Governments impose sin taxes on beer and cigarettes supposedly to promote more virtuous behaviour, but what happens when people actually start giving up their vices?
Taxes decline. This is where the marijuana business comes in as a substitute. In the US, taxpayers do not tolerate higher state taxes, since they can hop across the border to the next state offering lower tax rates. The scope for increasing taxes is therefore limited. Marijuana represents a new form of tax revenue. It is also viewed as “sinful” and therefore subject to higher taxes. The challenge now is how to tax this “new” vice without killing the revenue stream.
As we previously reported, the SA courts recently legalised dagga (marijuana for our overseas readers) for personal consumption. Dealing is still a crime, though the law is still hazy on how exactly this will play out. The US is far more advanced in tackling the legal challenges of marijuana growth and consumption.
As Jennifer Weidler Karpchuk writes in Accounting Today, in 2018 Vermont became the first US state to successfully legalise marijuana through the legislative process. Up until that point, where legalisation had occurred in eight other states, as well as the District of Columbia, this was done through ballot initiatives.
Tax authorities also realise that if marijuana tax rates are too high or too heavily regulated, buyers will be driven to the black market. Black market dealers can ignore the vast taxes and regulations that drive up the price of marijuana in the legal market, while concomitantly selling to underage buyers and ignoring safety protocols, writes Karpchuk.
Establishing the ideal tax structure
“To determine what is the best tax structure for a new marijuana industry, a state must first determine the tax base and decide whether it wants to tax the dollar value or the volume sold. Historically, “sin” taxes tend to be excise taxes imposed on volume, i.e., at a specific amount regardless of the retail price – for instance, a gasoline tax per gallon or a cigarette tax per pack. Of the states that have legalized and are taxing recreational marijuana, Alaska (a state without a sales tax) is the only state that does not impose some form of sales tax on the end-user and taxes marijuana growers $50 per ounce when selling the product to marijuana dispensaries or retailers.
“However, the nature of the recreational marijuana market makes a specific excise tax on volume problematic since marijuana comes in various forms – cigarette, edible, liquid, vapor – all with a wide variety of concentrations. States attempting to tax the end user may find volume difficult to measure. Therefore, states have tended to frame their respective marijuana taxes as a certain percentage of the retail or wholesale sales price. Both Washington and Oregon experienced difficulties in implementation when they deviated from the norm. This was ultimately replaced by a 17 percent excise tax on the retail price because enforcement proved too complicated. Amid concerns over double-taxation, Washington also simplified its tax structure – moving from taxing marijuana at three points in the supply chain to a single price-based retail tax. Thus, in practice, a tax based upon retail or wholesale sales price has proved the most workable framework.”
Read more here.