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Pot: Washington law changes with great benefits

IRS rules say that if you make money in illegal activity you must still pay taxes (think Al Capone) on your profits. Usually profits are defined as revenue minus expenses, but IRS rule 280E says if you are engaged in illegal activity you may not deduct your expenses.

Those in the marijuana business have to pay federal income tax on their total revenues, not just the profits.

One expense that the IRS does not allow in these cases is taxes paid to the state. So not only does the state excise tax on marijuana raise your price, and you must remit it to the state, you must pay income tax on it. You pay the feds to collect the revenue for the State of Washington.

The state redefined the relationship between themselves and the marijuana businesses so that tax revenue meant for the state is collected by “agents” for a trust fund. Now those in the business can ignore the revenue for the tax for IRS purposes. But that just took affect July 1.

All the state taxes are now collected at point of sale, from the customer [37%, plus sales taxes of about 10%]. I talked with a grower today who said he can now stay in business and likely turn out product at $4 a gram. He was happy about that, but I know that the right number is more like $2. He’s dead meat at 4.

As I predicted a few weeks ago, this change will amount to a modest reduction in price to the consumer, and I think that’s showing up on the websites of stores. At any rate, not paying a price which includes federal taxes on state taxes is a plus for the consumer.

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