Source: https://lawprofessors.typepad.com/marijuana_law/taxation-information-and-issues/
Timestamp: 2019-04-21 02:34:21+00:00

Document:
"Legalized Pot Isn’t Going to Save Us"
Gov. Andrew M. Cuomo announced that he would push to make pot smoking — for fun — legal in New York State. It was quite a statement for a governor who had repeatedly questioned the wisdom before, calling it an enabler of more pernicious habits. The “facts have changed,” he had said several months before, meaning really that the polling had changed — in October of 2017, support for the legalization of marijuana reached its highest point in five decades with nearly two-thirds of Americans surveyed by Gallup expressing enthusiasm for the revision.
The governor made his argument deploying the progressive rhetoric he has turned to increasingly as his neoliberal leanings have become less politically expedient. That rhetoric rightly maintains that legalization of the drug is essential to redressing injustices in a criminal justice system that has overwhelmingly penalized young men of color for carrying or smoking pot.
Two days after Mr. Cuomo made his commitments known, in fact, Brooklyn’s district attorney, Eric Gonzalez, asked a judge to obliterate more than two dozen past marijuana convictions; his office vacated open warrants for more than 1,400 people who had missed court dates for possession cases. In the absence of such erasures on a broad scale, merely legalizing the drug would do nothing to remediate the damage inflicted on thousands of people ensnared in a legal universe that so severely handicaps them for doing what white people pull off with impunity. This is why mayor Bill de Blasio followed the governor’s announcement with his own endorsements of legalization — this too a reversal — recommending that convictions for marijuana-related crimes be expunged automatically.
Of course, lawmakers in New York are not primarily motivated by the desire to make our daily chores less of a drag. They quickly suggested that taxing marijuana could fix the transit system, in need of $60 billion worth of repairs. They invited us to envision a world in which pot really was a gateway — to more efficient infrastructure!
Leaving aside for a moment whether these ambitions are all too utopian, it is easy to see what is problematic about legislators relying on our escapist pleasures to perform some of the most necessary functions of government. In 1951, for example, the federal excise tax on cigarettes was raised to help finance the Korean War. Given that the previous year had produced five separate epidemiological studies confirming the growing suspicion that smokers were more likely to contract lung cancer than nonsmokers, 1951 might have been a good time to mandate warning labels on cigarette packaging but, as it happened, that would take another 14 years to accomplish.
The enthusiasm for revising the legal status of pot around the country has for the most part obscured any debate about consequences to public health. That pot is regarded as relatively harmless is troubling, because much of what we know about it is based on studies conducted nearly 50 years ago at a time when what was consumed was much less potent than it is now.
Within the academic community, Jonathan P. Caulkins, a professor of public policy at Carnegie Mellon, has been a leading voice warning of marijuana’s attendant dangers. As he has put it, beyond the fact that pot use has been correlated with a wide variety of negative outcomes in terms of physical and mental health, the real issue is that more than half of marijuana is consumed by people who are high more than half of all their waking hours. Pot shouldn’t be dismissed simply because it won’t kill you.
Mr. Caulkins’s research also shows us who is likely to bear these health burdens to a disproportionate degree — and it is not snowboarders in Vail. Looking at a decade’s worth of federal surveys on drug use, he and a partner determined that Americans with a household income of less than $20,000 accounted for close to 30 percent of all marijuana use, even though they make up less than 20 percent of the population.
I asked Mark Kleiman, of the Marron Institute at New York University and one of the most sought-after experts on drug policy in the country, what the future looked like. He foresaw a world in which pot, legal in ever more states and eventually at the national level, will get cheaper and cheaper. The expected tax windfalls would become less likely, unless pot is taxed at the level of potency rather than sale price. The trend toward vaping means there will be greater demand for oil, and if you can melt everything down for oil, pot will be less expensive to produce, because at that point you can grow it like corn.
"Taxation and Market Power in the Legal Marijuana Industry"
In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Eight other states have subsequently followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana consumption. We use a unique dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results.
We document that overall demand is relatively inelastic, that restrictions on entry result in retailers with significant market power, and that cost shocks are more than fully passed through from retailers to consumers. We combine these empirical estimates to calculate the relationship between revenue and the tax rate, the dead-weight loss of taxation and the share of the tax burden that falls on consumers and producers, each of which are significantly effect by imperfect competition.
