Washington CPA: Update on 25% Marijuana Excise Tax

"If you any person in a trade or business receives a payment of $10,000 or more in any single transaction or series of transactions they are required to file a form 8300 within 15 days of receiving the cash.  Please note that a “person” includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate.  You should also be aware that “cash”  includes cashier’s checks, money orders, bank drafts and traveler’s checks.

By Dean G. Guske, CPA

Over the last several weeks, there has been quite a bit of discussion about how to apply the 25% excise tax to your sales. I have read a few emails that have been forwarded to me for interpretation and have had some conversations with clients about what to do. I’m writing this to all of you in Washington’s legal marijuana industry as a courtesy and to clarify the issue from my perspective and give you my opinion of how the tax should be calculated.  This primarily applies to producers and processors, however there are some implications to retailers, and I have some comments on some strategies being considered by them.

At this point, the LCB is still working to get all of their interpretations out to license holders.

RCW 69.5 0.535 reads in relevant part as follows:

1.    There is levied and collected a marijuana excise tax equal to 25% of the selling price on each wholesale sale in this state of marijuana by a licensed marijuana producer to a licensed marijuana processor or another licensed marijuana producer. This tax is the obligation of the licensed marijuana producer.

2.    There is levied and collected a marijuana excise tax equal to 25% of the selling price on each wholesale sale in this state of marijuana concentrates, usable marijuana, and marijuana infused products by a licensed marijuana processor to a licensed marijuana retailer. This tax is the obligation of the licensed marijuana processor.

3.    There is levied and collected a marijuana excise tax equal to 25% of the selling price on each retail sale in the state of marijuana concentrates, usable marijuana, and marijuana infused products. This tax is the obligation of licensed marijuana retailer is separate and in addition to general state and local sales and use taxes that apply to retail sales of tangible personal property, and is part of the total retail price to which general state and local sales and use taxes apply.

 This is all simple and straightforward on the face of it. However, all of you are very clever entrepreneurs and you want to arrange your business transactions in a way that minimizes the impact of this tax on your business.  I obviously agree.

According to Rick Fortin, Marijuana Tax Unit Supervisor at the LCB, packaging is required by law and needs to be included in the price of the product which would therefore be subject to the 25% excise tax. In other words, the LCB will not allow you to separately state your packaging and avoid paying excise tax on any amount that you separately state on your invoice. In my opinion, this is a logical interpretation.  I know this won’t make you happy, but unless you want to litigate the point, I wouldn’t recommend stating this separately on your invoices to reduce your excise taxes.  As for delivery, transportation and other service fees, it is my understanding that the LCB is still formulating their interpretation and position. It’s also my understanding that they are consulting with the Department of Revenue (DOR) and the Atty. Gen.’s office in order to clarify what should be included in the selling price subject to the excise tax.

I think the fact that the LCB is consulting with the Department of Revenue on these issues means that it may not bode well for separating service and delivery charges with respect to the LCB excise tax. I say this only because when computing sales tax, shipments that consist of taxable tangible personal property and delivery charges, those delivery charges are included in the sales price and are therefore subject to sales tax. I’m not sure where the LCB will come down on this, but my guess is that they may try to follow the DOR rule on sales taxes. Monkey see, monkey do.

Okay, where do we go from here? The LCB has made their position clear with respect to packaging costs. Therefore, I do not recommend separately stating those costs on your invoice with an expectation of avoiding excise tax for the packaging portion of your sale. With respect to service and delivery charges, my recommendation is as follows. If you are going to separately state service and delivery charges prior to the LCB’s official ruling don’t be overly aggressive until we get some additional clarification from them. I don’t want you to put yourself in a position where you will be required to amend returns, pay substantial amounts of additional tax and potentially some penalties. I know this is frustrating but the downside could be more so.

I have also had some discussions with a few retailers recently asking if they can avoid some excise tax by a selling ”kits”. For instance, selling a gram of cannabis at a minimal amount over the wholesale price if they also purchase a pack of rolling papers that have been generously marked up. (Again, the entrepreneur’s mind at work!) A strict reading of the excise tax law seems to allow this strategy. However, if we take a look at the RCW that addresses “bundled transactions” for sales tax purposes, there may be some pushback from the LCB on this kind of strategy. Again, my recommendation is to not get overly aggressive with this strategy.

As always, if you want to discuss this in more detail and how it applies directly to your business please give me a call or shoot me an email at dean@deanguske.com

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