [gross after cost of goods] falling out at about 25% of gross – including Federal taxation on the State excise tax itself.). —
So on the retailer side alone that is ~60% of the product in pure tax, with ~30-35% going to to cost of goods and ~5% left to actually run the business; the growers and processors are in a similar situation.
How is this taxation impacting your business?
All cannabis businesses in Washington are set to fail under this unreasonable and compound tax structure; many will fail, some will survive; but none can exist under this tax structure for very long.
What can be done?
There are four fixes to the above tax problems; some easy, some hard, some more hard:
Push the Washington State Marijuana Excise Tax directly on to the customer as a true sales tax. If the rate stays the same at 25% that would still be in addition to the ~10% sales tax puting the tax to the customer at ~35% of the product — that is about the most I think the public will tolerate. And by pushing on to the customer as a true sales tax, we would avoid having to pay federal tax on the excise tax itself — which is certainly the most pressing problem (the 280e problem).
Remove the “processor” and “grower” distinction entirely. Under the present system a grower cannot sell directly to a retailer, but has to send the product (even just bud) to a processor for packaging and distribution. This adds additional cost. A grower can be a “processor” and “grower” if they pay for each licence separately and by doing so they can skip one level of 25% tax. This then puts true “processors” (such as an edible company who do not also have a farm to grow on) at a significant financial disadvantage because they do have to pay the extra tax — and that puts the cost of edibles out the roof with two levels of excise tax before selling to retail where it is taxed yet again (a set of 5 cookies of 5 mg THC each in my store retails for about $45 … ). To simplify, I recommend two licenses: wholesaler and retailer. And a wholesaler should be able to sell to “wholesale processing” without additional taxation.
Also Less Easy
Remove the 25% excise tax from the wholesaler/grower/processor entirely. One of the prime directives of I-502 is to limit spillage of the product over into the very robust black market here in Washington; yet the heavy taxation of the grower/processors by the State and Feds provides significant incentive for them to sell to the black market to stay afloat. This has already happened in Colorado resulting in several Federal raids, and their taxation is much much more reasonable.
Fix the 280e problem. But, there is a very easy fix to this very hard problem: 280e is the IRS code that declares if you have a business that sells a Schedule I or Schedule II substance, and that substance is prohibited at the Federal or State Level, than you cannot take ANY normal business deductions, including things like the State of Washington Excise Tax (since at this point it is not pushed to the customer and is presently hidden within the sale of the product). Pharmaceutical companies get to skirt this code and sell schedule II substances since they are not prohibited at the Federal or State level. All you really have to do is change the “or” to “and.” The code would then read “which is prohibited by Federal law AND the law of any State in which such trade or business is conducted.” — therefore if it is legal in a State (Like Colorado or Washington) then this code would no longer apply, but it could be used against a business operating illegally in any State. Certainly much more true to the spirit of the law; penalize those operating illegally, but if someone has a legal business licensed by the State, they then can function as a true legal business with normal federal taxation.