We find that despite having the nation's highest tax rate, Washington still has significant scope to increase revenues by raising the tax rate on retail marijuana sales. That is, they are still on the upward sloping portion of the laffer curve. The amount of revenue generated by a given tax increase is also significantly larger due to retailer market power than it would be under perfect competition. We also find significant social costs of taxation, roughly 2 dollars are lost to consumers and producers for every dollar of tax revenue generated.
A new criminal justice institution could be funded by the taxes, fees, and other revenues generated by marijuana reforms and assigned the mission of developing policies and practices to minimize the economic and social burdens that persist for those previously convicted of marijuana offenses.
Ex-offenders are often saddled with collateral sanctions at the local, state, and federal levels and have to deal with the widespread availability of their criminal records. These challenges justify the establishment of a permanent restorative institution in every jurisdiction, funded by fractions of the new resources generated by the legal marijuana industry and associated taxes.
A new Commission on Justice Restoration could be a public agency mandated to address the cumulative undue harms of prior convictions. The Commission could provide a much-needed clearinghouse and site for analyzing hard-to-collect data about the collateral consequences of convictions, and provide a centralized and impartial forum for statewide policymaking to redress these collateral consequences, to conduct and disseminate research on the fiscal and social costs of these collateral consequences, and to advocate for steps that can be taken to reduce long- term harms.
"Harmonizing Federal Tax Law and the State Legalization of Marijuana"
As states legalize marijuana and cannabis-derived products, both for medical and recreational use, the punitive federal tax effect of section 280E makes it economically impossible for many marijuana-related businesses to function profitably. By disallowing the deduction of otherwise legitimate business expenditures, the Internal Revenue Code places such businesses in a situation where they are potentially paying federal income tax on their gross receipts despite netting much less in actual income. This article explores the disproportionate tax burden on marijuana sellers and the growing tension between current federal tax law and states’ legalization of marijuana.
This article recommends the amendment of section 280E to eliminate this burden. It is structured in four parts. Part II discusses the history and legislative intent behind section 280E. It delves into the differing tax treatment for illegal drug traffickers versus that of other illegal activities. Part III describes the effects of section 280E, both intended and unintended, on state-legal marijuana sellers as well as on the overall marijuana industry. It explains how the original intent of section 280E, specifically as it relates to marijuana sellers, has been undermined by the changing public attitude towards marijuana and the rise of legal medical and recreational marijuana facilities. This part also considers the onerous tax regime placed on state-legal marijuana businesses due to the inability to deduct ordinary expenses, and how this regime could be counter-productive to overall tax policy. Part IV describes several alternative solutions to eliminate the reach of section 280E to state-legal marijuana businesses. It concludes with the recommendation to amend section 280E to make it inapplicable to activities that are statutorily legal in the states in which they are conducted.
Auditor General Eugene DePasquale today said Pennsylvania is missing out on $581 million per year in revenue by not regulating and taxing marijuana — money that could fund critical initiatives that affect Pennsylvanians’ lives. “Repeated polls have shown that a majority of Americans now believe marijuana should be legalized. In Pennsylvania, it’s 56 percent,” DePasquale said during a news conference with Pittsburgh Mayor William Peduto.
The 14-page special report, “Regulating and Taxing Marijuana,” compiles national research data, which show that an average of 8.38 percent of the commonwealth’s adults (21 and older) currently use marijuana at least monthly — a total of 798,556 adults. In Colorado and Washington, where marijuana has been legal since 2012, adult users spend an average of $2,080 annually. If Pennsylvania’s 798,556 adult users spent the same amount, they would create a $1.66 billion retail industry.
1. The illegal market can be marginalized by law enforcement or low taxes.
2. Only low taxes can defeat legal tax competitors.
3. Tax competition threatens local retail taxes more than state retail taxes.
4. Tax competition threatens local producer taxes much more than state producer taxes.
5. Federal legalization would ipso facto expose state taxes to daunting competition.
Altermeds, LLC, a medical marijuana dispensary near Boulder, Colorado, recently experienced the effects of § 280E after a tax audit found they had under-reported their taxes. The ruling from the US Tax Court in Alterman v. Commisioner, TC Memo 2018-83, is already being widely discussed in the marijuana industry.
In 2010 and 2011, Altermeds filed its taxes and applied normal tax deductions to its business. The IRS audited Altermeds and found a deficiency of $157,821 in 2010 and $233,421 in 2011 holding Altermeds was not eligible for business expense deductions. Additionally, the Internal Revenue Code (IRC) provides for a tax penalty of 20% the portion of the underpayment for under-reporting taxes.
