Is Washington State Becoming a Drug Kingpin?

Submitted By Darren Smith, Guest Blogger

Washington State SealA controversy is developing in Washington State involving revenue collection between Recreational Marijuana, legalized by Initiative 502, and existing Medical Marijuana dispensaries.

Medical Marijuana has been available for over ten years and the language of the original initiative was such that the purpose of which was for the treatment of various ailments users were suffering. Those possessing a medical marijuana card could legally possess a small amount in either usable form or owning a small number of plants. Collectives could also be formed where patients would aggregate their grow and share among themselves the drug for their own use. Since according to the statute the use of the cannabis is for medicinal purposes, like prescription drugs or medical devices, it is not subject to state recreational marijuana taxes.

With Recreational Marijuana the taxation is nearly a polar opposite. The state imposes a twenty five percent excise tax on sales from a producer (farmer) to a processor, a twenty five percent excise tax on sales from the processor to the retailer, and a twenty five percent sales tax on the consumer who purchases marijuana from a retailer. Could this difference be influencing the state toward protectionism or undue influence?

In macroeconomics having one segment of the market with a tax advantage can often lead to imbalances in which the tax favored segment can drive out competition if the tax discrepancy is high. In this situation the imbalance is high. We can briefly look at some numbers.

The market for Recreational Marijuana has not been fully established in the legal market due to the system not being open for business. The following numbers are speculative and not vetted in the market but are used for illustrative purposes.

We will assume the cost of marijuana produced at a medical collective to be eight dollars per gram and due to economies of scale five dollars at a recreational marijuana producer. We will assume also a profit margin of thirty percent at each stage and factor in statutorily mandated excise and sales tax for each to be imposed upon the consumer. Prices are per gram.

Medical Marijuana:

Cooperative: $8 cost x 30% markup = $10.40 + $0.90 sales tax = $11.30
(The Washington State Department of Revenue interpreted medical marijuana to be subject to regular sales taxes (which vary by locality) and to B & O tax)

Recreational Marijuana:

Producer: $5 cost x 30% markup = $6.50 + Tax = $8.13 ($1.63 paid to state)
Processor: $8.13 cost x 30% markup = $10.60 + Tax = $13.25 ($2.65 paid to state)
Retailer: $13.25 cost x 30% markup = $17.23 + Tax = $21.54 ($4.31 paid to state)

The discrepancy to the consumer is high. Using these assumptions and statistics those obtaining marijuana for medicinal purposes pay $11.30 per gram while the recreational consumer pays $21.54. The state’s cut is $0.90 and $8.59 respectively. There is great incentive for the citizen to obtain marijuana for medicinal purposes and the state to shunt users into recreational usage.

MarijuanaMoreover, a business needs to maintain a markup on their products or services that is sufficient based on expected sales volumes to pay for operating expenses. The regulatory cost of being a marijuana retailer could be argued as being almost extreme compared with other retailers such as restaurants, hardware, or widgets. The state mandates surveillance equipment, high amounts of record keeping, floor plan approvals, procedures, and makes draconian fines for rather minor violations. In fact, a retailer can be fined several thousand dollars if their employees forget to wear their name tags for a day and a producer can have 25% of their crop seized by the state if a state mandated security system fails twice upon inspection. All of these regulations add to the cost of doing business and add to the cost and hence taxation of the consumer. These could force the markup higher than the percentage used here.

But with the tax favoritism facilitated by the two sets of laws, there is going to be extreme price pressure placed upon retailers to be competitive with the medical marijuana cooperatives. If there are a number of medical marijuana cooperatives in a particular area, and the medical marijuana cards are easy to obtain, being a recreational marijuana retailer might not be a viable business model.

The state is looking at this with much interest and now one can see some rather bizarre behaviors of the legislature. The legislature was expecting the state to receive about $500,000,000.00 annually in tax revenue from the sale of recreational marijuana but it now apparent it is not going to receive anything close to this amount due to the presence of medical marijuana cooperatives and those citizens who possess medical marijuana cards may legally under state law produce their own.

