Pubdate: Thu, 22 Jan 2015
Source: Seattle Times (WA)
Copyright: 2015 The Seattle Times Company
Contact:  http://seattletimes.nwsource.com/
Details: http://www.mapinc.org/media/409
Author: Evan Bush

BILL AIMS TO SIMPLIFY TAXES ON POT FIRMS

Legislature 2015

Store Owners Cite Federal Levy As Particularly Onerous

At Main Street Marijuana in Vancouver, a bottle of marijuana-infused 
drink additive comes with three pipes.

ZootDrops are supposed to be added into a beverage or consumed on 
their own, so why does the store's "promotional pricing" tie their 
sale to pipes? Taxes. Bundling, or selling pipes and marijuana 
together, is a loophole that some pot businesses believe allows them 
to sidestep some state and federal tax laws and take more federal 
deductions. It's one strategy marijuana businesses are using to 
reduce the tax burden they say threatens to sink the state's marijuana system.

The industry is hoping for an overhaul, and the state Legislature might abide.

State Sens. Brian Hatfield, D-Raymond, Pacific County, and Ann 
Rivers, R-La Center, Clark County, are pushing a bill that would 
replace the state's three-tier tax system with a single marijuana 
tax, paid by the consumer.

Initially, the tax would be 37 percent of the selling price, but 
would scale down to 30 percent in July 2017 and 25 percent in 2019. 
Sales tax also would be collected.

Now, marijuana is taxed at 25 percent at each level - production, 
processing and retail.

"The (current) tax rate makes it just about impossible to compete," 
Hatfield said. "The idea is to combine the three and reduce it enough 
to where it's competitive."

Despite soaring sales figures and markups that can exceed four times 
wholesale prices, many marijuana store owners say they're losing 
money or barely breaking even. They say steep state taxes are a 
problem, but reserve most of their ire for a piece of the federal tax 
code called 280E, which says businesses can't take deductions if 
they're "trafficking in controlled substances."

The federal government, of course, considers marijuana a controlled 
substance, and many marijuana businesses believe that designation 
means they cannot write off business expenses, including the excise 
tax they're required to pay to the state.

"I actually have to pay federal tax on the tax I pay to the state of 
Washington," explained James Lathrop, who owns Cannabis City, 
Seattle's first pot store.

The implications of 280E surprised many entrepreneurs new to the pot business.

"No one really thought about 280E. None of us did," said Dan Devlin, 
of Seattle's Db3, a pot processor in the Sodo neighborhood. He 
estimates 280E is taking about 10 percent off his bottom line.

Oltion Hyseni, who owns Ocean Greens in North Seattle, said he likely 
will face a federal tax bill he can't pay because he didn't know about 280E.

Hyseni compared getting into the industry to walking into a room with 
a ticking bomb - the bomb being when business taxes are due.

"Maybe Bruce Willis from 'Die Hard' will show up and deactivate it 
and everything will be OK," he said. "We're waiting for Bruce Willis."

Without a change to the system, he said, he's worried his company 
will dig itself into a hole it can't climb out of.

Hyseni said competition from the black market and from nearby medical 
dispensaries that don't pay the high state taxes have prevented him 
from marking his product up higher to offset the tax.

He also said he's had difficulty getting tax advice because the 
industry is so new.

Jim Hunt, a Seattle tax attorney, said he understands the marijuana 
industry's frustration, and he hopes the IRS will give clear guidance 
on how tax preparers should handle marijuana businesses.

"In a regulated business, it's: 'Here are the rules - follow them.' 
People are just trying to understand the rules," Hunt said. "This 
business is really hard. You're at a disadvantage."

Packaged sales

By bundling, stores can charge consumers wholesale prices for pot and 
make up the difference in paraphernalia sales tied to the transaction 
- - which aren't subject to the 25 percent excise tax.

No state laws or rules prevent these types of packaged sales, said 
Mikhail Carpenter of the state Liquor Control Board, which regulates 
marijuana. He said the agency is working on addressing the issue. Tax 
experts said the practice might draw the IRS' attention.

"The I-502 market, recreational cannabis, is a different kind of 
business. It's a strictly regulated environment," said Hunt. "It's 
prudent to be in strict compliance."

Reticent on bundling

Many I-502 business people said they were reticent to try bundling.

"It undermines the spirit of what 502 is supposed to do," said Ian 
Eisenberg, the owner of Uncle Ike's Pot Shop in Seattle. "It would 
change my revenue immediately, drastically, but it would be a short-term fix."

Brian Budz, who owns New Vansterdam and competes with Main Street 
Marijuana, called bundling a brilliant strategy, but said he didn't 
want to "push the envelope at this time."

That businesses are resorting to the practice, said John Hudak, a 
fellow in governance studies at the Brookings Institution, means 
there are structural tax problems in the state's pot system.

"Those sorts of efforts are entrepreneurial creativity at its best 
but it flies in the face of effective regulation," Hudak said. 
"That's a real concern if sellers are resorting to loopholes to make 
the market function in a normal way."

Vicki Christopherson, the executive director of the Washington 
CannaBusiness Association, said the Hatfield-Rivers bill would iron 
out the marijuana industry's tax issues.

"It fixes kind of all the problems in one fell swoop," said 
Christopherson, who lobbies on behalf of a group of 
recreational-marijuana businesses. She said decreasing the tax over 
time will also help the state compete on price when Oregon's 
marijuana industry comes online.

Hatfield said he thinks the Legislature has an appetite for 
large-scale change to the tax system.

Many marijuana retailers said they're counting on legislative action 
on taxes to keep their businesses afloat and sustainable.

"I'm still super optimistic this is going to change," said Hyseni, an 
immigrant from Albania who came to the U.S. about 14 years ago. "I'm 
putting my good faith in the U.S. government. I did that with my 
life, so, Godspeed."
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MAP posted-by: Jay Bergstrom