280E states: "No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."
The origins of § 280E are slightly comical. In 1982, Jeffrey Edmondson, a drug dealer, was able to write off his business expenses under § 162. Edmondson wrote off traveling, his scale he used to measure drugs, and his rent. When Congress found out Edmondson was writing off his drug dealing expenses, they enacted § 280E.
The majority of businesses know when entering into the state legalized cannabis market they will still pay federal taxes without being able to deduce business expenses. Non-cannabis related expenses such as the sale of t-shirts are eligible for § 162 tax deductions even while selling cannabis, cannabis-infused edibles, or pipes are not deductible because of their relation with cannabis. The tax court is more likely to permit deductions the clearer the line is between a cannabis and non-cannabis business.
When Altermeds was audited, they claimed they had multiple businesses. One of their businesses sold their non-cannabis merchandise, but the tax court did not find the business to be distinct enough from their cannabis dispensary. To prove a business is distinct, Altermeds would have to show there is a separate bank account and business. The tax court held that the non-cannabis products sold by Altermeds (pipes and other cannabis paraphernalia) were sold to complement selling cannabis and were not eligible for any deductions. Lastly, the court was willing to deduct the amount for the non-cannabis business as well, but Altermeds’ brief failed to follow the court rules and the court was precluded from even contemplating the deductions.
The tax court did allow for the cost-of-goods-sold allowances that the IRS had stipulated prior in the litigation, but Altermeds was still forced to pay its overdue taxes along with the 20% penalty. With this most recent tax decision taking a hard line approach to deductions associated with cannabis businesses, participants in the industry need to be careful about, and cognizant of the tax consequences that can result from, intermingling cannabis and non-cannabis products.
UPDATE: I just noticed that Bryan Camp over at TaxProf Blog has this long posting on the Altermeds decision under the heading "Lesson From The Tax Court: Into The Weeds on COGS." Here is his concluding "Lesson" concerning the case: "Get your accounting straight and be sure to hire tax counsel who have the specialized knowledge needed for the job of representing you before both the IRS and Tax Court."
In just the past six years, voters in eight states and the District of Columbia have passed ballot measures to legalize the adult use of marijuana. At least seven more states may follow suit this fall. In total, over half of states have legalized marijuana for medical purposes since California first did so in 1996. This dramatic change in public attitudes is reflective of changes as measured by survey data, with 61% of Americans now supporting lifting the ban on marijuana. More than just a change in attitudes toward marijuana itself, the growing movement for legalization also acknowledges the immeasurable harm done by the criminalization of marijuana use, especially among communities of color.
New York State’s 2014 Compassionate Care Act legalized marijuana for medical use. Legislation to legalize adult marijuana use, the Marijuana Regulation and Taxation Act, has been reintroduced in each subsequent legislative session. In his Executive Budget for State Fiscal Year 2018-2019, Governor Cuomo proposed a study of the economic impacts of legalization and the implications of continuing to prohibit use while other nearby states move to legalize. In this report, New York City Comptroller Scott M. Stringer provides an estimate of the fiscal impact of legalizing adult-use marijuana sales in New York. This report estimates the legal, adult-use marijuana market at some $3.1 billion per year in New York State, about $1.1 billion of that in New York City. In turn, the Comptroller’s Office estimates that this market could conservatively yield annual tax revenues of as much as $1.3 billion total at the State and City levels. That assumes a combination of state and local sales and excise taxes in line with what other jurisdictions have passed that could yield up to $436 million in revenues for the State, $336 million for the City, and some $570 million for localities outside of the city. Of course, the total revenues realized at the State and local levels would depend on the final outcome of any legalization effort.
Beyond the mere dollars that legalization could yield, decriminalization has clear human and societal benefits. In states where adult marijuana use has been legalized, there have been declines in teenage usage of marijuana, and public health and safety concerns have been addressed. Finally, misdemeanor marijuana arrests continue to fall most heavily on young Black and Latino New Yorkers, despite a higher reported usage rate among White youth. Erasing the harmful repercussions, including the stigma of a criminal record, would open doors that have been closed to too many for too long, yielding incalculable human, economic, and societal benefits.
