Washington State Considers Revising Excise Tax

On April 3, 2015, the Washington state Senate approved a measure that would replace the current three-tiered excise tax on cannabis with a single 37 percent tax to be paid on retail sales. SB 6062 now moves to the House, which is also considering measures to combine the recreational and medical industries under one regulatory umbrella and to permit collaboration with Indian tribal cannabis businesses.

The legislature is considering major revisions to a system of taxation and regulation that appears increasingly unworkable. The changes may come none too soon as Oregon retail sales are expected to begin in early 2016 and a number of Indian tribes have begun to explore the potential for cheaper and more convenient cannabis commerce.

Washington now imposes a 25 percent tax on retail cannabis three times: when producers sell to processors, when processors sell to retailers and when retailers sell to end consumers. Taxes reportedly make up nearly two-fifths of the retail price. Medical sales, on the other hand, are untaxed and relatively unregulated. Even under proposed measures they would remain tax exempt. The 37 percent rate is still too high in the view of many, but less than the present system’s rate and it may reduce the price incentive for recreational consumers to turn to the medical or black markets.

Oregon’s Measure 91 provides for a single excise tax that is paid by the producer. The rate is $35 per ounce for flower, $10 per ounce for leaves and $5 per immature plant. Currently, 40 percent of the revenues will go to the state’s Common School Fund, 20 percent to the Mental Health, Alcoholism and Drug Services Account, 15 percent to the State Police Account; 10 percent each will go to cities and counties, and 5 percent to the Oregon Health Authority for drug prevention programs.

The law prohibits local taxation, although certain localities have adopted them in hope that the measures will be grandfathered prior to the July 1 effective date of the state law. Cities and counties that have adopted local taxes are apparently variously motivated either to keep the industry out or to find a way to pay for the increased costs that legal marijuana may bring. In any event, for those locations in Oregon on the Washington border, the lower tax rate could certainly encourage marijuana tourism and further harm the competitive position of Washington retailers.

As became clear at the recent Tribal Marijuana Conference at the Tulalip Resort Casino on the Tulalip Reservation in Washington state, several tribes are exploring the possibilities for capitalizing on their sovereign status, as some tribes have chosen to do with casinos or tax-free cigarettes. Reservations could open marijuana stores in parts of the state where they are scarce because of local bans, such as Yakima and Klickitat counties, home to the Yakama Indian Reservation.

Tribes might also compete on price because state taxes are generally inapplicable on tribal land. Finally, tribes could also set up their own consumption rules. In Washington, as in many states, consumption is banned in sales establishments. Tribes could elect to permit it, opening the way for Amsterdam-style cafes or casinos that would permit marijuana consumption. Tribes have considerable room for invention in states that have legalized retail marijuana.

This apparently is already cause for concern in the state legislature, which is currently contemplating a bill that would permit tribes to enter into a compact with the governor in order to interact with existing marijuana businesses. It is not clear that tribes would want to do this, but it is a good indicator that the legislature is worried about competition between the tribes and the existing retail industry.

As an early state to legalize recreational marijuana, Washington was likely expected to have to fine tune its tax and regulatory system. As more states and Indian tribes get into the marijuana business, however, it is rapidly becoming  urgent for Washington to act in ways that will protect its recreational marijuana industry.

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