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Colorado Will Tax Pot Up to 25% as Lawmakers Set Rules

May 9 (Bloomberg) -- Colorado became the first U.S. state to pass legislation regulating the retail sale of marijuana and proposing to tax the new industry as much as 25 percent, defying federal law that labels marijuana an illegal substance.

Lawmakers approved bills dictating how the manufacture, sale, distribution, dispensing and testing of retail products may occur; setting a limit on driving while under the influence; and sending an initiative to the ballot this fall that would set an excise tax of up to 15 percent on wholesale sales and a 10 percent sales tax on retail purchases. Total state and local levies could approach 36 percent.

“We need to make sure that the implementation of Amendment 64 does not take away from K-12 education,” said state Senator Cheri Jahn, a Democrat from Wheat Ridge, referring to the constitutional amendment voters approved in November legalizing retail pot sales. “This has to be a self-sustaining program. We don’t want too much tax, but we want just enough.”

Underlining the complexity of the task facing the state in regulating what remains an illegal activity under federal law, lawmakers amended an omnibus bill on marijuana regulations more than 130 times -- making changes up to the last minute before the final vote -- and a separate measure on taxing it.

The Colorado House passed the bills yesterday on a party-line vote, with 37 Democrats in favor and 28 Republicans opposed. The bills now make their way to Governor John Hickenlooper, a first-term Democrat, who supports them, said Eric Brown, a spokesman. The omnibus marijuana bill reflects many of the 58 recommendations made by a 24-member task force convened by Hickenlooper in December.

Task Force

The task force included state officials, legislators, medical marijuana representatives and residents. A 10-member legislative committee that crafted most of the legislation used the group’s 165-page report as a guide.

Among the measures is a resolution calling on the federal government to “provide guidance in implementing this law.” The U.S. Justice Department is reviewing the constitutional amendment voters approved permitting recreational pot sales in Colorado, as well as a similar initiative passed in Washington state, Allison Price, a department spokeswoman, said by e-mail.

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 change gave 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.

New Taxes

The new excise and sales taxes approved by lawmakers must also be approved by Colorado voters in November. If voters don’t approve additional levies, state regulators will be forced to use general-fund money to pay for staff necessary to enforce rules.

The department charged with regulating the state’s current medical marijuana industry testified in committee last month that it doesn’t have sufficient resources to meet the demands of overseeing the existing 1,400 businesses. About 144,000 patients patronize about 500 dispensaries in the state.

A forecast on the fiscal impact of Amendment 64 released April 24 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.

Retail Sales

Lawmakers are so concerned about how much it will cost to oversee the new industry that on May 6 they introduced a resolution proposed for the November ballot that would have tied passage of taxes to retail sales. The measure would have asked voters two questions: Should new taxes be allowed and should retail sales be suspended if the levies aren’t approved?

Over the objections of industry representatives, who rushed to testify at a hastily called committee hearing, senators sent the measure to the floor before it was available for anyone to read. They later killed it before it came up for debate, saying they made their point: If the industry opposes the tax measure, causing it to fail, they will bring back a bill to halt retail sales next session.

“This resolution is an attempt to get the industry’s attention,” Senate President John Morse, a Democrat from Colorado Springs, said on the Senate floor on May 6. “If a tax measure is unsuccessful, the taxpayers can be left holding the bag and I can assure you that the members will take up this measure again.”

Growing Product

Among the most-controversial issues in the five-month-long debate on how to regulate retail pot sales was whether these shops should be required to grow most of their product, which would mimic the structure of the state’s existing medical-marijuana industry. Under the omnibus bill, stores will be required to do so until September 2014.

Businesses won’t be allowed to sell their products online. Medical marijuana firms will be given preference for the first round of licenses for retail shops.

Another contentious matter, which failed to make it into law six times in the past three years, is a bill that sets a limit of 5 nanograms of THC -- the psychoactive chemical in marijuana -- drivers can retain in their blood that would allow juries to consider whether they were too high to drive.

The measure requires police to have probable cause to pull over a driver and doesn’t change anything about how they stop or question motorists. Drivers would be required to give consent to have their blood drawn, although their licenses could be revoked if they refuse.

Medical marijuana industry lobbyists and patients fought the measure, saying science doesn’t exist to support the limit and adding they retain 5 nanograms of THC in their blood on a routine basis.

Driving Limit

Lawmakers persisted, introducing a second bill with an under-the-influence driving limit this session at the urging of Hickenlooper and law enforcement officials after a first measure died in committee.

“Fatalities by drivers with positive cannabis in 2006 were 33; in 2011 it was 59 -- almost a 50 percent increase,” said state Senator Steve King, a Grand Junction Republican who sponsored the measure. “People are dying on our highways from people driving high and it is going up and it is going up significantly.”

Dozens of new regulatory questions emerged even over the last three days of the session, with legislators agreeing that retailers may not put pot in trademarked products, that it may not be sold from anything with wheels, and that collectives where residents pool pot plants and sell them would be outlawed.

Senators applauded after voting on the omnibus marijuana measure, with several co-sponsors wearily embracing one another.

“I think we’ve all heard just about all we want to hear on retail marijuana,” said Jahn, who sat on Hickenlooper’s task force and sponsored the taxation and omnibus bills in the Senate.

To contact the reporter 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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