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Washington and the Taxation of Recreational Marijuana

  • Dec 7, 2012 | Gail Cole

A happy crowd lit their pipes under the Space Needle just after midnight on December 6, in celebration of the legalization of recreational marijuana. Whether you're for or against it, the passage of Initiative 502 is a historic moment. For the Washington State Liquor Control Board (LCB), however, it's a call to action.

The intent of I-502 is to take "marijuana out of the hands of illegal drug organizations" and bring it "under a tightly regulated, state-licensed system similar to that for controlling hard alcohol." Great. The problem is that right now, it's legal to possess up to an ounce of marijuana, but there are no "tightly regulated, state-licensed stores" prepared to sell it.

Under LCB director Pat Kohler, the organization is "taking the lead in creating rules for state-licensed marijuana stores, growers and processors." Some of the 328 former state liquor stores could eventually be used to sell marijuana to the estimated "363,000 state residents" who partake. (Seattle Times). All marijuana retailers in the state of Washington will be regulated by the LCB.

The state has until December 1, 2013, "to establish the procedures and criteria necessary to implement the initiative". It can't happen soon enough. As Senator Adam Kline (D-Seattle) has pointed out, "The more time … goes on, the more we're asking for trouble." He's referring to the fact that drug dealers will meet the now-legal demand for marijuana.

Furthermore, the longer it takes to establish licensed marijuana retailers, the longer the state will miss out on the much-anticipated tax revenue sales of recreational pot will generate.

Taxing Recreational Marijuana

Three new excise taxes will be collected by the LCB, pursuant to I-502:

  • "25% of the selling price on each sale between licensed producer and licensed processor. Paid by the producer."
  • "25% of the selling price on each sale of usable marijuana/marijuana infused product from a licensed processor to a licensed retailer. Paid by the processor."
  • "25% of the selling price on each licensed retail sale of usable marijuana/marijuana infused product. Paid by the retailer. This tax is in addition to any/all applicable general, state, and local sales and use taxes, and is part of the total retail price."

The Office of Financial Management estimates that marijuana will cost $12 per gram. Current prices for medical marijuana vary from $10-$15 per gram, on average.

While we're on the subject, it doesn't hurt to review how medical marijuana is taxed in Washington.

Taxing Medical Marijuana

Sales of medical marijuana are subject to sales tax in Washington State. According to a special notice on the sales of medical cannabis, the following applies:

Sales Tax

  • "Retail sales of cannabis remain subject to retail sales tax even when sold by a dispensary for medical purposes."
  • "Sales of medical cannabis are not eligible for the retail sales tax exemption provided for prescription drugs… [because] cannabis is a Schedule I controlled substance and cannot be prescribed under either federal or state law in Washington."

Business and Occupation Tax

  • "[G]ross income from retail cannabis sales are subject to business and occupation (B&O) tax under the retailing classification."
  • "Sellers of medical cannabis may qualify for the small business B&O tax credit, which can be used to partially or completely offset the B&O tax."
  • "The small business B&O tax credit may not be used to offset any sales tax liability."

photo credit: Matthew Kenwrick via photopin cc

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.