Pubdate: Tue, 07 Apr 2015
Source: Globe and Mail (Canada)
Copyright: 2015 The Globe and Mail Company
Author: Gary Mason
Page: A6


Taxes are too high, competition from medical marijuana is too great,
and the bureaucracy is overwhelmed by the volume of applications. As
Gary Mason reports, the new regulated system is giving rise to a
robust black market

Amber McGowan surveys the clutch of customers milling around the three
counters in her tiny marijuana retail outlet and nods approvingly -
pot is hot.

Men and women who appear to be mostly over 50 consider products with
names such as Headband, Skunk, Banana Kush and THC Bomb. A five-pack
of oatmeal cookies that are nothing like the ones your mother used to
make go for $42 (U.S.). Behind a glass enclosure there are bongs of
every colour and description. Psychedelic renderings grace the store's
wood-panelled walls.

"I have to say business has been fantastic," says Ms. McGowan, manager
of Cannabis City, the first marijuana store to open in Seattle. "But
unfortunately that's not the whole story." Not even close. Two years
after legalizing marijuana, and nine months since the first retail
outlets opened, Washington State has encountered more than a few
potholes in its bid to regulate and profit from the sale of cannabis.
The experience is a cautionary tale for Canadians only six months
before an election as they debate the merits of the federal Liberals'
pledge to legalize marijuana across the country.

Far from eliminating the black market, the new, regulated system in
Washington State has instead allowed it to thrive. Licensed growers
complain of a glut of weed that is driving down their profits.

Store owners, meantime, complain about a tax structure that is too
onerous to make decent earnings and is, in many cases, driving
potential customers to explore cheaper options such as medical
marijuana or the scores of unlicensed pot shops that have sprouted up.
The situation is slightly better in Colorado, which legalized cannabis
at the same time as Washington State but did not impose as burdensome
a tax regime on the drug. That has helped keep prices low and make the
black market less appealing.

"We're one of the top three retailers in the state but to be honest
profits aren't great," says Ms. McGowan, whose shop is located amid a
stretch of lowslung buildings on the southern edge of town. "It's a
new industry so it's going to take a while before things sort
themselves out in terms of what's the best tax rate, what's too high,
too low, how you ensure that you're not defeating the whole purpose of
this and just fuelling alternative markets, which I think is what's
happening now."

Randy Simmons, Washington State's marijuana project director who
oversaw the implementation of the legalization program, concedes there
are problems that need to be addressed. But generally, he thinks the
first few steps the program has taken have been positive.

"Right off the bat we were overwhelmed by the volume of applications
we received for retail outlets," he said in an interview from his
office in the state capital of Olympia. "We have just under 100 stores
up and running now. Over the next three to four months, we'll have
another 90 stores opening. The marketplace is starting to find us, I
think, at just the right time."

More stores could help meet demand in some corners of the state where
no licensedmarijuana operations exist now. But that doesn't solve
bigger problems around the current tax rate and competition from the
medical marijuana field, which Mr. Simmons also recognizes as a major

On the tax front, this is the challenge: Currently there is a
25per-cent tax at three levels of the production and sales process -
from grower to processor, processor to retailer, retailer to customer.
And that's on top of other state and local taxes that apply.
Cumulatively, the effective tax rate is 44 per cent in Washington
State, compared with just 29 per cent in Colorado.

In licensed retail outlets such as Cannabis City, pot is selling for
between $23 and $25 a gram . Medical marijuana dispensaries escape the
worst of the tax regime. Their product is subject to a meagre
2.9-per-cent sales tax, allowing them to sell pot for a fraction -
around $9 a gram - of what licensed state stores are charging.
Prescription can be issued by everyone from a nurse practitioner to a
naturopath. They are easy to obtain.

The growth of the medical marijuana industry in the state has been
astronomical. Since Initiative 502, making marijuana in the state
legal, passed in November, 2012, the number of medical marijuana
storefronts has almost doubled to around 1,000, the state estimates.
In just the past year, the total in Olympia alone has grown to 20 from

>From a policy perspective, lawmakers are wrestling with how to direct
people to use statelicensed marijuana stores without penalizing
legitimately sick (and often poor) people who use marijuana.

"I wouldn't say it's the black market that has exploded but the grey
market," Mr. Simmons says. "We have an unregulated medical dispensary
system here and that's really where we've seen the growth [in sales]

He accepts that the current tax structure around marijuana does not
work. That situation is expected to be addressed by state legislators.
Mr. Simmons also believes an amendment will be made to existing laws
to tax pot at one point in the supply chain, instead of three.
Finally, there is a bill before the legislature that

would put both medical marijuana and its recreational counterpart
under the authority of the same agency - the Washington State Liquor

"Several bills before the legislature relate to marijuana and one
would combine the two marketplaces (medical and recreational) into one
with similar licensing procedures, the same regulations, the same
enforcement requirements," he says. The hoped-for result would be a
more competitive cost environment between the two.

