Colorado May Tax Pot Sales 40% as Lawmakers Design Rules

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A man smokes a joint at a pro-marijuana "4/20" celebration in front of the state capitol building in Denver, Colorado. Close

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Photographer: John Moore/Getty Images

A man smokes a joint at a pro-marijuana "4/20" celebration in front of the state capitol building in Denver, Colorado.

Colorado lawmakers set out yesterday to create a framework for how the state would become the first in the nation to regulate and tax recreational marijuana sales, including combined levies as high as 40 percent on the newly legal product.

They quickly found themselves deep in the weeds.

A House of Representatives committee voted yesterday to endorse a 57-page omnibus pot bill after attaching about 20 amendments -- some of which were changes to other amendments. Just 10 days remain in the legislative session for lawmakers to consider this measure, a second which would set a retail-tax structure, and a third bill to revise the state’s criminal code.

“The people of Colorado deserve better on this contentious of an issue than to rush it through at the end of the session,” Representative Brian DelGrosso said in an interview. “It’s going to be a stressful last couple of weeks,” said the Republican from Loveland, who sat on a 10-member panel that helped draft the bills.

Major changes made yesterday to the omnibus marijuana bill, which lays out how the manufacture, sale, distribution, dispensing and testing of retail products may occur, underscore the complexity of regulating an industry that remains illegal under federal law. The measure was the subject of a House committee hearing for the first time.

Controversial Issues

Among the most-controversial issues are whether retail shops should be required to grow most of their product, which would mimic the structure of the state’s existing medical-marijuana industry. Another is how to tax the industry to provide enough money to enforce rules, and a third is whether to set a limit for driving while under the influence of the drug.

Coloradans voted in November to legalize possession of up to an ounce (28 grams) of marijuana by adults 21 or older and approved its sale in retail stores.

The constitutional change, known as Amendment 64, gives the state’s Revenue Department until July 1 to draft rules for recreational pot cultivation, distribution and sales. Officials must start accepting applications for retail marijuana stores by Oct. 1 and begin issuing licenses for them by Jan. 1, the date when they may begin operating.

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“It’s very difficult to predict demand because currently it’s an illegal enterprise,” Ronald Kammerzell, acting executive director of the Revenue Department’s enforcement section, said at the State, Veterans and Military Affairs committee hearing. “We don’t have numbers on how much marijuana today is being sold illegally.”

Fiscal Impact

A forecast on the fiscal impact of Amendment 64 released yesterday by the Colorado Futures Center, a nonpartisan research organization at Fort Collins-based Colorado State University, predicted that 642,772 Coloradans will use legal marijuana next year -- or about 13 percent of state residents.

The U.S. Justice Department is still reviewing Amendment 64, as well as a similar initiative passed in Washington state in November, Allison Price, a spokeswoman, said by e-mail.

The omnibus pot bill debated in Denver yesterday reflects many of the 58 recommendations made by a 24-member task force convened by Governor John Hickenlooper. It included state officials, legislators, medical marijuana representatives and residents. The 10-member legislative committee used the group’s 165-page report in crafting the bills.

Hearing Tension

At the hearing, tensions ran high as law-enforcement lobbyists and representatives from the state attorney general’s office asserted that officials must retain tight control over the emerging marijuana industry, even as the agency that regulates Colorado’s medical-marijuana marketplace admitted it lacks the resources to monitor the existing 1,440 pot-related businesses. About 144,000 patients patronize about 500 dispensaries in the state.

“We don’t have the money to do a great deal of enforcement on medical marijuana,” Barbara Brohl, executive director of the Revenue Department, told the committee. “We have 15 employees doing the work of 55.”

The lack of state enforcement forces local law enforcement officials to investigate medical marijuana operations on their own, testified Annmarie Jensen, a lobbyist for the Colorado Association of Chiefs of Police.

“Because we haven’t had sufficient resources for good oversight at the department level, most of the marijuana dispensary enforcement occurs at the local level,” she told the committee. “The cop on the street has to go look at the books and try to figure out if marijuana is going out the back door.”

Existing Model

The association supports using the rules for medical marijuana businesses -- requiring them to grow at least 70 percent of their inventory -- for retailers, at least in the near term, she said.

A second measure, which would ask voters later this year to give lawmakers taxing authority over retail sales of the drug, is set for a first hearing today in the House Finance Committee. The bill would request approval from voters for a 15 percent excise tax on wholesale sales of recreational marijuana, as well as a separate tax of 15 percent on retail purchases.

When added to a 2.9 percent state sales tax and local levies, the total may rise to a 40 percent tax on retail marijuana purchases. Amendment 64 includes a 15 percent excise tax on wholesale sales, so voters already gave an implicit nod to that rate.

$130 Million

If enacted, the levies would add an estimated $130 million to state revenue in fiscal 2015 and “may not cover the incremental state expenditures related to legalization,” wrote Charles Brown, director of the Colorado Futures Center, and Phyllis Resnick, the group’s lead economist, in the Amendment 64 forecast report.

Lawmakers who drafted the omnibus pot bill are concerned that the proposed taxes, which they say are needed to adequately fund regulatory activities, will be rejected by Republicans, as well as voters.

“It’s tough for me to say how much support we’ll get from the Republican side for assessing taxes on marijuana,” Assistant Majority Leader Dan Pabon, a Denver Democrat, said in an interview.

“I’m worried that without these taxes we won’t have the resources we need to regulate this and also do community outreach and address the public-health issues that are going to be associated with this,” said Pabon, who served on the Governor’s task force and sponsored the omnibus pot bill.

Medical-marijuana businesses, which under the omnibus bill would be given the first crack at applying for retail licenses, expressed concern about the proposed sales taxes.

“I think that’s overly burdensome and overreaching,” said Megan Sanders, chief executive officer of Gaia Plant Based Medicine in Denver. “All this is ultimately going to be passed on -- the consumer is ultimately going to feel the pinch.”

To contact the reporters on this story: Jennifer Oldham in Denver at joldham1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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