Tax Shift in Washington State Could Ease Burden on Businesses, Lower Cannabis Prices

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 [email protected]

13 comments on “Tax Shift in Washington State Could Ease Burden on Businesses, Lower Cannabis Prices
  1. Jim Dandy on

    What an absolute cluster. 37% tax……. and that is a better deal than what they had. WA government should be ashamed of themselves. Oregon is going to kick your ass when we start selling early rec on Oct 1st. Tables are turning and WA residents will be crossing our boarder to buy OR herb. Please remember WA residents, in OR, we only use the left hand lane to pass, not toodle along, and it is THE LAW.

    Reply
    • Ryan Agnew on

      Too funny. My #1 gripe about OR drivers is that they like to chill in the left lane doing 5 under. I’m embarrassed for all Washington citizens if any of us are doing the same thing down there.

      To be sure, we should worry about competition from Oregon but you’ll need the CSA to be amended before you’re a true threat to revenues.

      Reply
  2. Briteleaf Jimmy on

    Washington’s greedy high taxes on cannabis have done wonders at continuing to urge the competition of the black market. Oregon will charge about 15% lower taxes and will steal about 1/3 of Washington’s revenue next year when recreational stores open there. Everyone in the business wants to become a millionaire overnight but lower prices is where the future lies and where the open market will eventually lead the industry. Washington has been a very broke state, giving away some of it’s best state parks FOREVER. The politicians there are trying to balance their state budget with marijuana revenue.

    Reply
  3. Ryan Agnew on

    If indeed a retailer is looking to keep the same price from June to July, the wholesale price needs to come down at least 10%. (Assuming 280e factored into their previous markup- else its more like 12%).

    Every negotiation is going to be different of course, and some processors may gladly reduce their price by 25% to keep their existing relationships.

    Reply
  4. Toni Reita on

    As a licensed Wa Cannabis producer processor here are some simple facts that might help shed some light on why the Wa retail prices are so high.

    It would be a difficult challenge to find many growers who enjoy my unique advantages or who can consistently produce a reasonable quality product at the lowest price possible without sacrificing quality.

    My advantages:

    organically sun grown,outdoor, cultivation with massive predicted harvest this year

    slow drying and glass jar curing

    superior, honest lab testing with consistent high thc

    already owned property so neither rent nor mortgage

    workers kept to a minimum to keep costs down

    no sales staff & we handle our own deliveries

    private well & solar power

    owner availability hours are 24/7

    with min 12 hour days

    no salary or percs for owner

    inexpensive no building permitted structures to further minimize costs

    Most of us were unaware of the punitive 25% excise tax and dismayed that the state has failed to provide the promised 334 retail stores.

    There are currently about 150 operative retail stores, with almost 600 producer/processors licensed and another 195 lined up for inspections and a further 2,000 or so eager applicants waiting to fill our shoes as we fail in record number.

    There are no easily found publications of failures, but estimates are that more than 100 prod/proc have already closed there doors within the first season of operation. Business failures in that magnitude are not normal.

    My predictions are that unless the industry quickly merges several hundred medical marijuana dispensaries into the fold the big guys will start to topple in record number this year. It is economically infeasible for large indoor growers, with mortgages, dozens of employees, expensive buildings, investors and outrageous light, AC, heat, water utility bills to turn a profit…that type of business can not pencil and the big boys will put their dollars elsewhere rather than continue to lose monthly.

    My wholesale product is already priced as low as possible and I’ve yet to make $1 or receive any type of compensation…this is the norm for producer/processors.

    After thousands of organic soils, nutrients we plant and then for 5 months of lovingly attending to the plants, we harvest, trim, slow dry & glass jar cure. When we sell the packaged product to the retailer, instead of being content to double their investment for placing our product on their shelves, I don’t know of any retailer who doesn’t at least quadruple the price and some price it 7 times higher!

    Don’t you believe that they have ample room to lower their sales price?
    Ask your retailer to post the price he paid the producer/processor.

    We all recognize this is a wild west, rough ride on the first Cannabis Wagon Train west, but when combined with Russian roulette, luck of the draw, a retailer/grower imbalance and it will take more than a welcome excise tax restructure to stabilize this industry.

    The only conceivable way this industry can prosper & offer a price competitive with the black market is to allow vertical integration where the farmer may sell directly to the consumer, as do wineries.. Personally, I’d be thrilled to sell my flower at the gate for a fraction of what the public is paying at the retail operation.

    Black Dog Acres

    Reply
  5. John Gehlmann on

    Let’s do the math. If the retail price is $19.gm, the excise tax at 25% is $4,75. The average cost of goods sold is 36% based on information published by the State. The wholesale price is $6.84/gm. The Processor pays an excose tax at 25% of $1.71. The total excise tax in the retail price to the customer is $6.46 or 34%. The revision to the excise tax structure is essentially revenue neutral to the State. Surprise! Surprise! The Processors can aford to reduce their price by at least 25% or more since they will not have the burden of Sec 280e taxes on the excise tax. The retail store tax burden will increase. The market price to the customers will not be reduced as a result of this chnage in tax structure by the State. Oregon’s proposed excise tax is 17% with discussions that it should be increased to 25%. These revision to the tax structure will provide no relief for retail stores in Washington to be more competitive with the Black market which is selling product for $8 to $11 per gram and they don’t collect any sales tax.

