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Colorado's Crazy Marijuana Tax 
Posted by CN Staff on November 08, 2013 at 13:48:49 PT
By Pat Oglesby
Source: Huffington Post
Colorado -- Taxing what you can't measure is nonsense. But Colorado voters were poised Tuesday to do just that, by taxing wholesale marijuana sales at 15 percent -- when no wholesaler exists. That's right: Most Colorado adult-use marijuana sales must go directly from producer to consumer with no wholesaling allowed, and no wholesale price as a measure for the wholesale tax! That's because Colorado law, at least at first, requires vertical integration of marijuana businesses.
Vertical integration? Here's an example: A wine company owns land, vines and a winery, and sells to consumers only at its own outlet store. Substitute "marijuana grow area" for land and vines, "marijuana production facility" for winery and "marijuana retailer" for outlet store, and you understand the Colorado model. Colorado law will require that at least 70 percent of marijuana sales follow that model, with the supply chain integrated vertically (from top to bottom) -- and with no wholesaler.So how do you apply a wholesale level tax when no wholesaler exists? With great difficulty. Colorado regulatory authorities are struggling for answers. Basing a tax on a fictitious price means no one will ever know the correct tax. Taxpayers will spend time and money trying to beat the system, and government will spend time and money in self-defense. Government and business are likely to grow irritated with one another as they argue about unanswerable questions. Our dysfunctional international income tax system should have taught us that taxing what we can't measure is crazy. Multinational corporations like Google, Amazon and Starbucks pay little tax anywhere as they transfer assets among subsidiaries. What do they charge themselves for those assets? (How much does the right hand charge the left hand?) Current transfer pricing rules allow multinational corporations to construct artificial prices for sales between related parties, sales that almost never occur in the marketplace. "Fabled tax wizards" working for multinationals come up with a "tax return position" -- the company's view of how much tax it should pay. (Not much, and often zero.) Why make the same mistake -- opening the door to artificial pricing -- in taxing marijuana? Back to Colorado's tax mess, and its warnings: Vertical integration (the no-wholesalers rule), imposed by the Legislature in 2013, could coexist easily with a tax based on weight or potency. That is, to tax marijuana at so many cents per gram, you never need to know the price. But a price-based, wholesale level tax was locked into place by Colorado's 2012 initiative (which did not require, forbid or address vertical integration at all). Colorado's wholesale, price-based tax would be administrable without vertical integration, because without it, real, separate wholesalers want to receive high prices, and their real, separate customers want to pay low prices. With that tension, there's a real, bargained-for market price to base taxes on.Meanwhile, Washington State's law taxes newly-legal marijuana at wholesale, too, but Washington avoids Colorado's problem by forbidding vertical integration -- so related-party sales can't happen. That is, wholesalers are separate from retailers, so the wholesaler will get an arm's length, fair market value price from the retailer. That means the Washington State price-based wholesale tax will be related to reality. No fuss, no muss.We are just at the beginning of figuring out how to regulate and tax marijuana. Other states thinking about legalization need to study the primitive example of Colorado's tax, and avoid the pitfall. The obvious answer is to forget price and adopt a surer tax base like weight or potency, following Federal precedents for alcohol and tobacco. Or, if states want a price-based tax for some reason, they can delay measuring it until there's an actual arm's length sale to an unrelated party. But here's the clear lesson for future legalizing states: If you require or allow vertical integration, a wholesale tax on prices -- when there is no actual sale -- is crazy. It's the kind of tax whose only fans will be tax professionals, billing by the hour.Pat Oglesby: Lawyer; Former Congressional Tax Staffer.Source: Huffington Post (NY)	Author: Pat OglesbyPublished: November 7, 2013Copyright: 2013 HuffingtonPost.com, LLC Contact: scoop huffingtonpost.comWebsite: http://www.huffingtonpost.com/URL: http://drugsense.org/url/iURfZv1QCannabisNews  -- Cannabis Archiveshttp://cannabisnews.com/news/list/cannabis.shtml 
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Comment #3 posted by museman on November 11, 2013 at 16:24:52 PT
I got an idea!
"Tax the rich to feed the poor, until there are no rich no more." -Ten Years After
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Comment #2 posted by Sam Adams on November 11, 2013 at 08:25:02 PT
Terrible idea
This author takes one bad idea and supplants it with a worse one. The answer to a nonsense wholesale tax is the same answer we have for most consumer products - a sales tax by percentage of gross sale.Taxing by weight seems to be gaining traction and it's an awful idea. Why?- Regressive! People buying cheaper, outdoor herb will be paying a tax rate at 5 or 10 times the rate of people buying boutique indoor.- Based on nothing. This guy says a wholesale tax is based on a ficticious price, then he suggest a tax rate completely separated from the value of the product. There is not a single person who knows the final market value of indoor and outdoor cannabis in Colorado or anywhere else on Earth.  This is the reason why we use the sales tax model on everything else.Believe me, the ONLY reason for anything other than a sales tax is to take more money from us. When a substance has been demonized the govt. is eager to move in and profit off the scapegoated user class.After Prohibition is when they added the ridiculous, multi-layer alcohol tax scheme.  A lot of people hate alcohol and they know they'll support targeting that population for more money.Should people that drink and smoke be forced to pay the government more money than overweight people? If you think that makes sense, then go ahead and support excessive taxes for cannabis.btw, taxing based on potency is another AWFUL idea. Cannabis is a natural herbal plant product.  It's not distilled in a lab like alcohol or Big Tobacco's nicotine. Know that taxing cannabis by potency will result in direct price increase to consumers.  Producers will be forced to spend thousands complying with expensive lab testing to prove that flowers are 18% and not 15%, with potency varying from stem to stem of individual plants.
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Comment #1 posted by The GCW on November 08, 2013 at 17:47:00 PT
Crazy?
That aint crazy; what's crazy is neighboring states will cage people for having cannabis. Now that's crazy.-0-Of course, the whole deal here in Colorado may not be perfect but it's a start. Prohibitionists are also involved in the regulation process, what can You say. It's legal and things will only get better. Starting Jan. 1, 2014, fellow Americans can visit Colorado and walk into a store and legally purchase cannabis and legally use the God-given plant.And it's legal to own and use right now.Wow.That's not crazy, that's God-awesome.Colorado has stopped vile and ignorant people from caging responsible adults for choosing to use the God-given plant cannabis.Wow.
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