MARIJUANA RELATED TAX EXPENDITURES

MARIJUANA RELATED TAX EXPENDITURES

EVALUATION SUMMARY | SEPTEMBER 2022 | 2022-TE37

Expenditure TAX TYPE YEAR ENACTED REPEAL/EXPIRATION DATE REVENUE IMPACT

NUMBER OF TAXPAYERS

Medical Marijuana Sales Tax Exemption for Indigent Patients

Sales and Use 2010 None

$10,133 (Tax Year 2021)

83

Retail Marijuana Sales Tax Exemption

Sales and Use 2017 None

$53 million (Tax Year 2021) Could not determine

Marijuana Business Expense Deduction

Income 2013 None 10.6 million (Tax Year 2018) 488

KEY CONCLUSION: The Medical Marijuana Sales Tax Exemption for Indigent Patients is underutilized and appears to benefit few indigent medical marijuana patients. The Retail Marijuana Sales Tax Exemption and Marijuana Business Expense Deduction are widely used and help define the tax base for taxing marijuana and marijuana businesses.

WHAT DO THESE TAX EXPENDITURES DO?

MEDICAL MARIJUANA SALES TAX EXEMPTION FOR INDIGENT PATIENTS (INDIGENT PATIENTS EXEMPTION) [Section 39-26-726, C.R.S.]--Exempts purchases of medical marijuana by indigent patients from the state sales tax. Indigent patients are classified as individuals with income at or below 185 percent of the federal poverty level.

RETAIL MARIJUANA SALES TAX EXEMPTION [Section 39-26-729(1)(a), C.R.S.]--Exempts sales of retail marijuana from the state sales tax.

MARIJUANA BUSINESS EXPENSE DEDUCTION [SECTION 39-22-304(3)(m), C.R.S. AND SECTION 39-22104(4)(r), C.R.S.]--Allows licensed marijuana businesses to deduct business expenses that are disallowed for federal tax purposes from their Colorado taxable income.

WHAT IS THE PURPOSE OF THESE TAX EXPENDITURES?

INDIGENT PATIENTS EXEMPTION--To eliminate the additional financial burden of the state sales tax for individuals with low incomes who purchase medical marijuana to treat debilitating medical conditions.

RETAIL MARIJUANA SALES TAX EXEMPTION--To exempt purchases of retail marijuana from the state sales tax of 2.9 percent because they are instead subject to the special retail marijuana sales tax rate of 15 percent.

MARIJUANA BUSINESS EXPENSE DEDUCTION--To apply the same income tax treatment to marijuana businesses as other businesses in the state by allowing them to deduct business expenses from their Colorado taxable income.

WHAT POLICY CONSIDERATIONS DID THE EVALUATION IDENTIFY?

The General Assembly may want to consider:

Establishing a statutory purpose and performance measures for the Marijuana Related Tax Expenditures.

Whether it should amend statute to address the limited use of the Indigent Patients Exemption. This could include allowing alternative documentation to establish qualifying income or expanding the exemption to include all medical marijuana sales.

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MARIJUANA RELATED TAX EXPENDITURES

EVALUATION RESULTS

WHAT ARE THE TAX EXPENDITURES?

This evaluation covers three tax expenditures that apply to the State's medical and retail marijuana industry, which we refer to as the Marijuana Related Tax Expenditures.

In Calendar Year 2000, Colorado voters approved Amendment 20, which created Article XVIII, Section 14 of the Colorado Constitution. This amendment legalized sales, possession, and cultivation of limited amounts of medical marijuana for patients with a debilitating medical condition. In order to qualify, patients must receive a certification from their health care provider indicating that they have a qualifying medical condition and apply for a medical marijuana card with the Colorado Department of Public Health and Environment (CDPHE). Generally, applicants for a medical marijuana card must submit a $29.50 fee with their application; however, patients with household incomes at or below 185 percent of the federal poverty level can receive a fee waiver.

In Calendar Year 2012, voters passed Amendment 64, which created Article XVIII, Section 16 of the Colorado Constitution, which legalized the retail sale, purchase, and possession of retail marijuana for individuals aged 21 years and above, beginning January 1, 2014, and allowed local governments to prohibit retail marijuana sales. Retail marijuana is sometimes referred to as recreational marijuana and individuals are not required to meet any qualification standards, other than the age requirement, to purchase retail marijuana.

In addition to legalizing medical and retail marijuana, Article XVIII, Sections 14 and 16, of the Colorado Constitution requires the Department of Revenue (Department) to establish a state marijuana regulatory structure. As a result, the General Assembly passed several

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bills to implement Amendment 64, including House Bill 13-1318, which referred Proposition AA to voters. Proposition AA authorized the Department to tax the cultivation, sale, and use of marijuana. Marijuana sales and businesses that sell marijuana can be subject to several types of taxes in Colorado, including regular sales tax, a special retail marijuana sales tax, and a retail marijuana excise tax, with businesses that sell marijuana also subject to the State's income tax. However, medical and retail marijuana sales are subject to separate taxing structures and statute establishes several tax expenditure provisions that define when the taxes apply. These taxes and the relevant tax expenditures are discussed below.

