January 12, 2015 marks the beginning of the 2015 Washington legislative session and a few cannabis related bills have already been introduced, including Senate Bill 5052, the Cannabis Patient Protection Act. On the tax front, State Senators Hatfield and Rivers have introduced Senate Bill 5003, which could change the landscape for implementing the current Marijuana Excise Tax (MET).
It is now old news that Washington imposes a 25% MET on Washington producers, processors, and retailers. That is, a 25% tax is assessed at each stage of the supply-chain. Washington’s three-tier excise tax places a significant burden on operating in the I-502 economy. To make matters worse, it is widely viewed that the MET is not deductible for federal income tax under IRS Code 280E. Thankfully, SB 5003 is an attempt to address the shortcomings of Washington’s current marijuana tax structure and will hopefully alleviate the resulting financial stress in the marketplace.
Overall, SB 5003 proposes the following:
- Increase the MET rate from 25% to 26%
- The MET is paid by the buyer to the seller
- The MET is deemed to be held in trust by the seller until paid by the seller to the Liquor Control Board
- If the seller fails to collect the tax, or collects the tax but does not remit it to the Board, the seller is personally liable for the amount of tax; and
- The MET must be separately stated from the selling price on any invoice or bill of sale.
Marijuana producers will be the clear winners under SB 5003 as it provides for them to escape the MET. So long as the producer collects and remits the MET from a buyer (e.g., the cannabis processor), the producer no longer has a tax cost or expense but instead has a trust-fund liability. Because the tax burden is shifted to the buyer, producers no longer need worry about how the MET is treated for federal income tax purposes.
SB 5003 also defines a number of key terms. For example, the terms “selling price” and “retail sales” are the same as for sales tax in Washington. In any event, the selling price must represent the true value of the product, as measured either by market value or the sum of all direct and indirect costs. Finally, SB 5003 creates a detailed structure for imposing personal liability for any unpaid MET on officers, chief executives, and other responsible parties if a business entity “has been terminated, dissolved, abandoned, or is insolvent.”
* This is a guest post by tax lawyer, James Hunt.