Analysts say mainstay revenue such as income, property and sales taxes still dwarf marijuana taxes in local and state government budgets. However, "every dollar is important," said Stephen Walsh, a director with the U.S. Public Finance group at Fitch. "It's very difficult for governments to raise taxes." Cannabis taxes represent a welcome infusion of all-new money, he said.
Were the federal government to OK sales throughout the nation, New Frontier analysts forecast that through 2025, weed could bring in about $100 billion in fresh revenue for the U.S. Treasury Department. That includes a hypothetical 15% federal sales tax, business tax revenues and payroll deductions. But for now, revenue is on the rise in the handful of states that allow sales, though the way state budgets are structured makes it difficult to trace marijuana taxes from the point of sale to the purchase of school textbooks.
Colorado and Washington, which started allowing recreational marijuana sales in 2014, have so far collected nearly $1.48 billion in revenue. Washington has brought in more than $773 million to pay for healthcare services, research from state universities on the effects of short-term and long-term pot use, reducing marijuana use among minors and other efforts. Meanwhile, Colorado has received more than $702 million, with the money going toward grants that help pay schools' capital construction costs, as well as shoring up local and state tax bases. The state collected $247,368,473 last year alone, revenue records show.
In an interview, U.S. Rep. Jared Polis, D-Colorado, said bringing underground economic activity above-ground, then taxing it reasonably, creates "a more efficient market."... While Colorado's counties and cities can choose whether to allow marijuana businesses, Polis said some less-prosperous parts of the state have seen pot turn into an important revenue producer, letting officials support schools and children's scholarships, along with addressing infrastructural needs.
The list of states with legal weed is growing, with others that have voted to allow it now including Oregon, Nevada, Massachusetts, Maine and Vermont. After starting tax collections in 2016, Oregon has divvied up about $126.9 million in marijuana taxes between schools, city and county governments, mental health, alcoholism and drug services, the Oregon State Police and the Oregon Health Authority's drug prevention and treatment services.
"These funds will be used in combination with other resources for drug and alcohol prevention for a comprehensive, evidence-based approach to reducing drug misuse and excessive alcohol use," said Jonathan Modie, OHA spokesman. A campaign to prevent minors from using marijuana and data collection on alcohol and drug use are part of the drug prevention and treatment program, he said.
The amount of pot money Oregon allocates annually to school districts is based on a district's weighted daily membership, a metric that takes into account how many full-time students are in a district and other factors, such as the number of students with special needs or experiencing poverty. Salem-Keizer Public Schools, Oregon's second largest school district, is receiving a little more than $2.7 million in marijuana money this year, said Oregon Department of Education spokesman Peter Rudy. That's enough to pay for the equivalent of 27 teachers, considering each costs around $100,000 with salary and benefits combined, according to district spokeswoman Lillian Govus.
As the first state to open recreational marijuana retail stores, Colorado provides a case study to examine the potential economic effects from legalization. Direct employment in the marijuana sector has risen robustly since the passage of Amendment 64, contributing about 5.4 percent of all employment growth in Colorado since January 2014. Despite these solid gains, employment in the sector makes up just 0.7 percent of total employment in the state. Similar to employment, tax collections from marijuana have also increased sharply in recent years, and are equal to about 2 percent of general fund revenues in the state. Although legalization has contributed to employment growth and tax revenues in the state, it is important to weigh those benefits against the potential costs to public safety and health outcomes.
"Taxing & Zapping Marijuana: Blockchain Compliance in the Trump Administration"
Proponents of the legalization of recreational marijuana have argued that the policy would result in increased tax revenues for states. However, if legal substances are highly substitutable, tax revenues from marijuana may crowd out pre-existing revenues. We study the interaction between the marijuana, alcohol, and tobacco industries in Washington state using a combination of detailed administrative data on the marijuana industry and scanner data on alcohol and tobacco sales.
We estimate a demand system and find that alcohol and marijuana are substitutes, with the legalization of marijuana in isolation leading to a 12% decrease in alcohol demand, and a marginal cross price elasticity of demand of .16. Marijuana legalization results in a 20% decrease in tobacco demand, but the marginal relationship is unclear. When prices are held fixed, 50% of marijuana tax revenue comes from cannibalizing alcohol and tobacco taxes. When those industries adjust their prices, only 22% of marijuana tax revenue comes from alcohol and tobacco. Though Washington has the highest marijuana tax rate in the country, a 1% increase in the marijuana tax results in a 1.01% increase in total revenues collected by the state.

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