Where formerly the state legislators were more or less indifferent to medical marijuana, many of them are turning against it and this is mostly, if not entirely, driven by the thirst for tax revenue. There was recently an unsuccessful attempt to impose a twenty percent tax on medical marijuana sales. But where does the state find the ethical courage to impose a twenty percent tax on what by statute is a medical industry? The state does not impose sales taxes on prescription drugs or medical devices, though as described above, the DOR interprets the law that sales taxes apply on medical marijuana. But if the effort to impose a twenty percent tax on marijuana where it is used as a treatment for nausea during chemotherapy how can it not charge a tax on Marinol, a prescription containing THC, the active ingredient in marijuana, for the same affliction? What would be the reaction of the public if politicians put a 20% tax on all prescritption drugs? It would be an outrage to say the least, but that is essentially what the legislature wants with this tax on medical marijuana.

There is also the likelihood the illicit market might not be driven away due to the taxation issues on recreational retail marijuana. If the cost of illicit marijuana is low, and recreational is high, the consumer might still obtain marijuana from the traditional illegal sources for economic reasons if they cannot obtain a medical marijuana card. (or of the act of obtaining the illegal product remains easy and anonymous, which the retail marijuana seller being forced to have surveillance equipment that is viewable by the State Liquor Control Board and people are required to produce ID might be dissuasive to the consumer,)

Recently there have been several raids by federal DEA agents of medical marijuana dispensaries in the state and seizures have happened. The federal government has been rather unpredictable in how it is dealing with medical and recreational marijuana that is legal in several states. One worry is that the state will collude with the federal government to oust the medical marijuana dispensaries from their business through selective enforcement. The state has a great financial incentive to put medical marijuana establishments out of business and to favor recreational marijuana retailers due to a possible nine fold taxation advantage.

The oddity of this is that before the recreational marijuana law was ratified, the state received zero revenue from recreational users. Now that the law is in place, it wishes to make certain it receives all the revenue it can get its hands on, and it does not like competition with those that might keep some of that revenue for itself. So can one make a point of calling the State of Washington a drug kingpin? It dictates who can and who cannot produce marijuana. It grants permission and directs others to process and deliver the drug. It takes a cut from each person in the supply chain. It acts as an enforcer and punishes those who “violate the rules”. It also makes efforts to drive out competition from those who threaten its income stream.

Strange it is how just three years ago legislators often wrapped themselves in the flag by proclaiming they were dedicated to fighting organized crime linked to the illegal marijuana market and now they are fighting over how much money they can make from essentially, though less violently, some of the same practices.

50 thoughts on “Is Washington State Becoming a Drug Kingpin?”

  1. Well, this may be a bit off-topic but I think it may not be entirely inappropriate to discuss here. Maybe a new blog to address what I am about to comment on would be helpful or maybe the subject has been addressed before and I just need to be made aware of the discussion. Here it is:

    In THE U.S. government enclave, Washington D.C., the city government (mayor and council) has ratified medical marijuana. As nothing in Washington D.C. happens without the tacit approval of the Congress, what effect will there be upon all marijuana laws in the country if the system of dispensaries is allowed to be established?

    I have already heard one attorney say that he (and I cannot recall his name) intends to file in Federal court a complaint that the passive acceptance of the dispensaries by the Congress means that Federal laws not being enforced in D.C. deprives all other citizens outside the enclave of their 5th and 14th Amendment protections.

    (Even though the 14th was aimed at the states, SCOTUS has upheld its application to the Federal government as well. Even so, the 5th would likely be sufficient to support a Due Process argument.)

    I wonder if the Congress will allow the city government of D.C. to actually establish any dispensaries. If so, and the DEA doesn’t move in immediately to shut them down, would that mean state and Federal marijuana laws would be rendered inept? If the DEA does move to shut them down, would the city government be vulnerable to prosecution by the U.S. government under any number of laws not the least of which would be the conspiracy statutes?

    If the city government was prosecutable and action was not taken, would that not raise a further quandary for the Federal government and expose it to another action under the 5th and 14th Amendments? After all, it would be undeniable that the mayor and the members of the city council colluded to effectively construct a criminal enterprise to manufacture and distribute a controlled substance in violation of Federal laws. I doubt that any argument that the city government is protected from prosecution under any eminent domain would succeed.

    Also, since medical marijuana is sanctioned by the government of Washington state (or any other state or municipal government), wouldn’t the U.S. government actually need to bring an action in Federal court to nullify the laws that contravene Federal supremacy? As a matter of fact, isn’t it already the case that 5th and 14th Amendment guarantees have been triggered by the fact that no state medical marijuana law has been challenged and overturned (to my knowledge) by the Federal government?

