By John Schroyer
A big change is afoot for Washington State’s recreational marijuana industry.
On Tuesday, Gov. Jay Inslee approved a bill that replaces Washington’s original three-tiered tax structure on adult-use cannabis with a single 37% excise tax, to be levied at the point of sale in recreational shops.
The move attempts to address one of the biggest stumbling blocks for Washington’s nascent recreational cannabis industry: complicated, burdensome taxes assessed on multiple parts of the supply chain.
Although the exact impact of the change is unclear, the new structure could help reduce the overall tax burden for cannabis businesses to some degree and allow the industry to compete more effectively with the black market.
It also has sent immediate ripples throughout the industry. Seattle attorney Ryan Agnew said he’s already seen a flurry of activity as growers, processors and retail stores renegotiate contracts and deals with each other based on the new tax structure.
Under the previous model, the state assessed a separate 25% tax as marijuana moved from grower to processor, then again from processor to retail stores, and again at the point of sale.
“Some retailers are calling up their processors and saying, ‘Okay, now that you guys don’t have to pay 25% excise tax, you have to reduce your wholesale cost by 25% to us,'” Agnew said.
The tax change could have a noticeable financial impact on retail stores in particular.
Prior to the change, rec shops essentially had to pay federal taxes on the state tax dollars they collected from customers – even though that state tax is not income the shop generated.
Agnew said store owners will still probably have to pony up those taxes for the first half of 2015, which means their tax bills next year will still be fairly hefty. However, the tax hit will could be much lower going forward.
“The 280E implications of this bill are some of the most significant,” Agnew said.
Retail prices for cannabis also could dip, which would ultimately help the industry lure customers away from the black market.
James MacRae, the owner of Straight Line Analytics in Washington, said the average price of a gram of recreational marijuana typically ranges from $15 to $22, and for medical it’s $12 to $15. Thanks to the tax structure change, he said, rec prices will likely drop between $1.50 and $2 over the next month, and perhaps up to $1 for MMJ.
“I expect that the recreational shops will begin coming down. It will not be immediate, because they have to clear out their inventory,” MacRae said.
But part of the ongoing problem is that there are still too few shops in existence to deal with the massive over-supply in the state, Agnew added.
“If I were a retailer, I’d want to keep the price right where it’s at,” Agnew said. “Everyone’s looking at consumers; how much are they paying right now, how much are they willing to pay right now, and how much does my wholesaler have to come down in order to keep that?”
In the long run, the tax change may also help keep Washington marijuana companies competitive with Oregon’s emerging rec market, which will almost certainly have a lower tax rate – and therefore cheaper prices.
John Schroyer can be reached at firstname.lastname@example.org