The bill replaces the current multi-tier excise tax (25% of the total value of each wholesale and retail transaction) and replaces it with a single 37% tax at the retail level. This rate is also scheduled to decrease to 33% starting July 1, 2017 and to 25% starting July 1, 2019. The bill also shifts the obligation of the tax, so that instead of it being a direct obligation of the seller, the tax is now an obligation of the buyer that the seller must collect and hold in trust for the buyer.
SB 5467 has a few other provisions of note, but let’s look at the tax shift first, because it’s a biggie. First, understand that this is likely not a tax cut, at least not until the rate falls to 25% in 2019. This may be a surprise to those pushing the notion that Washington’s market had a 50% tax on all sales, but that is really a failing in math, as Washington’s current effective tax rate when discounting sales and B&O tax is in the 30%–35% range, depending on retail markup. For example, here’s how it works if the wholesale price for one gram of marijuana is $4.00. Add 25%, and the total wholesale price is $5.00. Current retail prices are marked up by about 200%–300% of the wholesale prices. If the retailer doubles that price to $10.00, there will be an additional $2.50 of excise tax paid. If the retailer triples to $15.00, there will be an additional $3.75. Do the math and you get an effective tax rate of 35% when the retailer marks up to double the wholesale rate and about 31.7% when the retailer marks up to triple the wholesale rate. So until 2019, we should really see this as basically a revenue-neutral tax.
However, SB 5467 is still worth supporting because of its effect on the federal tax side for marijuana businesses. Under Washington State’s current tax structure for marijuana, excise taxes must be treated as income by the recipients for federal tax purpose, even though the tax is paid almost immediately back to the state. As most of you already know by now, I.R.C. 280e bars marijuana businesses from deducting expenses from their gross profit on their tax returns. So unless the excise tax is considered a Cost of Goods Sold for producers (unlikely) or retailers (definitely not), those businesses have to pay federal taxes on purely phantom income.
This bill changes that. By shifting the tax burden to the buyer and by directing that the tax be held in trust for the state, retailers will no longer have to report the tax as income. It will mirror our state’s general sales tax in that way. Producers and processors won’t need to deal with the tax at all. This simplification should do wonders for the industry and make life easier and cheaper for just about everyone.
One caveat is that SB 5467 also includes liability language similar to what Washington has for unpaid sales taxes. If the retailer does not or cannot pay the sales tax to the state, its employees, owners, or officers in charge of paying the tax to the state can be found personally liable. The tax would not be considered a trust fund tax, and the potential liabilities of a trustee in this case carry a little more weight than other types of business tax liabilities.
All in all, this is definitely a measure to support, so we encourage you to call your local legislators to urge them to push this measure forward.