    Reply
  6. Toni Reita on

    As a licensed Wa Cannabis producer processor here are some simple facts that might help shed some light on why the Wa retail prices are so high.

    It would be a difficult challenge to find many growers who enjoy my unique advantages or who can consistently produce a reasonable quality product at the lowest price possible without sacrificing quality. Yet after being licensed for slightly more than 1 year, I’ve yet to make $1, turn a profit or take a salary.

    My advantages:

    organically sun grown, outdoor, cultivation with massive predicted harvest this year

    slow drying and glass jar curing

    superior, honest lab testing with consistent high thc

    already owned property so neither rent nor mortgage

    workers kept to a minimum to keep costs down

    no sales staff & we handle our own deliveries

    private well & solar energy

    owner availability hours are 24/7 with min 12 hour days

    no salary or percs for owner

    inexpensive no building permitted required structures to further minimize costs

    Most of us were unaware of the punitive 25% excise tax and dismayed that the state has failed to provide the promised 334 retail stores. There are currently about 160 operative retail stores, with almost 600 producer/processors licensed and another 195 lined up for inspections and a further 2,000 or so eager applicants waiting to fill our shoes as we fail in record number, There are no easily found publications of failures, but estimates are that more than 100 prod/proc have already closed there doors within the first season of operation. Business failures in that magnitude are not normal and my predictions are that the big guys will start to topple in record number this year. It is economically infeasible for indoor growers, with mortages, investors and outrageous light, AC, water, heat utility bills to turn a profit…it can not pencil.

    My product is already priced as low as possible and I’ve yet to make $1 or receive any type of
    compensation…this is the norm for producer/processors. After we invest 5 months of energy planting, lovingly attending to the plants, we then harvest, trim, dry & cure.

    When we sell the packaged product to the retailer, instead of being content to double their investment for placing our product on their shelves, I don’t know of any retailer who doesn’t at least quadruple the price and some price it 7 times higher!

    Ask your retailer to post the price he paid the producer/processor. Don’t you believe that they have room to lower prices?

    We all recognize this is a wild west, rough ride on the first Cannabis Wagon Train west, but when combined with Russian roulette, luck of the draw, a retailer/grower imbalance and it will take more than an excise tax restructure to stabilize this industry.

    The only conceivable way this industry can prosper & offer a price competitive with the black market is to allow vertical integration where the farmer may sell directly to the consumer, as do wineries.. Personally, I’d be thrilled to sell my flower at the farm gate for a fraction of what the public is paying at the retail operation.

    Hanging on for this year’s ride, I’ve already done my 8 seconds!

    Black Dog Acres

    Reply
  7. Ali Jannati on

    After Oct. 1 would it be legal to purchase rec. marijuana from OR and cross the state line to WA state or vise versa? I thought crossing state lines with illegal substances could be breaking federal laws!!!!

    Reply
    • Jason on

      I would say that’s a pretty touchy subject. Right now it’s kind of up to the states but anything to do with marijuana is illegal so… I doubt states will push it. I think that growers should leave it in their states anyway tbh.

      Reply
  8. i502 producer processor on

    with the new law retailers no longer need to multiply the price they buy it for by 2.75-3
    It’s more like 2-2.25
    I could potentially sell a gram for 7 and they could double it and with the tax they can get a gram out the door at a reasonable price. why must the retailer make as much a the processor just for selling it? We have yet to really start making a profit will be nice to not have to write anymore $50000 checks to the the wslcb. I’m supposed to share my tax break with the retailer? yeah right. now their excise tax which wasn’t tax deductible before is a 37 percent buyers tax which is tax deductible. They will get the money back. Might just raise the price stop being greedy retailers who have been making more than processors in the past it’s our turn. It’s up to u to decide the final price to the consumer now .

    Reply
  9. calicorock on

    Lot’s of Wishful thinking here. Anyone who believes that Oregon is going to have big a boom off of Washington residents ( except for a few adjacent WA. cities) clearly knows nothing about Washington’s enormous free market.

    Why would Washington residents drive to Oregon when I can still call a delivery service and have my selections delivered to my front door here in Seattle at drastically lower price’s than I’m reading about.

    Reply
  10. calicorock on

    Toni Reita:
    Insightful informative post. Many WA. growers appear to feel like unpaid tax-collector’s for Washington State. It’s clear that it wasn’t just medical patients the proponents of I-502 mislead during the run-up to the Nov. 2012 election.

    There are law-suits due any day now to stop the States destruction of RCW69.51A by recently signed into State law SB5052 if you aren’t aware of the pending lawsuits you might want to read about them. These are three very powerful Seattle attorney’s willing to go to the mat to protect Washington’s MMJ patients from a State that could care less.

    Reply
  11. calicorock on

    New thought for custom Washington State licence plates : “Washington, the Barney Fife State of marijuana legalization

    Reply

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