Equalizing the Market for Medical Cannabis and Recreational Marijuana1

Purpose

The purpose of this document is to provide options for addressing the disparate regulatory systems for medical and recreational marijuana and the potential tax leakage resulting from the dual systems. The document provides background on the medical and recreational marijuana systems in Washington and Colorado. It also provides several general options for addressing the challenges with Washington’s current dual market model.

Background

In November 1998, Washington voters approved ballot initiative 692 which allows qualifying patients to legally use medical cannabis. No state agency is charged with regulatory oversight of medical cannabis. The LCB estimates that 92% of Washington’s medical cannabis users do not meet the definition of “qualified patient” and are abusing the unregulated medical cannabis system. Before July 1, 2014 the Washington State Institute for Public Policy must conduct a cost-benefit analysis of the medical cannabis laws and rules. Initiative Measure No. 502 (I-502) was adopted by Washington voters in November 2012. I-502 requires the Washington Liquor Control Board (LCB) to regulate the production, distribution, and sale of recreational marijuana in Washington state. LCB is also responsible for collecting the 25% marijuana tax imposed up to three times in the chain of production and sale. The Department of Revenue (Department) is responsible for collecting business and occupation (B&O) tax, retail sales tax (RST), and use tax in connection with marijuana-related business activities.

Current law

I-502 creates a tightly regulated recreational marijuana market that is in direct competition with the unregulated medical cannabis market. In addition, the recreational market is at a substantial tax disadvantage. Medical cannabis is only subject to RST. Recreational marijuana is subject to a marijuana excise tax of 25% on at least two tiers of the supply chain, and is also subject to RST. 2 The result is that the consumer price for recreational marijuana will likely be significantly higher than that of medical marijuana.

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We have found no information indicating that medical cannabis is substantively different than marijuana used for recreational purposes. “Cannabis” and “marijuana” are used interchangeably throughout this memorandum . 2 If an LCB licensed marijuana producer is also a licensed processor, the 25% excise tax is only due twice; once on the sale from the producer/processor to a licensed marijuana retailer and again on the sale from the retailer to the consumer. In that instance, the sale of recreational marijuana to the consumer in Table 1 (infra) will total: $16.64.

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The different tax treatments of recreational marijuana and medical cannabis are reflected below in Table 1: 3
Initiative No. 502: Recreational Marijuana
Producer sells to Processor Cost of goods sold = $10.00 plus 25% Producer tax = 2.50 Processor pays = $12.50 Processor sells to Cost of goods sold plus 25% Processor tax Retailer pays Retailer = $12.50 = 3.13 = $15.63

RCW 69.51A: Medical Cannabis

Tier 1

Tier 2

Dispensary sells to qualifying patient Cost of goods sold $10.00 plus 6.5% WA RST = .65

Tier 3

Retailer sells to Consumer Cost of goods sold = $15.63 plus 25% Retailer tax = 3.91 Retail price = $19.54 plus 6.5% WA RST = 1.27

Consumer Pays

$20.81

$10.65

Proposed changes to Medical Cannabis under SB 5887 and HB 1789

There will almost certainly be a substantial price disparity between recreational marijuana and medical cannabis. The high level of taxation imposed on recreational marijuana is a disincentive for recreational users to migrate from an unregulated, largely untaxed, medical cannabis market to a regulated, highly taxed, recreational marijuana market. On February 8, 2013, Representative Ross Hunter introduced HB 1789 which imposes a 25% excise tax on medical cannabis. Also, on March 27 Senator Ann Rivers introduced SB 5887 which adds regulatory provisions and excise taxes to the medical cannabis RCW chapter. Summaries of how both bills propose to regulate medical cannabis, and how they compare to the regulation of recreational marijuana under I-502, are in Table 2 below:
HB 1789 Specifies
1. A 25% marijuana excise tax on the privilege of engaging within this state in a business operating as a medical cannabis dispensary, 2. Exempts pharmacies from the tax, and 3. Makes the tax payable to the Department of Revenue

Omits
1. Regulatory control and supervision of the medical cannabis supply chain, 2. A tax rate comparable to I-502, i.e. collective 50% -75%, plus RST, and 3. Regulation of medical cannabis collective gardens.

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The prices in this table do not include the cost of business “mark -up” most business generally add to the selling price of tangible personal property.

2

SB 5887

Specifies
1. The LCB must license medical cannabis producers, processors, and dispensaries, 2. A 20% medical cannabis excise tax on each wholesale sale of dried medical cannabis to a medical cannabis processor or medical cannabis dispensary, 3. Imposes a 10% medical cannabis excise tax on retail sales, 4. Authorizes the DOR to adopt rules for tax collection 5. Defines key terms: cannabis, collective garden, medical cannabis dispensary, processor, and producer, 6. Specifies where medical cannabis can be used, 7. Requires that a qualifying patient must be at least 18 or a supervised minor and visit the recommending health professional at least twice a year, 8. Exempts sales of medical cannabis from RST and use tax, 9. Requires mandatory safety inspections and recordkeeping of medical cannabis dispensaries, 10. States health professional recommendations for medical cannabis are valid for only 365 days (90 days for minors), 11. Provider recommendations must state cannabis will benefit the patient, 12. License and renewal fees are commensurate with the costs of administering the medical cannabis licensing program, and 13. Establish other rules needed to ensure the safety and security of medical cannabis and medical cannabis products

Omits
1. A tax rate comparable to I-502, i.e. collective 50% -75%, plus RST, 2. Regulation of medical cannabis collective gardens.