    Further, since the government (DEA and other LEA) doesn’t move consistently to immediately and aggressively shut down all dispensaries, couldn’t the argument be made that the enforcement is selective as well as arbitrary and capricious in nature? After all, if the various enforcement agencies know of a dispensary and allow it to operate for even a day beyond that knowledge, doesn’t that call into question the government’s motives and bias?

    Further, as I see it, is the conundrum raised by the Oath of Office taken by every public official (as far as I know) wherein any official that actively pursues establishing a law that violates U.S. law has in fact violated their oath to uphold the laws of the United States. What rich irony there is in the fact that the very people tasked with upholding the laws are violating the law by enacting laws that oppose Federal law. Whew!

    What’s more is the fact that every police officer in every state where medical and casual marijuana use has been enacted by state government is also in violation of their oaths to uphold all of the laws of the state of (fill in the blank) and the United States if they do not make arrests. The argument that the local and state police are barred from enforcing Federal law is naturally absurd at least in my view.

    I find this whole thing absurd to the extreme but that may only be I am a reasonable person and not lawyer, judge or member of the ruling class.

    1. Barry Williams,

      An altogether brilliant comment that emphasizes the innate irony of the entire marijuana issue by sticking to the illogical difficulties ignored by anti-pot proponents. .

  2. The Mafia would have loved to have the force the govt. has. In fact the govt. Is the Mafia, stealing from people’s businesses, and producing nothing of value in return but intimidation and threat; which, of course, the sheeple love, and clamor for more.

  3. Gene & Tony:

    The WA law has a provision where the state Liquor Control Board, which regulates the recreational marijuana industry, may adjust the taxes to deal with market conditions. An incident that could trigger this is the taxation might be too high and the black market increases.

    I don’t see this happening. The state has already one of the highest cigarette taxes in the US and it was reported in the news here a few months ago a study found that 40% of all cigarettes possessed by residents here were untaxed by the state. Either they were imported from other states or, mostly, they were purchased from reservations, or consumer resorted to buying loose leaf and papers for rolling their own.

    The LCB has been very lackluster on enforcing this. In fact, I saw this for myself when I had a case where we received a highly credible report that someone was selling bootleg cartons of cigarettes and liquor out of their home in a rural part of the county. An informant said that cases of smokes were being sold each week. State law is that possession of more than 50,000 untaxed cigarettes by someone other than a wholesaler, transporter, or manufacturer is a Class C Felony. That amounts to only 250 cartons. The informant claimed there was more than that there. The taxes on these cigarettes would by over $7,600.00 (250 cartons) I was going to open up a case on this but my supervisor directed me to hand it over to the LCB as it was their perview.

    After getting the runaround with them their area supervisor came back and wanted us to make a field contact with the suspect and “ask them to comply”. Ask a person to comply who is committing a felony? I was a bit dismayed. So I felt if they didn’t want to do their jobs, why waste time trying to enforce their revenue collection. It didn’t come out of the sheriff’s budget so I just dropped it.

    1. If it makes you feel any better, Canada’s worse.

      In the 90’s, the Canadian government found that 85% of all Canadian made tobacco products were being sold to the states and smuggled back into Canada to avoid the oppressive overtaxation. They decided that the best thing to do was to “accidentally fix the problem” (we know they didn’t do it on purpose!) by lowering tobacco taxes to a more reasonable “couple hundred percent”, which dropped the price of a pack of smokes from almost $7.00 down to about $2.00, leaving tens of thousands of tobacco smugglers with tons of $4.00 smokes that they couldn’t sell for $5.00 as they did only days before.

      Nobody complained about a 50 cent pack of smokes selling for $2.00 being too high. The problem was COMPLETELY solved. There was ZERO cross-border tobacco smuggling. But that “just wasn’t good enough” for “our employees” who promptly set about raising tobacco taxes again, to even more ridiculously oppressive levels.

      Today, the same now-60-cent pack of smokes is selling for $10.00 to $12.00, and the smuggling operations have come back far, far stronger than they were before due to the even higher profit margins from smuggling. Of course, it’s no longer Canadian tobacco products involved, as the US and Canadian smugglers aren’t willing to get burned a second time, so now the tobacco is smuggled in from India and China, who do not have the same quality standards as the Canadian products, but they have far higher profit margins due to vastly lower growing, processing and production costs.

      What it all boils down to is that the government is entirely capable of fixing any problem it sets its mind to…but only by accident, and whenever they realize that they have actually fixed a problem, they must IMMEDIATELY set about making the problem far, far worse than it was before they “accidentally fixed it.”

      It’s not just in the states…it’s everywhere.

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