Washington state regulation of pot sales – edibles rules, taxes on taxes, and how do you deliver product?

I am watching the legalized markets for marijuana in the states of Washington and Colorado. I think this is a natural experiment in regulation. How well does a new industry develop when it is under heavy regulation?

Some additional info:

7/21 – KCET – The New Frontier of Marijuana Edibles Regulation – The author seems to know his way around a California-based medical marijuana dispensary, noting they are looking more like a corner grocery store these days, what with all the edible products on the shelf.

He describes some of the edibles issues in Colorado and Washington.

Colorado is moving toward the same rules that exist for all other food preparation. Washington is going further to require approval of the wrappers and descriptions on the packages.

Colorado is working through the amount of THC (the active ingredient) that can be in one package. They are also pondering the ‘recommended serving size.’

An issue I hadn’t thought of is trademark and copyright infringement. Since the products are now in the light and out of the shadows, existing food companies will be actively protecting their products. Put your wrapper together in a way that looks too much like an existing candy product and you will be running up legal fees. Hershey’s has already sued one Colorado-based producer.

Along that line, I expect producers will start to trademark their product. If you come up with a snappy name or unique blend of pot, you will want to have a recognizable brand name, so customers will ask for your product by name.

That opens up the federal trademark issue for a product that is illegal at the federal level. Expect to eventually see trademark infringement cases by one pot producer against another producer.

Watching a brand new industry grow

I agree with the author. We will get to watch as an entire new industry develops.

I recently watched a series, “The Men Who Built America, from History channel. That is the story of how the captains of industry like Vanderbilt, Rockefeller, Carnegie, Morgan, and Ford essentially built industrial America. It is fascinating to watch an industry like the railroads, high grade steel, or electric companies seemingly appear out of nowhere.

Likewise with the pot industry – we get to watch a new industry grow from nothing.

Of course, there is a huge difference. The standard of living for everyone on the planet won’t double because the pot business will grow to maturity.

We have seen our standard of living increase by a factor of around 20 or 30 in the last century and a half thanks to men like Vanderbilt, Morgan, Rockefeller, Morgan, and Ford along with all the other technological progress along the way.

On the other hand, I wasn’t around to see those other industries begin and thrive. I will sit back and (soberly) watch this one grow (yes, pun intended).

7/23 – Oregon Live – Legalizing marijuana in Oregon could produce $38.5 million in new taxes, study estimates – The study is from the group organizing the legalization effort. A few stats:

  • -estimate 1.3 million ounces sold
  • -average tax rate $28/oz
  • -Washington tax is at each level of the production chain, resulting in total tax around $700/oz

I didn’t understand the 25% excise tax to apply at each level. That would add the tax at production, manufacturing, (if that is separate step), and retail. Will keep it in mind. Issue resolved for me in the next article.

8/7 – The Columbian – Taxes a problem with pot – Shop owners surprised by federal tax on excise tax say revenues may take big hit  – Not sure if a ‘hit’ pun was intended. They are so easy to work into a headline or article.

Article explains the industry is struggling with the idea that the several layers of 25% excise tax is not deductible for federal income tax purposes. The way this is characterized is paying federal income tax on state excise taxes.

The issue, according to the article, is that since marijuana is a Schedule I product, the costs of the product are not deductible. (That’s way beyond my tax knowledge, so check it out yourself if it matters to you – I’m not giving tax advice).

The article does clarify for me that there are three layers of 25% excise tax in the state. Once on producers, a second time on manufacturers of infused products, a third time on retailers. If a retailer or producer is also cooking up the edibles, the middle 25% excise tax does not apply. My guess is the supply chain will integrate the cooking step, either to producers or retailers.

Transporting drugs – Here’s another issue. The person delivering product to the food maker or the retail store is driving around with many pounds of marijuana.

That’s usually characterized as possession with intent to distribute by police and DAs. Get pulled over for a traffic violation and there could be a felony distribution charge to go along with the speeding ticket. The product would be confiscated and destroyed as well.

Can you picture giving this explanation to the nice police officer for the boxes in your trunk that are filled with stuff in plastic bags? “Oh, um, yeah, what’s up with the three pounds of pot in my trunk? Ah, oh yeah, I remember!  I’m delivering it to the MagicBrownie store on Main Street.”

And the cop says ‘Oh, okay, move along’? Not likely.

What to do?

A company has been authorized by the state to provide routing manifests from place to place. People delivering product must have that manifest printout with them and be on the delivery route, according to the article. If so, then they get a pass from police if pulled over. I wonder if that will work for the DEA?

The only problem, according to the article, is that the software is showing bad routes. Like taking drivers through Portland.

Washington state laws don’t apply in Oregon. So having dozens of pounds of infused product in back of the truck is a problem if you follow the approved route out of the state.

Again, why am I following this issue?

This is a natural experiment to see what impact heavy-handed regulation and taxation has on a newly developing industry. Will the industry thrive or will it be crushed?

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