OLYMPIA, Wash. — Washington state’s recreational marijuana law has a new tax structure under a measure signed into law Tuesday by Gov. Jay Inslee.
The new law eliminates the current three-tier tax structure and replaces it with a single excise tax of 37 percent at the point of sale — a change sought by the legal-pot industry. To encourage more cities and counties to allow marijuana businesses, the bill directs the state to share pot revenue with jurisdictions that do so. It also allows them to adopt more flexible zoning for where pot grows and stores can be located.
The passage of Initiative 502 in 2012 allowed the sale of marijuana to adults for recreational use at licensed stores, which started opening last year. Earlier this year, the Legislature passed and Inslee signed into law a measure that regulates the state’s medical marijuana system and reconciles the two markets.
The tax structure change is significant for marijuana businesses. Previously, pot shops charged their customers 25 percent as required so they could pass that money along to the state. But because of the way the law was written, they had to pay federal income tax on that money they collected from the customer, even though it didn’t go toward their bottom lines.
The change makes the new 37 percent tax akin to a sales tax, so stores won’t have to report it as income.
In Colorado, for recreational marijuana sales the state imposes a standard 2.9 percent sales tax and a 10 percent special marijuana sales tax, as well as a 15 percent excise tax on wholesale marijuana transfers. There are also local taxes on recreational sales.
Rep. Reuven Carlyle, a Democrat from Seattle who sponsored the measure, said that he had concerns that the state is relying too much on projected tax revenue from marijuana. The new two-year state budget passed by the Legislature assumes a net gain of about $300 million over the next two years as the result of both the medical marijuana and recreational reform measures that passed this year. But Carlyle said the measure was important because it addresses regulatory framework issues around the marijuana law.
“It was absolutely imperative to have an update and refresh of the initiative law,” he said after the signing. Under the initiative for the recreational system, a previous three-tier excise tax system was set up to impose a 25 percent tax on the producer, a 25 percent tax on the processor and a 25 percent tax on the retailer. Under the measure, that structure is compressed to one 37 percent tax at the point of sale at the retailer.
Under the new law, starting Wednesday, the excise tax is one that everyone would have to pay, both medical marijuana patients and recreational users. However, patients who are in a registry that takes effect in July 2016 created under another bill passed by the Legislature this year would be exempt from sales tax on their purchases. But current collective gardens would get a sales tax exemption up until that time.
The new measure allows counties and cities to reduce the buffer zone around businesses from the current 1,000 feet to as little as 100 feet for recreation and child care centers, public parks or transit centers, libraries and arcades. The 1,000-foot zone would remain in place for schools. The measure also bans marijuana vending machines, marijuana clubs and drive-thru facilities.
Oscar Velasco-Schmitz, general manager at Dockside Cannabis, a legal pot shop in Shoreline, said it’s not clear how the new tax structure will affect prices. Will growers who have been operating at slim margins lower their wholesale prices if they don’t have to pay the 25 percent excise tax, or keep them where they are to improve their bottom line? Will retail stores pass savings on to customers or hang on to the difference because they’re still worried about their federal tax liabilities?
“This is supposed to happen tomorrow. You have a few hours to change an entire market’s pricing structure,” he said Tuesday. “It is an exceptionally short window for such a tremendous change.”
Gene Johnson contributed from Seattle.