Even governments aren't immune to the occasional spanking from a tax audit. In 2016, Denver Auditor Timothy O'Brien released a report calling for more transparency and efficiency in how the City of Denver spends cannabis tax revenue. Four years later, O'Brien's latest audit is even more stern, taking the city to task over what the auditor believes are shaky cannabis tax collecting and reporting practices, as well as a lack of discipline over black-market delivery services. We caught up with O'Brien to learn more about his beefs with the city's strategy and practices regarding pot taxes.
Westword: A 2016 audit on Denver marijuana taxation called for more transparency in how pot tax revenue is spent, as well as more community outreach and progress reports. How do you think the city performed with regard to those goals?
Timothy M. O'Brien: Denver has not implemented this recommendation from 2016. They believe they are transparent through the budget process, the annual budget report estimates of revenues and expenditures. I believe that the best method to demonstrate transparency would be the use of a special revenue fund. Denver uses many special revenue funds. A special revenue fund shows the dollars coming in and how they are spent. The budget document is over 700 pages. I don’t believe citizens are inclined to review this document to get information on the revenues and expenditures of the marijuana taxes received by Denver. A special revenue fund makes transparency and accountability simple. This type of accounting and reporting does not preclude Denver from using the funds the way they are used today.
Is there anything about the regulatory structure or business operations surrounding marijuana businesses that could lead to poor tax auditing and revenue information of these businesses?
I think the regulatory structure is sound. Our audit focused on the method used by Denver to determine compliance by the cannabis industry when reporting and remitting taxes. All marijuana businesses are required to use an inventory-tracking system called METRC (Marijuana Enforcement Tracking Reporting Compliance). This state system provides a seed-to-sale chain of custody for all marijuana products.
Let's say I'm someone who doesn't know how tax auditing and collection works (because I am someone who doesn't know how tax auditing and collection works). How would you explain Denver's shortcomings in this area — and the consequences — for marijuana businesses?
Collection is not performed by the audit unit of Denver’s Treasury Division. For tax auditing, Denver needs to decide which businesses it chooses to audit. Denver decides which businesses based on prior audits, the amount of taxes collected, and the amount of taxes assessed after a marijuana business audit compared to a non-marijuana business audit. We believe these are faulty assumptions. There is more relevant data, such as the METRC system above, that should be used to identify the businesses with the highest risk of underreporting. A data-driven approach and a coordinated effort with the State of Colorado would improve both collection of taxes and compliance with the law.
Is there any numerical value to how much revenue has gone uncollected because of this? Or if the data used as the foundation for an audit is wrong, does that blow up everything?
No numerical value. Denver does not retain the documentation we would need to evaluate uncollected revenue, if any. We recommended that they retain documentation, and Treasury disagreed with the recommendation.
We recommended that the Treasury Division’s audit unit develop a set of performance measures to determine if they are meeting the goals and objectives they have set.
Illegal marijuana delivery is also mentioned in the audit as an example of revenue loss for the city, with some pretty stark examples. But you believe that will only intensify once Denver legalizes the practice of delivery. How so?
Once the practice is legalized, it would no longer be illegal. Once the practice is legal, there could be even more businesses doing it and even more businesses expected to get licenses and pay taxes. Denver then needs to be sure that these stores are properly licensed and the taxes are collected. The data-driven approach we recommend would help identify any businesses with a high risk of underreporting.
What moves could Denver make in the near future to clear up some of these inconsistencies?
Implement all of the recommendations we made in the audit report.