The tax man cometh: Cal­i­for­nia pon­ders le­gal pot, pay­ing up

Daily Local News (West Chester, PA) - - MARKET PLACE - By Michael R. Blood

LOS AN­GE­LES >> Cal­i­for­nia’s le­gal marijuana in­dus­try is ex­pected to in­volve ev­ery­thing from back­yard grow­ers to sprawl­ing fields in the farm belt, store­front sell­ers along ru­ral roads to chain-store like out­lets in Los An­ge­les.

State tax col­lec­tors are tak­ing ini­tial steps to get a hand into that vast, emerg­ing economy, with bil­lions of dol­lars at stake in the fu­ture for the state trea­sury. State an­a­lysts have es­ti­mated that state and lo­cal gov­ern­ments could even­tu­ally col­lect over $1 bil­lion an­nu­ally from the pro­duc­tion and sale of le­gal pot.

Just how big a job that will be, no one knows.

The state has no re­li­able way to pre­dict how many new re­tail­ers will en­ter the mar­ket­place when marijuana be­comes le­gal in 2018. It’s es­ti­mated there could be 25,000 cul­ti­va­tors who will have to reg­is­ter and be­gin pay­ing taxes.

But it’s only a guess how many operations mak­ing money off the fra­grant, sticky buds will try to re­main hid­den in the black mar­ket.

“It’s just go­ing to be the wild, wild West out there,” pre­dicted Jerome Hor­ton, who sits on the state’s tax­col­lect­ing Board of Equal­iza­tion.

The panel on Tues­day started fram­ing its job, ap­prov­ing on a di­vided vote a pro­posal to re­quest funds to be­gin grad­u­ally adding staff in an­tic­i­pa­tion of col­lect­ing taxes from the le­gal sale and cul­ti­va­tion of marijuana.

The board’s ac­tion came three weeks af­ter vot­ers ap­proved Propo­si­tion 64, which le­gal­ized the recre­ational use of marijuana in the na­tion’s most pop­u­lous state.

A draft re­port made an early es­ti­mate of new jobs that would be needed to po­lice the mar­ket and make sure ev­ery­one is pay­ing up: by 2021, 114 po­si­tions and nearly $20 mil­lion in fund­ing. But with so many un­knowns, sev­eral board mem­bers ac­knowl­edged those fig­ures would likely need to be up­dated within months.

Hor­ton, at the meet­ing in Cul­ver City, Cal­i­for­nia, called the pro­jec­tions “grossly un­der­stated.”

Board mem­ber Diane Harkey al­luded to the chal­lenges of tak­ing what has been largely an il­le­gal mar­ket­place and mov­ing it un­der state govern­ment. “No­body knows how this is re­ally go­ing to work,” she said.

Cal­i­for­nia was the first state to em­brace le­gal, medic­i­nal marijuana two decades ago, and the board es­ti­mates there are 1,700 dis­pen­saries op­er­at­ing in the state.

The Cal­i­for­nia vote on Nov. 8 rep­re­sented the na­tional le­gal­iza­tion move­ment’s big­gest vic­tory to date and sets the stage for a sweep­ing trans­for­ma­tion. The new law at­tempts, at least in the­ory, to tame a mar­ket that now ranges from le­gal, medic­i­nal pro­duc­tion and sales to vast il­le­gal grows op­er­ated by drug car­tels.

In gen­eral, the state will treat cannabis like it does al­co­hol. Tak­ing ef­fect in 2018, the law al­lows peo­ple 21 and older to legally pos­sess up to an ounce of pot and grow six marijuana plants at home. It also al­lows cities and coun­ties to im­pose their own reg­u­la­tions and taxes on recre­ational marijuana.

Propo­si­tion 64’s ap­proval comes with two new state taxes on le­gal weed: Con­sumers will pay a 15 per­cent ex­cise tax on the re­tail sell­ing price, which ap­plies to recre­ational and med­i­cal marijuana. Sep­a­rately, a cul­ti­va­tion tax will be im­posed on all har­vested marijuana that en­ters the com­mer­cial mar­ket. Lo­cal gov­ern­ments can also take a bite, and dozens of com­mu­ni­ties are ready to im­pose new levies and reg­u­la­tions.

With pot-grow­ing long a growth in­dus­try for crim­i­nal gangs and car­tels, there are fears about pos­si­ble vi­o­lence against tax in­spec­tors or in­ves­ti­ga­tors who go look­ing for hid­den grows.

Mean­while, with pot re­main­ing il­le­gal on the fed­eral level, it’s un­clear what stance the in­com­ing Don­ald Trump ad­min­is­tra­tion will take with the new mar­ket­place. Cal­i­for­nia and other weed-friendly states might be in for trou­ble: Trump’s pick for at­tor­ney gen­eral, Alabama Sen. Jeff Ses­sions, has called marijuana a danger that should not be le­gal­ized.

Twenty-eight states and Wash­ing­ton, D.C., al­low marijuana for med­i­cal or recre­ational pur­poses.

The pre­dic­tion by state an­a­lysts of $1 bil­lion an­nu­ally in tax rev­enue from pot could be an elu­sive tar­get. It could be years be­fore kinks are worked out of the sys­tem, and it is not known how much of the ro­bust il­le­gal mar­ket will come un­der the le­gal um­brella.

New po­si­tions could range from in­spec­tors who would visit grow­ing sites and pot shops, in­ves­ti­ga­tors who would probe pos­si­ble felony crimes and au­di­tors to check the books.

New sys­tems need to be de­signed. Be­cause marijuana is il­le­gal on the fed­eral level, the staff re­port said tax pay­ments from marijuana-re­lated busi­nesses must be made in cash. The agency is re­search­ing how that could be done on such a large scale.

In­evitably, some won’t pay up.

“Since the marijuana ex­cise tax and the cul­ti­va­tion tax rep­re­sent new tax li­a­bil­i­ties for tax­pay­ers, prior ex­pe­ri­ence shows hav­ing new taxes due re­sults in new delin­quen­cies from tax­pay­ers,” the re­port said.

“Since the marijuana ex­cise tax and the cul­ti­va­tion tax rep­re­sent new tax li­a­bil­i­ties for tax­pay­ers, prior ex­pe­ri­ence shows hav­ing new taxes due re­sults in new delin­quen­cies from tax­pay­ers.” — State’s tax-col­lect­ing Board of Equal­iza­tion re­port

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