Here is a horror article published in Portland’s Willamette Week last week. I like this publication pretty much, but the article has three tax statements that I find to be incorrect. In the author’s defense, the suspicious coverage of cannabis tax is an industry pastime, and the narrative of fiscally suppressed cannabis deals is attractive. Also note that the author appears to have been misled by an economist. Even so, we are not giving anyone a pass for this blog.
Before I get started, I want to say that if you are a business owner or a tax or corporate lawyer or a CPA with opposing views, I would like to hear from you. For those readers and everyone else, here is a recap of the offending article:
- The corporate tax increase proposed by Biden is having a significant negative impact on cannabis businesses in Oregon (but really everywhere). This is mostly wrong.
- Oregon “could soon tax its weed shops out of business.” That is outrageously wrong.
- With all of these taxes, the Oregon cannabis retail landscape could become an oligopoly where “the big companies buy the small companies at a discount and drive small companies out of the industry.” There may well be a strong consolidation, but this is not dependent on taxes. So also wrong.
Biden’s tax plan won’t destroy the weed industry
Historically, taxes are currently quite low and particularly low for businesses. The tax hike proposed by Biden would raise the corporate tax rate from 21 percent to 28 percent. (Note that for many companies, like today, the effective rates would stay lower than the base rate.) But how does that affect most cannabis companies? Not at all.
Most cannabis companies are taxed as partnerships, and the C-corp rate has no relevance to them. This includes cannabis retailers, although they take the worst chunks from IRC § 280 E. If these deals are taxed as C-Corps as the rates go up, they can uncheck the box at any time. For tax reasons, the change is treated as a liquidation, which in theory can lead to double taxation. However, this is only relevant for estimated assets, and cannabis retailers typically don’t have many (or none) of them. The asset side of most retail balance sheets consists largely of cannabis itself, a perishable commodity.
If the C corp’s tax rate rises to 28 percent or 38 or 88 percent next year, any partnership-taxed cannabis company – again, most cannabis companies – will not be affected in the least. The big change for these companies will likely come with federal legalization. In this case, IRC § 280E loses its bite. But you can absolutely bet that Congress will put in place a regime to keep that federal revenue up. And whatever it is, it will be higher than the 5 to 8 percent excise duty offered under the MORE law. I guarantee it.
Oregon isn’t proposing to tax its weed shops out of business
Oregon cannabis retailers do not pay special state or local taxes. Like bars and cafes, they or their owners pay state income taxes. and since 2016, they have been able to deduct business expenses not allowed under IRC Section 280E when filing their Oregon state tax returns.
The article I’m bagging today states that Oregon “could come up with a proposal to voters that would allow cities and counties to increase the local tax on cannabis products from 3% to 10%, on top of the state cannabis tax of 17%.” %. ” The reference there is probably to HB 2015, which I covered here recently and which has been moving down very slowly in Salem (which you can follow here). Still, I think it could happen.
However, the potential local tax hike does not directly impact Oregon cannabis companies as it is an excise tax paid by consumers, not businesses. All cannabis stores do is collect this tax and deposit it for the state or county (like HB 2015 would have). I suspect there could be some downward pressure on prices, but a 7% increase in excise duties should not be a backward move.
Would a ~ 25% sales tax on cannabis items be too high for anyone? I don’t think there is any danger of offending the people who are paying my mortgage by using my law firm. Today anyone can go to one of the most elegant cannabis stores in Portland and buy a premium box of 10 gummy bears at 5 mg / THC each. This box costs $ 20 including taxes. This means that for $ 20, or $ 2 per trip, you can make ten times the cash. It’s incredibly cheap! If you have to pay $ 21.40 instead of $ 20, it’s still quite a deal. From a tax theory perspective – where the goal is to achieve price points that are sufficient to offset negative external effects – the tax of 25% is probably still too low.
Sales in Oregon went over the roof during the pandemic, and those big numbers are here to stay. People will pay the tax and business should be fine.
The Oregon Retail Landscape won’t be an oligopoly (exactly)
Consolidation is the way things have evolved in our system over time, and the pace for cannabis retailing has accelerated over the past year or two. We’ve been talking about Big Canna for a long time, and you can find stats about it in places like the Portland Business Journal, or just check out the OLCC Retail License Directory. Anecdotally, our Portland office has never had so many stores in the pipeline.
I think where we end up with cannabis in Oregon is going to look like coffee. We’ll have our cannabis Starbucks, our Dutch brothers and Stumptown, and then our Extractos and Heart and other little shops. This has all to do with open markets and nothing to do with Joe Biden’s corporate tax ideas or Oregon’s 2015 HB.
In the comment section, tell me I’m wrong (or right) or drop me an email.