California Department Of Tax And Fee Administration Reports Cannabis Tax Revenues For Fourth Quarter Of 2018

CALIFORNIA:  The California Department of Tax and Fee Administration (CDTFA) reported revenue numbers today for cannabis sales for the 4th quarter of 2018. Tax revenue reported by the cannabis industry totaled $103.3 million for 4th quarter returns due by January 31, 2019, which includes state cultivation, excise, and sales taxes. It does not include tax revenue collected by each jurisdiction.

As of February 14, 2019, California’s cannabis excise tax generated $50.8 million in revenue reported on 4th quarter returns due by January 31, 2019. The cultivation tax generated $16.4 million and the sales tax generated $36.1 million in reported revenue. Retail sales of medicinal cannabis and medicinal cannabis products are exempt from sales and use taxes if the purchaser provides a valid Medical Marijuana Identification card and valid government-issued identification card.

Previously reported revenue for 3rd quarter returns was revised to $100.8 million, which included $53.3 million in excise tax, $12.6 million in cultivation tax, and $34.9 million in sales tax.

Revisions to quarterly data are the result of amended and late returns, and other tax return adjustments.

In November 2016, California voters approved Proposition 64, the Control, Regulate, and Tax Adult Use of Marijuana Act. Beginning on January 1, 2018, two new cannabis taxes went into effect: a cultivation tax on all harvested cannabis that enters the commercial market and a 15 percent excise tax upon purchasers of cannabis and cannabis products. In addition, retail sales of cannabis and cannabis products are subject to state and local sales tax.

To learn more, visit the Tax Guide for Cannabis Businesses on the CDTFA website.

Report: Retail Cannabis Tax Revenues Surpass $1 Billion In 2018

DISTRICT OF COLUMBIA: State and local excise tax collections on retail adult-use cannabis sales surpassed $1 billion in 2018 — a 57 percent increase over 2017 levels, according to data compiled by the Institute on Taxation and Economic Policy.

Annual excise tax revenues on adult-use cannabis sales ($1.04 billion) rivaled those for all forms of alcohol $(1.16 billion), the group reported. State-specific sales taxes on retail cannabis purchases also yielded an addition $300 million in revenue in 2018.

Authors of the report estimated that cannabis-specific taxes would raise an estimated $11.9 billion annually if the product were legally available at retailers nationwide.


For more information, contact Justin Strekal, NORML Political Director, at: (202) 483-5500. Full text of the report is available online.

Eaze Insights: The High Cost of Illegal Cannabis

CALIFORNIA: New research identifies why illicit sales are thriving in the world’s largest cannabis market, and what that means for legal retailers

Who: Peter Gigante, head of policy research at Eaze

What: California is seven months into rolling out the world’s largest adult use cannabis market. Eaze’s head of policy research, Peter Gigante, will present new research that shows why Californians are still purchasing illegal cannabis and what opportunities there are for the legal market to prevail.

This briefing will provide new consumer data on:

  • Why do consumers still seek out illegal cannabis when legal products are available?
  • What is the impact of taxes on purchasing behavior?
  • What are the differences in illegal purchase behaviors between regions?
  • What impact does a focus on wellness have on illegal purchases?

When: Wednesday, August 8, 2018 at 1:00 pm ET/10:00 am PT

Where: Telephone briefing and Q/A to be accompanied by written research findings distributed by email 30 minutes prior to the briefing.

How: Dial-in (877) 876-9176; Conference ID – Eaze

Cannabis Market Brings In Significant Tax Revenues

The cannabis market is experiencing significant growth due to the accelerating pace of cannabis legalization in the United States. According to a research report published by Technavio, the global legal cannabis market will grow at an impressive CAGR of around 37% between 2016 and 2020. The report indicated that rapid adoption of cannabis by individual consumers as well as economic benefits of legalizing cannabis are some of the pivotal factors that drive the growth in the market.

The report also indicated the several other benefits of legalizing cannabis: “The high tax revenues from the purchase of marijuana for recreational purposes have led governments of various countries to legalize marijuana. The legalization of marijuana for recreational purpose will increase at a rapid pace with the increasing number of countries allowing the possession of a limited quantity of marijuana. Such developments have propelled vendors to come up with legal recreational cannabis stores, which will further propel the growth of this segment in the coming years.”

Oregon House Bill 4014 Signed Into Law by Governor Kate Brown

by Larry J. Brant 

As reported in my November 2015 blog post, in accordance with Internal Revenue Code (“Code”) Section 280E, taxpayers (for purposes of computing federal taxable income) are prohibited from deducting expenses related to the production, processing or sale of illegal drugs, including marijuana.

A Bit of Welcome Relief?

Measure 91, officially called the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act, passed by Oregon voters, appears to have alleviated some of the impact of Code Section 280E as it relates to Oregon taxable income. Specifically:

  • Section 71 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our corporate income tax regime. This provision sets forth no specific effective date. So, in accordance with Sections 81 and 82 of Measure 91, it became effective on July 1, 2015.
  • Section 74 of Measure 91 provides that Code Section 280E does not apply for purposes of determining Oregon taxable income or loss under our individual income tax regime. This provision of Measure 91 specifically provides that the change became effective for tax years beginning on or after January 1, 2015.

