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Getting High on Taxes

March 3, 2015

Eight months after legal recreational cannabis stores opened, pot retailers say I-502's tax structure is driving consumers away.

Cannabis City in Seattle’s SoDo district was one of the first pot shops stores to open under Washington’s legal marijuana initiative. Licensed stores like Cannabis City were to attract recreational users from the black market and the medical marijuana dispensaries. The roll-out of legal pot was slow and shaky; there were very few stores, shortages of product, and retail pot prices were shy-high. More than a half year later, the legal retail system is expanding, but still a work in progress.

Half of the available retail licenses have been issued (116 out of 334 available), according to the Washington State Liquor Control Board (WSLCB). Total combined sales have topped the $100 million mark.  This includes figures from growers, processors and retail licensees. Combined taxes have brought in about $45 million to state coffers so far. This includes the hefty state excise taxes, sales taxes and other business taxes. The state forecasts another $237 million through 2017, and $436 million for the 2017-19 state budget.  It is significant revenue, but less than the $1 billion plus that initiative proponents promised.

Legal pot is still expensive, mostly because of high excise taxes.  And that threatens the industry right now, say licensees like Cannabis City owner James Lathrop.

“I think a major focus of the 502 law is to have it priced appropriately so we can use the market for, it says, to compete or eliminate the black market. And these prices do not do that.”

Marijuana is taxed at 25% at every stage – at harvest, at processing, and again at the stores.

Lathrop says, “The price point is keeping customers away from the store, if not driving them to these other markets, absolutely. You’ve got the medical market, which is now considered the grey market, and then you’ve got the black market, and both of them are able to succeed far better than we are.”

Adding to the burden is the fact that a marijuana business can’t deduct those taxes from federal returns as a cost of business, because of conflicting federal marijuana laws. So more expense is included in the final price of pot.

“I think the growers and processors are struggling hard,” Lathrop adds. “I think that some of them may be going out of business. I think the retailers--it’s very difficult to find a location and appropriate zone to get it open, to make it profitable. So it’s an incredible struggle right now for all of us in the industry, and I think that was certainly not part of the intention.

In response, the WSLCB spokesman Mikhail Schmidt said:

“The tax structure for recreational marijuana businesses has been known since I-502 was a ballot measure.  Only the legislature has the ability to change the tax structure. Prices should continue to drop as more businesses get licensed and recreational stores capture more of the market. All of these forces will continue to play out as the market sorts itself and some businesses will be successful and others will not.”

Initiative 502 was passed with the expectation by many—especially in the legislature-- that some fine tuning of the law would be necessary. That appears to be likely with several bills introduced in the legislature, especially with one sponsored by Seattle Rep. Reuven Carlyle (D-36th District) which would replace the compounded 25% tax with a single 30% excise tax at the point of retail sale.

Featured Image Credit: Stuart Isett

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Stephen Hegg

Stephen is a 25-year veteran of KCTS, producing a wide range of cultural and public affairs series, documentaries and arts programming.  His credits include PIE, Something in the Water  (PBS feature on Seattle’s indie music scene), the gala opening of Benaroya Hall, and documentaries on Asahel and Edward Curtis, Dan Sullivan and Doris Chase.  Seattle-born, Hegg is a graduate of Whitworth University and is also an accomplished violinist and avid cyclist.

More stories by Stephen Hegg

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"Eight months after legal recreational cannabis stores opened, pot retailers say I-502's tax structure is driving consumers away."

You mean the one retailer you quoted in this story?

Location could have something to do with his struggles. He's in an industrial part of SODO with no natural residential or walking traffic. He may have been the first but now that eastside has options and other shops have opened in Seattle's neighborhoods he's not attracting the same level of business maybe?

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