Colorado’s Crazy Marijuana Tax

Nov 9, 2013

Tax­ing what you can’t mea­sure is non­sense. But Col­orado vot­ers were poised Tues­day to do just that, by tax­ing whole­sale mar­i­juana sales at 15 per­cent — when no whole­saler exists. That’s right: Most Col­orado adult-use mar­i­juana sales must go directly from pro­ducer to con­sumer with no whole­sal­ing allowed, and no whole­sale price as a mea­sure for the whole­sale tax! That’s because Col­orado law, at least at first, requires ver­ti­cal inte­gra­tion of mar­i­juana busi­nesses. Ver­ti­cal inte­gra­tion? Here’s an exam­ple: A wine com­pany owns land, vines and a win­ery, and sells to con­sumers only at its own out­let store. Sub­sti­tute “mar­i­juana grow area” for land and vines, “mar­i­juana pro­duc­tion facil­ity” for win­ery and “mar­i­juana retailer” for out­let store, and you under­stand the Col­orado model. Col­orado law will require that at least 70 per­cent of mar­i­juana sales fol­low that model, with the sup­ply chain inte­grated ver­ti­cally (from top to bot­tom) — and with no whole­saler. So how do you apply a whole­sale level tax when no whole­saler exists? With great dif­fi­culty. Col­orado reg­u­la­tory author­i­ties are strug­gling for answers. Bas­ing a tax on a fic­ti­tious price means no one will ever know the cor­rect tax. Tax­pay­ers will spend time and money try­ing to beat the sys­tem, and gov­ern­ment will spend time and money in self-defense. Gov­ern­ment and busi­ness are likely to grow irri­tated with one another as they argue about unan­swer­able ques­tions. Our dys­func­tional inter­na­tional income tax sys­tem should have taught us that tax­ing what we can’t mea­sure is crazy. Multi­na­tional cor­po­ra­tions like Google, Ama­zon and Star­bucks pay lit­tle tax any­where as they trans­fer assets among sub­sidiaries. What do they charge them­selves for those assets? (How much does the right hand charge the left hand?) Cur­rent trans­fer pric­ing rules allow multi­na­tional cor­po­ra­tions to con­struct arti­fi­cial prices for sales between related par­ties, sales that almost never occur in the mar­ket­place. “Fabled tax wiz­ards” work­ing for multi­na­tion­als come up with a “tax return posi­tion” — the company’s view of how much tax it should pay. (Not much, and often zero.) Why make the same mis­take — open­ing the door to arti­fi­cial pric­ing — in tax­ing mar­i­juana? Back to Colorado’s tax mess, and its warn­ings: Ver­ti­cal inte­gra­tion (the no-wholesalers rule), imposed by the Leg­is­la­ture in 2013, could coex­ist eas­ily with a tax based on weight or potency. That is, to tax mar­i­juana at so many cents per gram, you never need to know the price. But a price-based, whole­sale level tax was locked into place by Colorado’s 2012 ini­tia­tive (which did not require, for­bid or address ver­ti­cal inte­gra­tion at all). Colorado’s whole­sale, price-based tax would be admin­is­tra­ble with­out ver­ti­cal inte­gra­tion, because with­out it, real, sep­a­rate whole­salers want to receive high prices, and their real, sep­a­rate cus­tomers want to pay low prices. With that ten­sion, there’s a real, bargained-for mar­ket price to base taxes on. Mean­while, Wash­ing­ton State’s law taxes newly-legal mar­i­juana at whole­sale, too, but Wash­ing­ton avoids Colorado’s prob­lem by for­bid­ding ver­ti­cal inte­gra­tion — so related-party sales can’t hap­pen. That is, whole­salers are sep­a­rate from retail­ers, so the whole­saler will get an arm’s length, fair mar­ket value price from the retailer. That means the Wash­ing­ton State price-based whole­sale tax will be related to real­ity. No fuss, no muss. We are just at the begin­ning of fig­ur­ing out how to reg­u­late and tax mar­i­juana. Other states think­ing about legal­iza­tion need to study the prim­i­tive exam­ple of Colorado’s tax, and avoid the pit­fall. The obvi­ous answer is to for­get price and adopt a surer tax base like weight or potency, fol­low­ing Fed­eral prece­dents for alco­hol and tobacco. Or, if states want a price-based tax for some rea­son, they can delay mea­sur­ing it until there’s an actual arm’s length sale to an unre­lated party. But here’s the clear les­son for future legal­iz­ing states: If you require or allow ver­ti­cal inte­gra­tion, a whole­sale tax on prices — when there is no actual sale — is crazy. It’s the kind of tax whose only fans will be tax pro­fes­sion­als, billing by the hour. Pat Oglesby: Lawyer; For­mer Con­gres­sional Tax Staffer. Source: Huff­in­g­ton Post (NY) Author: Pat Oglesby Pub­lished: Novem­ber 7, 2013 Copy­right: 2013 Huff​in​g​ton​Post​.com, LLC Con­tact: scoop@​huffingtonpost.​com Web­site: http://​www​.huff​in​g​ton​post​.com/

1132c4bd4clorado.jpg 150x115 Colorado’s Crazy Marijuana Tax

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Colorado’s Crazy Mar­i­juana Tax

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