These bills can be amended to provide the LCB with much more authority to regulate the medical cannabis supply chain. One example of how SB 5887 can provide greater market parity is to mandate that medical cannabis dispensaries purchase cannabis and cannabis-infused products from LCB licensed recreational marijuana processors. HB 1789 will require substantial amendments to lessen the perceived differences in how recreational marijuana will be, and medical cannabis is, regulated.

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Option 1

Increasing Regulation of the Supply Chain I-502 provides the LCB with statutory authority to regulate the recreational marijuana supply chain. However, medical cannabis remains largely unregulated. For instance, under Washington’s medical cannabis laws: 1. A qualifying patient can be an unsupervised minor, 2. There is no patient registry, 3. Medical cannabis dispensaries are statutorily undefined, 4. Qualified patients may grow their own cannabis individually or in “collective gardens,” which are statutorily undefined, 5. Collective gardens are not registered or taxed, 6. Dispensaries’ cannabis supplies are undocumented, 7. Provider recommendations for medical cannabis do not expire, 8. The provider must not explicitly state cannabis will benefit the patient, and 9. Medicinal cannabis is not tested for foreign, hazardous, or fatal substances. This option would provide LCB with authority to regulate the medical cannabis system. The LCB could be authorized to adopt rules similar to Colorado’s provisions for regulating medical cannabis. Providing the LCB with statutory authority to regulate medical cannabis will: 1. Divert abusers of the medical cannabis system to the recreational marijuana market and force them pay their fair share of taxes, 2. Protect recreational marijuana excise tax, B&O tax, and RST revenues, 3. Keep legitimate medical marijuana dispensaries in business, 4. Justify medical cannabis’ lower price, 5. Require stricter controls for collective marijuana gardens, which are not subject to any excise, B&O, or retail sales taxes, and 6. Ensure medicinal cannabis is not used recreationally.

Option 2

Impose Excise Taxes on Medical Cannabis Activities Medical cannabis is largely unregulated and not subject to any additional taxes even though it will compete with the recreational marijuana market. An excise tax imposed on the medical cannabis supply chain could potentially equalize the recreational marijuana and medical cannabis markets. Table 1 (above) displays the potential price disparities between the two markets. However, as Table 1 shows and footnotes 2 and 3 explain, a medical cannabis tax must be substantial to close the price gap between it and recreational marijuana for any meaningful diversion to occur. A tax imposed on medical cannabis at a rate equal to the recreational marijuana tax will: 1. Reduce the price gap, 2. Help create a single market for recreational marijuana users, and 3. Curb misuse of the medical cannabis system because those without a legitimate medical concern will not likely seek a physician’s recommendation for medical cannabis. 4

The legislature could also statutorily require medical cannabis dispensaries to purchase their supply from LCB licensed recreational marijuana processors. This will subject medical cannabis to the same levels of taxes imposed on recreational marijuana.

Option 3

Eliminate the Medical Cannabis Supply Chain Eliminating the medical cannabis laws will create a single, regulated market where both medicinal and recreational users purchase from LCB licensed recreational marijuana retailers. Eliminating the medical cannabis laws will also abolish statutory authority for collective gardens and the problem they create of supplying medical cannabis users who do meet the definition of “qualified patient” and are abusing the medical cannabis system. A retail sales tax exemption for prescribed medical marijuana, as is provided for other prescription medications, would provide a limited benefit for medical marijuana patients. If the exemption were tightly crafted, it would likely not have a substantial impact on the recreational market.

Colorado Marijuana Regulation and Taxes

Medical Marijuana Regulation in Colorado The Colorado Department of Revenue Medical Marijuana Enforcement Division (MMED) regulates and licenses businesses that grow, manufacture, distribute, and sell medical marijuana. The MMED has statutory authority to: 1. Suspend, fine, restrict, or revoke medical marijuana business licenses, 2. Grant or refuse state licenses to grow, manufacture, distribute, and sell medical marijuana, and 3. Make rules to implement the medical marijuana supply chain. Under Colorado’s vertically integrated model, dispensaries must be affiliated with a specific grow-operation and obtain at least 70% of their medical marijuana supply from that business. Similarly, marijuana-infused products manufacturers must enter into written agreements with a grow-operation or up to five dispensaries that agree to supply its medical marijuana. Patient Access to Medical Marijuana in Colorado To obtain a red card from the Colorado Department of Public Health (CDPH) to buy, possess, and use medical marijuana in Colorado, a patient must: 1. Have a bona fide relationship with a physician “in good standing” with the State who confirms that the patient suffers a specific debilitating medical condition and recommends medical marijuana to the patient, 2. Submit the recommendation and a $35 fee for a red card to CDPH. 3. Register with specific dispensaries (so their medical marijuana supply is specific to the number of registered patients).

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The Colorado Constitution allows patients to possess up to two ounces of useable marijuana and up to six plants at any given time. Patients can obtain medical marijuana by: 1. Growing and cultivating up to six marijuana plants for their personal medical use, 2. Acquiring medical marijuana from their designated primary caregiver, or 3. Purchasing medical marijuana from licensed dispensaries. Medical marijuana in Colorado is subject to the state’s 2.9% RST plus other additional fees and charges (see MMED Current Fee Schedule). Recreational Marijuana System in Colorado Although state officials in Colorado are still learning the dynamics of competing medical and recreational marijuana markets, they do recognize the need to regulate both supply chains. Recreational marijuana in Colorado is subject to a 15% excise tax and a 2.9% state RST. However, state officials are urging legislators to ask voters to approve an extra sales tax on recreational marijuana — perhaps as much as 25 %.

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