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." - --- MAP posted-by: Jay Bergstrom