So, following the passage of Measure 91, were there any Oregon tax problems plaguing the cannibals industry? The short answer is: Maybe.

Measure 91 generally only applies to the recreational marijuana industry. Even though nothing in Measure 91 says Sections 71 and 74 are limited to recreational marijuana, maybe an argument could be made that these provisions did nothing to alleviate the Code Section 280E issue for medical marijuana business activities.

Don’t despair; Oregon lawmakers came to the rescue. The law is now clear (at least as clear as a law can be) that, with respect to the Oregon individual income tax regime, folks in both medical and recreational marijuana businesses may deduct (for Oregon purposes only) expenses that would be otherwise be nondeductible under Code Section 280E.

House Bill 4014 Is Signed Into Law

On March 3, 2016, Oregon Governor Kate Brown signed House Bill 4014 into law. The bill, which spans numerous pages, deals with several issues related to the Oregon cannabis industry, including the application of Code Section 280E to both the recreational and the medical marijuana industries.

The provisions of House Bill 4014 relating to Oregon income taxation are contained in: Sections 28, 28a and 29.

SECTION 28 of House Bill 4014 amends ORS 316.680 by adding subsection (i) providing that there shall be subtracted from federal taxable income:

“Any federal deduction that the taxpayer would have been allowed for the production, processing or sale of marijuana items authorized under ORS 475B.010 to 475B.395 but for section 280E of the Internal Revenue Code.”

SECTION 28a of House Bill 4014 amends ORS 316.680 by adding subsection (i) providing that there shall be subtracted from federal taxable income:

“Any federal deduction that the taxpayer would have been allowed for the production, processing or sale of marijuana items authorized under ORS 475B.010 to 475B.395 or 475B.395 or 475B.400 to 475B.525 but for section 280E of the Internal Revenue Code.”

SECTION 29 of House Bill 4014 provides that the amendments to ORS 316.680 by Section 28 apply to conduct occurring on or after July 1, 2015 but before January 1, 2016, and to tax years ending before January 1, 2016. The amendments to ORS 316.680 by section 28a apply to conduct occurring on or after January 1, 2016, and to tax years beginning on or after January 1, 2016.

Implications for the Oregon Cannabis Industry

What this means for the cannabis industry in Oregon is twofold:

  • For Oregon personal income tax purposes only (for tax years beginning on or after July 1, 2015 but before January 1, 2016), the prohibition contained in Code Section 280E does not apply to the non-medical production, processing or sale of marijuana. In other words, a subtraction from Oregon personal income tax is permitted by folks in a recreational marijuana business for any federal deduction a taxpayer would have been allowed for expenses related to the production, processing or sale of marijuana had there been no prohibition under Code Section 280E.
  • For Oregon personal income tax purposes only (for tax years beginning on or after January 1, 2016), the prohibition contained in Code Section 280E does not apply to the production, processing or sale of marijuana (medical and non-medical marijuana).  In other words, on or after January 1 of this year a subtraction from Oregon personal income tax is permitted by folks in bothmedical and recreational marijuana business for any federal deduction a taxpayer would have been allowed for expenses related to the production, processing or sale of marijuana had there been no prohibition under Code Section 280E.

Interestingly, House Bill 4014 does not appear to address the Oregon corporate excise or income tax regimes. Remember, Section 71 of Measure 91 clearly tells us that, after July 1, 2015, Code Section 280E does not apply to the computation of Oregon corporate taxable income.

Why did Oregon lawmakers feel the need to make it clear that Code Section 280E does not apply to the computation of Oregon individual taxable income in the case of both medical and recreational marijuana business activities (as of January 1, 2016), but did not do the same for the computation of Oregon corporate taxable income?

Oregon law clearly contemplates corporations and other entities will be used to operate marijuana related businesses. In fact, both Measure 91 and the Oregon regulations governing the local marijuana industry allow businesses to be organized as corporations (and other entities). The definition of “person” in Measure 91 includes corporations (Section 5(24)), and various parts of the regulations contemplate that marijuana licenses will be issued to corporations and other entities (e.g., OAR 845-025-1045(3).

Was this apparent omission intentional or simply as oversight by Oregon lawmakers? It certainly seems Measure 91 covers (for purposes of Code Section 280E) recreational and medical marijuana activities at both the Oregon corporate and individual income tax levels. Was House Bill 4014 necessary to clarify the elimination of the application of Code Section 280E for Oregon income tax purposes?

It will be interesting to see how the Oregon Department of Revenue interprets House Bill 4014 and Measure 91 in this regard. Time will tell.

An Observation

One interesting observation about Measure 91 is that the clear language eliminating the application of Code Section 280E for Oregon individual and corporate taxation is not expressly limited to marijuana activities. Arguably, it eliminated the application of Code Section 280E for Oregon income tax purposes in all instances (including the sale or distribution of illegal drugs). It appears House Bill 4014 removes that interpretation of the law in the instance of the Oregon individual tax regime as it expressly limits the application to marijuana, but its silence as to the Oregon corporate tax regime leaves that interpretation alive. I hope this was not the legislature’s intent.

