BY: DANA GENTRY, Nevada Current
Nevada’s marijuana growers say they are being overtaxed and on the brink of going out of business, thanks to a tax formula that relies on the state’s calculation of the fair market value of a pound of cannabis, rather than its actual wholesale price. Competing proposals to tweak the calculation would each cost the state millions of dollars a year in tax revenue designated in part for education.
“Put simply, growers are selling a pound for $1,000 and paying taxes as if they sold it for $2,000,” Assemblywoman Shea Backus told her colleagues on the Assembly Revenue Committee Tuesday, as she presented the committee-sponsored bill.
The Department of Taxation publishes the Fair Market Value (FMV) of cannabis products twice a year, based on data that may be three months old at the time it’s released. Cannabis prices have plummeted rapidly in recent years, leaving the state to rely on stale data.
The FMV is currently $1,944 for a pound of cannabis flower. The actual wholesale price is half of that according to testimony from John Ackell of Zenway Corp, a cultivation facility in North Las Vegas.
“However, the ‘Fair Market Value’ price has not dropped a similar amount. As a result, our effective tax rate has averaged between 25% and 30%,” Acklell testified. “On some individual sales, the tax has been as high as 60%. With effective tax rates as high as this, it has not been possible to meet all our other obligations.”
Ackell says Zenway is behind on its taxes and has a payment plan with the state. He says basing the Wholesale Cannabis Tax on actual sales rather than an amount set by the state would give cultivators an effective tax rate of 15%.
Safi Boyajian, a former licensee of Flower One, a cultivation company that recently underwent bankruptcy proceedings in Canada, told the committee the company has paid approximately $30 million in wholesale marijuana taxes in Nevada since 2019.
“That represented 24% of our revenue. If the intent was to truly charge us 15% of our wholesale sales, that would have equated to about $18 million of taxes collected, meaning we technically overpaid by over $11 million dollars,” she said. “This amount would have been able to potentially save the company and prevent all of these people including myself from losing a very large amount of money.”
Gold mine or money pit?
Nevada’s legal marijuana industry was expected to generate an endless stream of profit for the individuals granted highly-coveted licenses by the state. The reality in recent years, with the exception of a Covid-era boom, has been sobering for the fledgling industry.
In 2021, sales totaled more than $1 billion, but fell 16% last year and are down 19.5% in 2023.
“Our largest competition being the unlicensed illicit market, which doesn’t have tax obligations, doesn’t have the cost of compliance, doesn’t have cost of testing, they can sell for much, much cheaper,” testified Layke Martin, executive director of the Nevada Cannabis Association, formerly the Nevada Dispensary Association.
A presentation from the NCA noted the cost of regulation, including “excessive fines, fees and time and effort charges” has skyrocketed in recent years. The state’s time and effort billings to licensees totaled $388,300 in 2019, $1.7 million in 2022, and are projected at $2.54 million for 2023, based on data from the state.
Given the illegal federal status of cannabis, licensees lack the ability to employ standard business strategies such as writing off expenses, yet they are on the hook for federal payroll and income taxes.
Assembly Bill 430 is intended to reduce the burden on cultivators by setting a flat 15% tax on wholesale transactions between unaffiliated companies, while transfers within vertically integrated operations would be taxed in accordance with the state-issued FMV, a proposal that gives growers no relief on sales to affiliated companies. The measure would also require the state to publish new FMV data quarterly rather than twice a year.
The proposal is based on the formula used in Colorado and has the support of the NCA.
“The simplest way to go forward, as every state has done except Colorado, is eliminate the wholesale tax,” suggested Will Adler, a lobbyist representing the Sierra Cannabis Coalition, which is seeking to eliminate the wholesale tax and increase the current retail tax on recreational sales from 10% to 15% to capture some of the lost revenue. Washington eliminated its wholesale taxes and now charges consumers a 37% retail tax on cannabis products.
The proposal met with opposition from the NCA.
“High taxes are already the number one complaint we get from our customers,” testified Brandon Wiegand, president of the NCA and chief operating officer of Thrive Cannabis Marketplace.
Adler argues customers are already paying a higher price that includes the cost of the wholesale tax.
Some lawmakers raised concerns about the loss of revenue to the state under both proposals. Cannabis sales contributed $147 million to education in 2022.
The 10% retail tax imposed on recreational sales generated $89 million in 2022. Revenue is distributed directly to education funding.
The 15% wholesale tax on sales from cultivation facilities to other licensees generated $63 million in 2022. Revenue goes to the operating budget of the Cannabis Control Board and to local governments throughout the state to offset the effects of the legal industry.
The state sales tax of roughly 8% imposed on cannabis sales generated $77 million in 2022.
Taxing arms-length transactions at a flat 15%, rather than based on the state’s FMV, would cut tax revenue by $19 million in fiscal year 2023, followed by annual increases of several million dollars a year, according to estimates provided by the Sierra Cannabis Coalition.
The proposal to eliminate wholesale taxes and increase the retail tax would result in a loss of $15 million in FY 2023, also followed by annual increases of several million dollars a year.
Department of Taxation officials testified eliminating the wholesale tax would reduce the department’s workload considerably.
The committee took no action on the measure.