Tax issues could cause pot store closures
UPDATE: Just added some comments to the story from Biotrack’s COO, who just called me.
Just as stores were starting to level out with at least a somewhat steady supply to keep their doors open, a new snag has hit.
If you saw prices jump a bit in the last week, its because stores got a tax surprise from their inventory tracking software, courtesy of the federal government.
Stores aren’t exempt from paying tax on the state excise tax, since the federal government doesn’t recognize pot as a legal substance.
So in Vancouver, both stores may owe thousands of dollars for their first month of sales – when the software didn’t include that tax.
That means prices for those $40 to $50 2-ounce bags have gone up by something like $7 or $8 each. It also means, oddly enough, that despite massive sales, stores are running in the red right now.
My story in today’s business section has more details about what’s going on. Check it out below or on our Website at http://columbian.com
Taxes a problem with pot
Shop owners surprised by federal tax on excise tax say revenues may take big hit
By Sue Vorenberg
A new tax snag that has hit marijuana stores could cause delays in new openings, higher product prices, and even closures of newly opened stores.
It looks like stores — and by default their customers — will end up paying a federal tax on the excise tax that already goes to the state, something that many were unaware of until recently.
“It’s quite possible that this makes retail business untenable,” said Brian Budz, one of the owners of New Vansterdam in Vancouver. “There just wouldn’t be enough revenue. It could create a really big issue for smaller stores.”
Main Street Marijuana manager Ramsey Hamide said the problem could mean his store will owe upwards of $80,000 in federal taxes for its first month of sales, which would be a heavy burden for him and other small retailers.
“This system is a lot more broken than people think it is,” Hamide said. “I don’t know that it’s even viable at this point.”
Last week, Florida’s BiotrackTHC, the software company contracted by the Liquor Control Board to track marijuana sales, began adding the extra federal tax to its software system, which store owners said was a surprise.
Stores pay a 25 percent excise tax on marijuana when they purchase it from a grower and another 25 percent excise tax when they sell the product to a customer.
Those taxes go to the state as part of the I-502 legislation.
Stores also pay a tax on their retail sales to the federal government. But excise taxes are usually exempt from that because it’s essentially taxing a tax.
The snag is that marijuana is illegal federally, so businesses can’t write off that expense, said Randy Simmons, deputy director of the Liquor Control Board.
“It’s listed as a Schedule I substance (a drug with no medical use) federally, and usually stores can write off the costs of a good, but because of that they have to declare those costs as income,” Simmons said. “That’s a federal issue. That’s not us. That’s because of the classification.”
Compounding the problem is the fact that Biotrack, which created the state system and also sells independent marijuana company management suites, didn’t add the federal tax into its products until last week — so many customers hadn’t anticipated the additional costs.
“It came to our attention through our CPA,” said Budz, of New Vansterdam. “We discovered that Biotrack had incorrectly programmed our point-of-sale computers (for the first few weeks to not collect the taxes).”
That means his store could also end up owing tens of thousands of dollars for its first few weeks of sales, Budz said.
BiotrackTHC Chief Operating Officer Patrick Vo said the company added the tax – which has existed since 2013 – as an add-on benefit to its commercial software last week.
Keeping track of that tax is the responsibility of the businesses in Washington’s recreational marijuana system, he said.
“There’s no hidden tax, there are no surprises,” Vo said. “They’ve been a part of the tax structure. You’re talking about business owners that are trying to get up and running, and it’s easy for details to fall through the cracks.”
Vo said he also sent out an email to clients prior to the software change telling them to make sure they calculated the federal tax.
“There are a number of licensees that did not pay attention to the rules, or chose not to pay attention,” Vo said. “Those who hadn’t been paying attention got surprised.”
Aside from the tracking issues though, the tax is still an extra burden on stores who have been paying high prices for product and high excise taxes to the state, Hamide said.
Retailers that haven’t yet opened may want to consider waiting until more of the issues are sorted out, Hamide added.
“They need at least to be aware of what they’re getting themselves into,” Hamide said. “The system is dependant on the stores’ survival at every level, but with this, stores should delay opening until they get clarification. This has been pitched as the green gold rush, but it doesn’t seem that way if you find yourself suddenly $80,000 in debt.”
He also said the Biotrack software has been problematic since it was first installed.
“There’s been a million little glitches with Biotrack with categorizing inventory, putting in data, even transportation manifests,” Hamide said. “Biotrack has been a major nightmare.”
The company’s software has told some growers to transport their product to Vancouver stores by taking Interstate 84 in Oregon, essentially breaking the law, Hamide said.
“When they deliver they’re supposed to go from their facility to ours, and if they get pulled over they have to show that designated route, which tells them to go through Portland,” Hamide said. “It’s humorous. It just characterizes all the issues we’re dealing with.”
Simmons, of the Liquor Control Board, said some of the software problems are from businesses that use the full Biotrack package, which is independent of the inventory tracking system that the state bought from Biotrack called mjtraceability.com.
“The taxes in that system have always been correct,” Simmons said.
The transportation issue, however, is associated with the state software, he acknowledged.
“That would be problematic” if it’s true, Simmons said. “The destination of the shipping manifest would be our system. We have to look into that.”
Vo acknowledged that the software has told some growers to travel through Oregon, but the manifests are editable and growers can alter them to stay in Washington, he said.
“When the manifest is generated, it uses one of the big map engines, like Google Maps, to track the shortest distance from the generator to the receiver,” Vo said. “You can edit that field. You don’t have to use that route. You, as the business owner, are responsible for making sure the route stays within Washington borders.”
Asked if he could change the software to not suggest that businesses travel outside of state borders, Vo said “that’s something we can discuss in the future with the Liquor Control Board.”
The federal tax issue, on the other hand, is not something the state or the company can really do anything about, Simmons said.
“The other Washington is the one that they’ll have to work with,” Simmons said. “I understand these people are hit by a lot of tax problems, but also, to be honest, a lot of these people are not used to running a business.”
That said, the state system — which taxes marijuana businesses at three stages — could also use some tweaking by the legislature, Simmons said.
Along with the excise taxes from growers and stores, another 25 percent excise tax is added if a grower sells marijuana to a separate processor for use in making edibles or other products.
Most growers also have processor licenses, so that tax hasn’t come up much yet.
“It was a messy tax structure that was put in the law,” Simmons said. “It’s three-tier, as opposed to one, which is what they have in Colorado. That would have made things a lot more simple for us.”
Store owners said they’re not sure what they will do about the tax problem yet. Some may push for legislative change on the three tier tax system, and there could also be some federal lawsuits that arise over it.
“At this point we’re just aggressively looking for answers,” Budz said.