5 NOV 2021
When it comes to the United States (US) cannabis industry, Colorado has been ahead of the curve and is one of the largest domestic markets.
Last week, we learned that Colorado cannabis regulators are reassessing taxes on wholesale cannabis transactions as the likelihood of federal legalization becomes more realistic. State officials believe that legalization is a matter of when, not if, and we are favorable on how they are trying to get ahead of the development.
There are several pieces of legislation that are focused on cannabis legalization at the federal level. Although the bills have a lot of progress to make before having a chance of being passed by Congress, we are favorable on how the legal landscape in the US has changed.
Currently, 36 states have legalized medical cannabis and 18 states have legalized recreational cannabis. We would not be surprised if Congress waited until every state has approved the sale of some form of legal cannabis to move forward on federal legalization legislation, but hope that we are incorrect on this.
Federal legalization measures could include excise taxes on recreational cannabis production or wholesale transactions that are as high as 25%. Currently, Colorado has placed a 15% excise tax on recreational cannabis production or wholesale transactions and is one of six states that allow retail cannabis to already have an excise tax on wholesale transactions.
Colorado Regulators to Analyze Existing Tax Laws
Earlier this year, Colorado passed legislation that included language that required the Colorado Marijuana Enforcement Division (MED) to examine existing rules and tax laws for the recreational cannabis wholesale cultivation market in an effort to be competitive if cannabis becomes legal at the federal level.
In mid-October, several Colorado cannabis operators warned MED regulators that cultivators may leave the state for more tax-favorable markets and we believe this would negatively impact the market.
Vertically integrated cannabis companies that produce and sell cannabis could move production operations to other states if wholesale taxes are too high when compared to markets like Oregon or California.
There are Better Solution Than the Wholesale Excise Tax
Based on what we have read, most of the members on the committee that the MED created as a result of House Bill 1301 want to lower or remove the 15% excise tax. Although we are favorable on the majority’s opinion, the excise tax generated more than $100 million of tax revenue in 2020 (according to the Colorado Department of Revenue).
If wholesale taxes are lowered or removed, the Colorado Legislature could replace that revenue with higher sales taxes. We believe this would be a more favorable scenario for cultivators and will monitor how state legislators decide to address this aspect of the industry. By having competitive tax and production rules in place, Colorado’s cannabis industry would be better protected against potential side effects of interstate commerce (which could be on the horizon if federal legalization occurs).
We believe the US cannabis industry is reaching an inflection point and are bullish on the long-term growth prospects that are associated with the market. During the last year, we have seen a substantial increase in the amount of companies that are levered to the Colorado market and this is a trend to be aware of.
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