Jacqueline Collins
Audio By Carbonatix
Marijuana cultivation taxes in Colorado could see one of the biggest shakeups since recreational sales began in 2014 if a proposed piece of legislation is successful.
Wholesale marijuana taxes, or excise taxes, are based on the state’s average market rate (AMR), which is actually the median price per pound of various cannabis categories. After a cannabis category’s AMR is set each quarter by the Colorado Department of Revenue, growers are charged a 15 percent excise tax on each sale of plant material to a dispensary or extraction facility.
Current categories for wholesale cannabis taxes include retail bud, trim, bud allocated for extraction, and a few others — with retail bud, sold as flower for smoking, the most expensive category. This approach has long been derided by business owners, who say that the rates can be unfair, but the Colorado Legislature has been hesitant to change the AMR system, which plays a critical role in how much tax revenue the state collects from the pot industry each year. The budget for the state Marijuana Enforcement Division, an arm of the DOR, is based almost entirely on industry taxes and fees, as well.
However, a cannabis chain based in southern Colorado and a handful of lawmakers think it’s time to rethink the status quo.
Different Quality and Prices, Same Tax Rate
Apothecary Farms has six dispensaries in the state, with two locations each in Colorado Springs, Denver and Pueblo, as well as several in Oklahoma. The cannabis chain is a vertically integrated operation, growing all of its cannabis at a large outdoor operation and some greenhouses in a small town south of Pueblo. Thanks to all of its seed-to-sale infrastructure as well as largely outdoor cultivation, Apothecary Farms is able to keep production costs low during the cultivation and extraction process. But the taxes are anything but a bargain, according to marketing director Brent McDonald.
“Basically, all the tax rates are as if we’re paying for indoor cannabis,” McDonald says. “Outdoor cannabis is effectively taxed as if it were indoor, even though they exist in different markets with different market value.”
Because the AMR takes all wholesale cannabis transactions into consideration and the vast majority is grown indoors, McDonald says that Apothecary Farms and other outdoor growing operations are often taxed at higher rates than their wholesale prices call for. Meanwhile, indoor cannabis benefits from its outdoor counterpart’s lower prices, which effectively pull down the median prices that the AMR is based upon.
According to McDonald, indoor cannabis currently goes for around $700 to $800 per pound on average, while outdoor sells closer to $300 to $400. As of December, the AMR for pounds of marijuana flower is $648, the lowest ever since recreational pot sales began in 2014. But it’s also close to double what most outdoor flower sells for, McDonald points out.
“Indoor is getting a better end of the deal, because their rates are being dragged down by outdoor,” he says.
This comes into play particularly for growers that also run extractions to make dabbable concentrates, vaporizer oil, edibles and other infused products, according to McDonald, who says that every time Apothecary Farms transfers flower, sugar leaves or trim over for extraction, the company is forced to pay the 15 percent excise tax.
“When it comes down to the AMR for fresh-frozen [plants used to make live resin and rosin], specifically, we are basically paying more in taxes than it costs to grow the product. It’s insane, and it’s mainly because we’re taxed at that rate because most of the fresh-frozen product being sold in volume is from indoors,” he explains.
Introduced on February 2, House Bill 26-1077 would create separate “indoor” and “outdoor” categories for unprocessed marijuana. This would make the AMR more accurate and help vertically integrated operations run more efficiently, McDonald says.
“Obviously, this is an issue that affects us more than most because we’re fully sun-grown and were vertically integrated,” he adds. “And you really get hit when you transfer product from your grow to your extraction lab. That’s what triggers that 15 percent tax.”
The MED has a provision allowing businesses that buy from external sources to pay the 15 percent excise tax based on the contract price of each harvest order; that would remain unchanged if the bill passes.
The proposal has bipartisan sponsorship but has received little attention from the industry so far. McDonald expects some opposition, likely from “some of the larger indoor operators” who benefit from lower AMR rates. The Epic Remedy, a Colorado Springs dispensary chain with four stores, has registered in opposition to HB 1077 with the Colorado Secretary of State’s Office but has not responded to a request for comment.
The bill will have a first hearing in the House Finance Committee, but no date has been set.
