Washington Passes Sweeping Marijuana Tax Reform

July 1, 2015

Washington has been navigating mostly uncharted waters since the state became one of the first in the country to legalize recreational marijuana. The prospect of legalization has been sweetened by the idea of new tax revenue, and the state has explored different ways of taxing the drug, but Washington lawmakers are no longer satisfied with the voter-approved tax system.

In addition to legalizing marijuana in Washington, Initiative 502 also outlined the ways in which marijuana would be taxed and the revenue distributed. The state levies a 25 percent tax three times during the production process: once from producer sales to processors, again from processor sales to retailers, and lastly from retailer sales to customers. Marijuana is also subject to the state’s Business & Occupation gross receipts tax, the 6.5 percent sales tax, and various local sales taxes. Altogether, the total effective tax rate is about 44 percent.

Initiative 502 also delegated revenue distribution, with 40 percent going to the state general fund and local budgets and the remaining 60 percent intended for “substance-abuse prevention, research, education, and health care.” So far, these promises have not come to fruition.

In comparison to the market for recreational marijuana, the market for medical marijuana in Washington was largely unregulated until the Governor signed the Cannabis Patient Protection Act (SB 5052) in April. When SB 5052 takes effect in July 2016, the medical marijuana industry will be merged with the recreational market and the taxes will be more unified.

Additionally, last week, lawmakers in the state passed HB 2136, a bill to reform the way the state taxes marijuana. HB 2136 would eliminate the current tiered tax system and replace it with a single 37 percent excise tax at the retailer level. The bill is largely favored by the recreational marijuana industry. Aaron Pickus from the Washington Cannabusiness Association told Tax Analysts that the “reformed tax structure eliminates unintended double-taxation consequences created in I-502.”

The bill also diverts some of the tax revenue away from the general fund and toward localities. If marijuana tax revenue deposits exceed $25 million in the state’s general fund in the prior fiscal year, 30 percent of the general fund revenue from marijuana taxes would be divvied up based on population and sales of counties and cities. There are additional specifications outlined for where the revenue would be allocated once received by the cities and counties.

The bill was signed by Governor Inslee (D) yesterday.

More on Washington here.

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