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Cannabis Taxes, the Biden Plan, the Oregon Plan and Your Bottom Line – Canna Law Blog™

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Here is a scare article published last week in Portland’s Willamette Week. I like that publication pretty well, but the article makes a trio of tax-related assertions which strike me as wrong. In the author’s defense, suspect cannabis tax reportage is an industry pastime and the narrative of fiscally oppressed cannabis stores is attractive. Consider too that the author appears to have been misled by an economist. Still, we aren’t giving anyone a pass on this blog.

Before I get going on this, I’d like to say that if you’re a business owner or a tax or business lawyer or a CPA with contrary views, I would love to hear from you. For those readers and everyone else, here is a summary of the offending article:

  1. Biden’s proposed corporate tax hike carries major, negative implications for cannabis businesses in Oregon (but really everywhere). This is mostly wrong.
  2. Oregon “could soon tax its weed shops out of business.” This is egregiously wrong.
  3. Because of all these taxes, the Oregon retail cannabis landscape may become an oligopoly where “the large corporations buy up the small businesses at a discount and drive small businesses out of the industry.” Heavy consolidation may well occur, but it won’t be a function of taxes. So, also wrong.

Biden’s Tax Plan Will Not Crush the Weed Industry

Taxes are pretty low right now, historically speaking, and they are especially low for corporations. Biden’s proposed tax increase would raise the corporate income tax rate from 21 percent to 28 percent. (Note that effective rates for many corporations would remain lower than the base rate, just like today.) But how does that affect most cannabis businesses? Not at all.

Most cannabis businesses are taxed as partnerships and the C corp rate has no relevance to them. This includes cannabis retailers, even though they take the worst lumps from IRC § 280 E. If these stores are taxed as C corps when rates increase, they can always uncheck the box. For tax purposes, the change is treated as a liquidation which can theoretically result in double taxation. However, this is relevant only to appreciated assets, and cannabis retailers tend not to have many (or any) of those. The asset side of most retailer balance sheets is predominantly made up of the cannabis itself, a perishable good.

If the C corp tax rate jumps to 28 percent next year, or to 38 or 88 percent, any cannabis business taxed as a partnership — again, most cannabis businesses — will not be affected in the least. The big change for these businesses will instead likely come with federal legalization. When that happens, IRC § 280E will lose its bite. But you can absolutely bet Congress will implement a regime to maintain those federal revenues. And whatever it is will be higher than the 5-8 percent excise tax proffered under the MORE Act. I guarantee it.

Oregon is Not Proposing to Tax its Weed Shops Out of Business 

Oregon cannabis retailers do not pay any special state or local taxes. They or their owners pay state income tax just like bars and coffee shops; and, since 2016, they’ve been able to deduct business expenses disallowed under IRC § 280 E when filing their Oregon state tax returns.

The article I’m bagging on today notes that Oregon “could refer to voters a proposal to allow cities and counties to increase the local tax on cannabis products up from 3% to 10%, in addition to the state’s 17% cannabis tax.” The reference there is likely to HB 2015, which I recently covered here, and which has been moving very slowly down in Salem (which you can track here). Still, I think it could pass.

But the potential local tax increase won’t directly affect Oregon cannabis businesses because it is an excise (sales) tax that’s paid by the consumers, not the stores. All cannabis stores do is collect this tax and hold it in escrow for the state or county (as HB 2015 would have it). I suppose a bit of downward pricing pressure could ensue, but a 7% jump in excise taxes should not be a backbreaker.

So, would a ~25% sales tax on cannabis items be too much for anyone? At risk of offending the people who help pay my mortgage by using my law firm, I don’t think so. Today, anyone can walk into one of the sleekest cannabis shops in Portland and buy a top-of-the-line box of 10 gumdrops, at 5mg/THC each. This box costs $20, inclusive of tax. This means you can get plenty high 10 times for $20, or $2 a ride. That’s incredibly cheap! If you must pay $21.40 and not $20, it’s still quite a deal. From a tax theory perspective – where the goal is achieving price points sufficient to offset negative externalities – the 25% tax is arguably still too low.

Sales have gone through the roof in Oregon during the pandemic and those big numbers are here to stay. People will pay the tax and stores should be fine.

The Oregon Retail Landscape Will Not Become an Oligopoly (Exactly)

Consolidation is the way things have tend to go over time in our system, and the pace for cannabis retail has accelerated over the past year or two. We have been talking about “Big Canna” for a long time and you can find statistics on this in places like the Portland Business Journal, or you can simply peruse the OLCC retail license directory. Anecdotally, our Portland office has never had so many deals in the pipeline.

I think where we end up in Oregon with cannabis will 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 will have everything to do with open markets, and nothing to do with Joe Biden’s corporate tax ideas, or with Oregon’s HB 2015.

Tell me I’m wrong (or right) in the comments section, or shoot me an email.