The state is also finally cracking down on hundreds of unregulated
marijuana businesses that have popped up in the last several months,
ones that sell pot free of state taxes. Liquor board investigators are
also nabbing unfettered marijuana delivery service operations that
have blossomed and are hurting legitimate state-sanctioned cannabis

Licensed growers are also unhappy with the current arrangements. The
270 growers outnumber retail outlets three to one. As of the middle of
January, the growers had harvested more than 31,000 pounds of pot, but
retail stores had sold less than a fifth of that. Virtually all of the
growers in the state have surplus inventory. Andrew Seitz, general
manager of Dutch Brothers Farm, a commercial grower based in Seattle,
says the current conditions formarijuana producers are

"We're being slaughtered," Mr. Seitz said in an interview. "We are
being absolutely slaughtered."

He said things were fine initially, when growers were able to sell
their crop for about $25 a gram. But because of a glut in supply, that
price has fallen as low as $4 a gram for some producers. "My costs are
about $4.23 a gram currently. Right now I'm grossing about $70,000
over the fourmonth growing cycle and that's between two people and
before taxes obviously. So there can't be any hiccups at all. We just
can't pay the taxes that are being levied right now. It's impossible.
Things have to change because right now producers are dropping like

Like many, Mr. Seitz says the state needs to address the proliferation
of medical marijuanadispensaries that are hurting the entire
recreational side of the industry. "Until they grapple with that and
get it fixed, this whole thing will never work. It's a joke right now."

Mr. Simmons believes that the opening of a hundred new stores in the
next year should help address the glut of product on the market, which
should help producers. The state has revised its revenue projections
and now expects to take in about $35-million in the first year ending
June 30. In Year 2, that number is expected to climb to $120-million.
By 2019, the state predicts it will have taken in more than
$690-million in tax revenue from the sale of pot.

Ms. McGowan is putting her faith in the state's ability to deal with
the problems that have emerged on the commercial side of the industry.
In particular, she is hoping the current tax scheme is revisited - and
soon. Alaska and Oregon have now passed laws legalizing the sale
ofmarijuana and store owners in Washington State are worried they
could lose business to their immediate neighbour to the south when pot
outlets open for business there in 2016.

"We're expanding our hours of operation because of demand, so that is
a positive," Ms. McGowan says. "We made an early stamp on the market
which has helped. And our location close to downtown has helped with
tourists, who form a huge part of our clientele."

The manager looks at her front door as more people walk

"Like I say, nobody's getting rich but I'm hoping that the industry
will become more financially viable in the years ahead. We're young
and it's all brand new."



The Dope on Legal Dope

Washington State's Initiative 502 passed in November, 2012, licensing
the production, distribution and retail sale of marijuana to anyone 21
or older. The law also removed state criminal and civil penalties for
specific activities, such as the possession and sale of marijuana;
established a tax structure on marijuana sales; and established how
revenue generated from taxing sales would be spent.

How does it work?

Initiative 502 created three marijuana licences - producer, processor
and retailer - and set an application fee of $250 (U.S.) for each
licence, with an annual renewal fee of $1,000. The sale of marijuana
is regulated by the Washington State Liquor Control Board.

Who can buy marijuana?

Anyone 21 or older. Adults may possess up to one ounce (28 grams) of
usable marijuana, 16 ounces of marijuana-infused product in solid
form, 72 ounces of marijuana-infused product in liquid form or any
combination of all three.

How is it taxed and where does the tax money go?

Washington State levies a 25-per-cent tax on producer sales to
processors, a 25-per-cent tax on processor sales to retailers and a
25-per-cent tax on retail sales to customers. This tax is in addition
to any/all applicable general, state and local sales and use taxes,
and is part of the total retail price. The total effective tax rate is
to be about 44 per cent. Revenue from taxes collected on the sale of
marijuana is deposited in the Dedicated Marijuana Fund and designated
for administration costs related to implementing and maintaining the
law, health care and substance-abuse prevention and education.

How many states have passed legal marijuana laws?

Colorado - legal for medical and recreational use

Washington - legal for medical and recreational use

Alaska - legal for medical and recreational use

Oregon - currently legal for medical use; by July, 2015, legal for
recreational use

- - Sources: Washington State Liquor Control Board,

Jessica Lepore/The Globe and Mail
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MAP posted-by: Matt