SALES TAX

Statute [Sections 39-26-104(1)(a) and 105(1)(a)(I)(A), C.R.S.] provides that sales of tangible personal property are subject to the state sales tax rate of 2.9 percent unless specifically exempted by statute. Since marijuana is considered tangible personal property, sales of both medical and retail marijuana are subject to state sales tax unless a specific exemption applies. However, unlike most sales tax revenue, which supports the State's General Fund, the sales tax collected from medical marijuana is distributed to the Marijuana Tax Cash Fund. There are two sales tax exemptions related to marijuana:

MEDICAL MARIJUANA SALES TAX EXEMPTION FOR INDIGENT PATIENTS (INDIGENT PATIENTS EXEMPTION)--Section 39-26-726, C.R.S., exempts purchases of medical marijuana by indigent patients from the state sales tax. Indigent patients are classified as individuals with income at or below 185 percent of the federal poverty level [Section 25-1.5-106(16)(a), C.R.S.]. The exemption was enacted in 2010 by House Bill 10-1284. In order for qualifying patients to claim the exemption, they must obtain a medical marijuana card and also submit a copy of their Colorado tax return from the most recent tax year along with their application for the indigent patient designation to the Medical Marijuana Registry, a division within CDPHE, showing that they meet the income requirement. A patient's medical

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marijuana card is then updated to show that they qualify for the exemption and patients must present their card to retailers when making qualifying purchases. Retailers then apply the exemption at the point of sale and report the exempt sales on Schedule A, Line 12, of the 2021 Colorado Retail Sales Tax Return (Form DR 0100). There have been no legislative changes to the exemption since its enactment. Additionally, statute [Section 29-2-105(1)(d)(I), C.R.S.] mandates that statutory cities and counties that have their sales taxes collected by the State apply most of the State's sales tax exemptions, including the Indigent Patients Exemption.

RETAIL MARIJUANA SALES TAX EXEMPTION--Section 39-26729(1)(a), C.R.S., exempts all sales of retail marijuana from the state sales tax. This exemption was created by Senate Bill 17-267 in 2017 and there have been no substantive legislative changes since its enactment. Additionally, under Section 29-2-105(1)(d)(I)(O), C.R.S., local governments that have their sales taxes collected by the State may choose whether to apply the exemption to their local sales taxes. Retail sales exempt from the State's 2.9 percent sales tax are reported on Schedule B, Line 10, of the 2021 Colorado Retail Sales Tax Return (Form DR 0100).

SPECIAL RETAIL MARIJUANA SALES TAX

Section 39-28.8-202(1)(a)(I), C.R.S., levies a special, 15 percent retail marijuana sales tax on retail marijuana in lieu of the state sales tax that is typically applied to sales of tangible personal property. The special sales tax collected on retail marijuana is distributed between the General Fund, the State Public School Fund, and the Marijuana Tax Cash Fund [Section 39-28.8-203(1)(b)(I.5), C.R.S.]. Because the authorizing statute for the special retail marijuana sales tax does not include medical marijuana, we did not consider the exclusion of medical marijuana from this tax base as a separate tax expenditure for the purposes of our evaluation. We did not identify any tax expenditures that apply to the special retail marijuana sales tax. RETAIL MARIJUANA EXCISE TAX

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Section 39-28.8-302(1)(a)(I), C.R.S., levies an excise tax at a rate of 15 percent on the first transfer of retail marijuana between unaffiliated retail marijuana business licensees or retail marijuana cultivation facilities. Although cultivators or manufacturers are responsible for paying the excise tax, excise taxes are typically passed on to consumers in the form of higher prices. Excise tax revenue collected from retail marijuana is transferred into the Building Excellent Schools Today (BEST) fund for public school capital reconstruction [Section 39-28.8305(1)(a)(III), C.R.S.]. The retail marijuana excise tax does not apply to the transfer of medical marijuana. However, we did not consider the exclusion of medical marijuana from the retail marijuana excise tax to be a tax expenditure for the purposes of this evaluation because it is prescribed by a constitutional provision approved by voters in Colorado that appears to establish retail marijuana as its own tax base for the purposes of the excise tax. We did not identify any tax expenditures that apply to the retail marijuana excise tax.

FEDERAL AND STATE INCOME TAX

Marijuana businesses are subject to federal and state income taxes. Both federal and state income taxes are based on a percentage of businesses' taxable income, which is generally equivalent to businesses' total proceeds for the year, less deductible expenses, such as the cost of goods sold and necessary business expenses. Because Colorado uses federal taxable income as the starting point for calculating taxable income for state tax purposes, most deductions that taxpayers claim at the federal level automatically apply to their Colorado taxable income. However, Section 280E of the Internal Revenue Code (IRC) disallows deductions or credits for amounts paid or incurred if "such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances..." This prevents marijuana businesses from deducting many business expenses at the federal level since marijuana is listed as a Schedule I substance under the federal Controlled Substance Act. The following income tax expenditure applies to marijuana businesses' Colorado income tax:

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