IRS 280E: A Real Bummer For The Marijuana Industry

BY LARRY J. BRANT

As a general rule, in accordance with IRC § 162(a), taxpayers are allowed to deduct, for federal income tax purposes, all of the ordinary and necessary expenses they paid or incurred during the taxable year in carrying on a trade or business.  There are, however, numerous exceptions to this general rule.  One exception is found in IRC § 280E.  It provides:

“No deduction or credit shall be allowed for any payment 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.”

Congress enacted IRC § 280E as part of the Tax Equity and Fiscal Responsibility Act of 1982, in part, to support the government’s campaign to curb illegal drug trafficking.  Even though several states have now legalized medical and/or recreational marijuana, IRC § 280E may come into play.  The sale or distribution of marijuana is still a crime under federal law.  The impact of IRC § 280E is to limit the taxpayer’s business deductions to the cost of goods sold.

On October 22, 2015, the U.S. Tax Court issued its opinion in Canna Care, Inc. v. Commissioner, T.C. Memo 2015-206.  In that case, Judge Haines was presented with a California taxpayer that is in the business of selling medical marijuana, an activity that is legal under California law.

The facts of this case are interesting.  Bryan and Lanette Davies, facing significant financial setbacks and hefty educational costs for their six (6) children, turned to faith for a solution.  After “much prayer,” Mr. Davies concluded that God wanted him to start a medical marijuana business.  Unfortunately, it does not appear that he consulted with God or a qualified tax advisor about the tax implications of this new business before he and his wife embarked upon the activity.

Revenue From Colorado Marijuana Tax Expected To Double In 2015

COLORADO: It’s heady times in the Mile High City, and that’s just at the state budget office.

Colorado is on track to more than double the state’s marijuana tax revenues this year, showing up the $44 million collected in 2014 with a projected 2015 windfall of $125 million, reports The Guardian. The state hoped to collect $70 million in 2014, but fell short.

According to financial data released last week, the state also raked in significantly more money taxing marijuana than it did taxing alcohol for the yearlong period of July 2014 to June 2015, with marijuana netting almost $70 million and alcohol just under $42 million.

Tom Yamachika: No Compassion In Overtaxing Medical Marijuana

HAWAII:  As you might be aware, in 2000 Hawaii enacted a medical use of marijuana law (Act 228, Session Laws of Hawaii 2000). The problem, of course, has been how to get this medical marijuana to those who need it without violating other laws. This year our Legislature is working on House Bill 321, which would establish standards for and regulation of medical marijuana dispensaries.

The bill started off in the House, and was referred to three committees: Health, Judiciary, and Finance. It passed all three and went over to the Senate. The Senate referred the bill to four committees, Health, Public Safety, Judiciary and Labor, and Ways and Means.

After the first two committees, the bill was still a regulatory bill. It then was heard by Judiciary and Ways and Means jointly, and those committees amended the bill by, among other things, adding two sections. One creates a special general excise tax rate for retail marijuana sales with a rate of 10 percent. The other imposes a GET surcharge on the same sales. That rate is 15 percent. So here we have a magically appearing levy: Instead of a rabbit coming out of the hat, we get a hefty new 25 percent tax.

Colorado Lawmaker Predicts ‘We Will See Cannabis Clubs Similar To Bars’

COLORADO:  Rep. Jonathan Singer, D-Longmont, has been a leading voice on how Colorado’s medical and recreational marijuana industries are regulated, carrying most of the most important bills and providing testimony and experts on nearly all of them.

Singer, 36, has represented House District 11 — which also includes northern Boulder County, most of Niwot, Allenspark and parts of Lyons — since 2012. He has undergraduate and master’s degrees in social work from Colorado State University. He is a former board member for the CSU Drug and Alcohol Task Force and the CSU Counseling Center.

He is vice chairman of the House Committee on Local Government and serves on several key committees: Appropriations; Health, Insurance and Environment; Joint Technology; and Public Health Care and Human Services.

The following is a Q&A with Singer about Colorado marijuana issues, from regulations for public use and edibles to the potential ramifications of federal rescheduling:

 

IRS Deal Will Refund Fines To Denver Pot Shop That Pays Taxes In Cash

COLORADO:

The Internal Revenue Service has backed away from a policy that penalized an unbanked marijuana business in Denver for paying taxes in cash, but the federal agency will not say if the approach applies industry-wide.

In a settlement with Denver-based Allgreens, a medical-marijuana dispensary that challenged the agency over its policy, the IRS said it would abate future penalties and will refund about $25,000 of fines the business was forced to pay despite having paid its federal employment withholding on time.

IRS rules require businesses to pay employee withholding electronically or face a 10 percent penalty for cash payments. Although the IRS allows for an abeyance in certain circumstances, it disagreed with Allgreens’ position that an inability to get banking services forced it to pay in cash.