For this entry in our I-502 Marijuana Law Series we'd like to highlight the potential tax benefits for entrants into the marijuana production and processing market.
As with its alcohol laws, Washington creates three distinct classes of recreational marijuana licensees: Producers, Processors, and Retailors. Applicants are allowed to file separate applications for each, but no applicant can hold both a retailor license and either a producer or processor license. However, an applicant may be licensed as both a producer and processor of marijuana. Obtaining both licenses and engaging in both activities may have a significant impact on the licensee's business, and how it is taxed.
I-502 creates a three-layer excise tax structure that essentially taxes licensees at each step toward bringing usable marijuana to consumers. First, producers (growers) selling their product to processors to be made into usable marijuana products will be taxed 25%, the excise tax rate. Next, after the processor turns the product into usable marijuana fit for a retailor, its sale of that product to the retailor is taxed again at 25%. The third layer of taxation occurs when the retailor sells its products to the consumer; that sale is taxed again at 25%.
That's a lot of taxes, but of course that was one of the purposes of legalizing recreational marijuana in the first place. For businesses willing to put in the work to both produce marijuana and process the plant for recreational use, that first layer of taxation will be skipped for most sales. This can have the added effect of giving the business a competitive advantage, as it will likely be able to reduce its prices.
Maybe this is best illustrated by example.
- Marijuana Producer X sells his product to Processor Y. In setting the price for that sale, Producer X likely makes increases to account for the amount he will lose to the excise tax on that sale.
- Next, Processor Y sells the product to Retailor Z. Even before considering the tax Processor Y is about to pay, it will have necessarily increased its prices to account for the higher price it paid to Producer X.
- Now, imagine a business holding both a producer and processor license. It will only account for one layer of excise tax on the sale to Retailor Z. Thus, it will be able to price its product lower than Processor Y, who's prices have both its layer of tax, and Producer X's layer of tax factored in.
In practice, sales won't always be from processor to retailor. But, if businesses plan carefully, the pricing advantage could pour over to every type of sale. If you're a recent entry to the recreational marijuana business, or are considering entering the market, a marijuana business law attorney can help you plan for the road ahead.