Cannabis Taxes Need Improvement

Posted 11/22/23


Eleven years after Washington voters approved the use of recreational cannabis it is still a work in progress, but one where its benefits can balance the pitfalls.

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Cannabis Taxes Need Improvement



Eleven years after Washington voters approved the use of recreational cannabis it is still a work in progress, but one where its benefits can balance the pitfalls.

Users are grateful for the access to product and the elimination of legal penalties, while merchants and legislators are often stymied by complicated rules and how to streamline the process.  

“It’s damn near impossible to stay in business,” said Travis Morgan, who owns and operates Sea Change Cannabis in Port Hadlock. “It’s a misconception that people in this business are making a killing. It’s really challenging to follow tax and banking rules. At the end of the month, I have very little profit.”

There are six cannabis outlets in East Jefferson County: One in Port Townsend, two in Port Hadlock, two in Chimacum, and one in Discovery Bay.

Merchants pay a 37 percent excise tax and 9 percent local sales tax on every cannabis purchase. This translates into a $20 product costing roughly $30 at the register. Most customers don’t even notice, as the sticker price includes the taxes.

This compares to a 20.5 percent liquor excise tax which is generally not included on the price tag and can surprise people at check-out.

It is up to the individual store, but most vendors choose to embed the taxes. Paying one-third more than the sticker price would be too much of a shock to the customer, according to Chimacum Cannabis owner Kody McConnell.

If managing taxes can be excruciating, the banking process is excessively inconvenient. Cannabis use is not approved by the federal government, so vendors aren’t allowed to use banks. Morgan accepts cash only, making twice-weekly trips to a private credit union in Poulsbo.

Many cannabis outlets have corporate ownership, considered to be an eventual path to profitability. Not Morgan. He manages the store. His wife handles the financial end. His son works at the store. And Samson, a 100-pound Labradoodle, rides shotgun on deliveries.

Every cannabis merchant has a variation of the same story. Universally, they are not allowed to deduct business expenses on their federal tax return. There are some workarounds: Morgan makes his tax payments with checks drawn on his credit union account.

Bryan Keith, owner of One Hit Wonder in Port Townsend, invests in an armored car service that securely transfers the proceeds.

Running a cannabis store includes obstacles absent in many small businesses, but Morgan isn’t going to change direction.

“I got into this to help people,” Morgan said. “Cannabis addresses a whole range of health issues.” McConnell said helping people was also his motivation, along with guiding people to the right product. “I think of myself as a sophisticated sommelier for cannabis.”

Keith said that the business is profitable, enough so to meet payroll and make sure that everyone is happy.

It will get a lot easier for everyone once the federal government reschedules cannabis, which has the support of President Biden.

An August 30 report in Marijuana Business Daily stated that the official recommendation to reclassify cannabis from a Schedule 1 substance to Schedule 3 (the same category as Tylenol with codeine) was a significant step. The next step is an official recommendation from the Drug Enforcement Agency, which could take place before the November 2024 election.  

Rescheduling would be the first step toward allowing banks to accommodate cannabis businesses, a step that would require congressional approval that is not immediately forthcoming.  

“No one has a crystal ball as to when Congress will act on this,” said Washington State Representative Sharon Wylie (D-Vancouver), co-chair of the Regulated Substances and Gaming Committee. “Right now they are having problems that are more urgent and more complex.”

McConnell is aware of the logjam, but said “there is a glimmer of hope they will do the right thing.”

Wylie admits that the system puts a lot of pressure on vendors, but favors those who follow the rules. Morgan confirms this, saying “the state is uninvolved unless you screw up and don’t pay your taxes.  If you get behind they are willing to work with you.”

The Liquor and Cannabis Board projects $1.23 billion in cannabis sales for fiscal year 2023, collecting roughly $475 million in taxes.

Of this, $6 million was collected in Jefferson County during fiscal year 2023. This generated a little more than $2 million in excise tax, which was allocated to the state general fund. Of this, the county expects to receive about $60,000 for its general fund, according to Jefferson County Treasurer Stacie Prada.  

This amount represents less than what counties were promised when the initiative passed, according to Jefferson County Commissioner Kate Dean. But the benefit brought from cannabis taxes crosses county lines and supports several statewide programs.

All the money collected from these excise taxes is deposited into a dedicated marijuana account, which then distributes the funds to a variety of sources. This includes support of health programs like Medicaid and marijuana-specific aspects of research and education. So even if the counties receive a sliver of funding from the total, many of these pockets benefit the citizenry as a whole.

Wylie said the cannabis tax structure reflects the role of government, and “how much money we need to spend to protect people from themselves.” She adds that any change in taxation is always “a heavy lift.”

“Washington has the highest cannabis excise taxes in the country,” said Washington State Rep. Kelly Chambers (R-Puyallup) who serves on House Regulated Substances and Gaming Committee and the House Appropriations Committee. “It frustrates many small businesses trying to be profitable.”

Chambers suggests that any funds remaining after the required allocations be redistributed to the public, perhaps as across-the-board sales or property tax reductions. This isn’t likely because Democrats write the budget “and they aren’t likely to give anything back.”  

Users who remember pre-legalization days are grateful they can visit a clean, fragrant store rather than spend an hour on a smelly couch admiring someone’s aquarium.

“I grew up with this,” One Hit Wonder’s Keith said. “I wanted to be part of the change. It’s about providing a cure to what ails you versus getting baked all the time, although that can be fun as well.”