Marijuana taxation and licensing

There were a few interesting stories on marijuana in Washington on Friday. First, according to the AP, a federal lawsuit has been filed

challenging Washington state’s authority to tax marijuana as long as marijuana remains illegal under federal law.

The case arises from the state’s attempt to collect sales taxes from a medical marijuana dispensary in Bellingham. But lawyer Douglas Hiatt, who filed it late Thursday, said it could throw a wrench in Washington’s plans for collecting taxes on recreational marijuana, too.

Both the Department of Revenue and Alison Holcomb (writer of I-502, which legalized recreational marijuana) think the courts will allow Washington to collect taxes:

The lawsuit asks the U.S. District Court in Seattle whether Washington’s decision to tax marijuana sales is in conflict with marijuana’s prohibition under federal law. If it is, the court could bar the state from collecting such taxes.

But Holcomb said there’s little danger of that. The state isn’t specifically taxing the marijuana at issue in Nickerson’s case — it’s applying a general sales tax to marijuana-related transactions, she argued.

That’s an important difference, she said: If the state had imposed a specific tax on medical marijuana, then Nickerson might be implicating himself by paying it.

Instead, when collecting sales taxes on marijuana transactions and turning that money over to the Revenue Department, dispensaries don’t have to identify for revenue officials what they sold — they just have to turn over the money owed on the value of the transactions they conducted, Holcomb said.

Second, Jacob Sullum writes in Reason Magazine’s Hit and Run blog about one of the results of the lottery to allocate licenses to operate marijuana stores:

When the Washinton State Liquor Control Board (LCB) decided to license just 334 marijuana stores, it made permission to operate such a business a scarce and valuable commodity. But when the LCB received more than 2,100 applications for those 334 licenses, it did not cash in on that artificial value by auctioning them. Instead it used lotteries to winnow the field in each jurisdiction with more applications than licenses (which was most of them), saying applicants who received the lowest numbers would get first crack at qualifying. Guess what happened next.

The Kitsap Sun reports that David Comeau, who drew the second lowest number in the lottery for Bremerton, where the LCB plans to issue two retail licenses, recently sold his business, Better Buds, to C&C Shop LLC, which came in 13th, for $150,000. Comeau, whose business exists mostly on paper, will also receive 10 percent of C&C’s net monthly revenue (or $10,000 a month, if the revenue is lower than that) for as long as the company’s store is open. Since the application fee was $250, that’s a pretty good payoff. Plus Comeau was competing against just 15 other applicants for Bremerton’s two licenses. Those have to be the best odds ever in a state lottery. . . .

Technically, they are selling their businesses, which happen to come with a marijuana license (or a good shot at one), just like a TV or radio station comes with a broadcast license or a restaurant comes with a liquor license. And just like the initial recipients of New York City’s taxi medallions, the winners of Washington’s marijuana lottery are enjoying a windfall thanks to legally mandated scarcity.

I-502 established a marijuana retailer license and specified the application and renewal fees for the license, but it left it up to the LCB to determine “the maximum number of retail outlets that may be licensed.” During the rulemaking process, the LCB decided that if applicants outnumbered licenses available, it would hold a lottery. Among other reasons, apparently it determined that statutory authority would be required to hold an auction, which — unlike a lottery — would have required collecting money. (I-1183, liquor privatization, specifically required the LCB to auction off the right to apply for the licenses of former state stores. That auction yielded $31.9 million.)