Since its first recreational marijuana dispensary opened in 2014, Colorado has been at the forefront of the burgeoning adult-use cannabis industry, setting a precedent for other states considering the legalization of recreational marijuana, and reaping significant tax benefits for the state in the process.
Indeed, the state of Colorado imposes a 15% excise tax on retail marijuana, in addition to a 15% sales tax. City, county, and special districts sales taxes may also apply to retail marijuana sales. According to the Colorado Department of Revenue, in 2022 the state collected more than $313 million in combined revenue from the excise and sales taxes on recreational marijuana, and collected nearly $71 million in retail marijuana excise taxes alone. According to an August 2023 memorandum by the Colorado Legislative Counsel staff, the state tax revenue derived from marijuana exceeds the tax revenues from alcohol or tobacco products.
This article concerns Colorado’s recreational marijuana excise tax, which is levied on the first sale or transfer of marijuana from a recreational marijuana cultivation facility to a recreational marijuana store or a facility that manufactures recreational marijuana products. The tax must be paid by any recreational marijuana cultivation facility licensed by the State of Colorado to cultivate, prepare, package, and sell marijuana to recreational marijuana stores or facilities that manufacture recreational marijuana products. This tax is paid by the cultivator but is often passed on to the consumer in the form of higher prices. And, as explained further below, the state’s manner of calculating the tax for cultivation facilities that are “affiliated” with the recreational marijuana store or recreational manufacturing facility to which the sales or transfers are made has affected cannabis entrepreneurs crying foul.
Revenue generated from the recreational marijuana excise tax benefits public education. Under Amendment 64 to the Colorado Constitution, which legalized the recreational use and retail sale of marijuana in Colorado for adults over age 21, the first $40 million collected each year is earmarked for the Building Excellent Schools Today (BEST) fund, which provides grants for school construction projects across the state. Any revenue collected beyond that amount goes to the Public School Fund.
Statutory and Regulatory Requirements
Under Colo. Rev. Stat. § 39-28.8-302, the 15% marijuana excise tax rate must be applied to “the average market rate of the unprocessed retail marijuana if the transaction is between affiliated retail marijuana business licensees,” or to “the contract price … if the transaction is between unaffiliated retail marijuana business licensees.” The statutory definition section applicable to the recreational marijuana excise tax law, Colo. Rev. Stat. § 39-28.8-101, defines affiliated marijuana businesses as those “that are owned or controlled by the same or related interests, where ‘related interests’ includes individuals who are related by blood or marriage or entities that are directly or indirectly controlled by an entity or individual or related individuals.” The “contract price” is “the invoice price charged by a retail marijuana cultivation facility to each licensed purchaser for each sale or transfer of unprocessed retail marijuana.” And the “average market rate,” meanwhile, is “the average price, as determined by the [Colorado Department of Revenue (CDOR)] on a quarterly basis, of all unprocessed retail marijuana that is sold or transferred from retail marijuana cultivation facilities in the state, to retail marijuana product manufacturing facilities or retail marijuana stores, less taxes paid on the sales or transfers.” Colorado’s Retail Marijuana Tax regulation, 1 Colo. Code Regs. § 201-18 et seq., applies statutory average market rate definition and excise tax calculation method to:
- Bud Allocated for Extraction,
- Trim Allocated for Extraction,
- Immature Plant,
- Wet Whole Plant, and
Actual Calculation of the Excise Tax Rate
CDOR practice, however, is to calculate the average market rates (AMRs) against which the marijuana excise tax is levied on a quarterly basis by examining “median market prices per pound or count of each category of unprocessed recreational marijuana that is sold or transferred from recreational marijuana cultivation facilities to recreational marijuana product manufacturing facilities or recreational marijuana stores.” (Emphasis supplied). Further, even though the “contract price” is derived from the invoice prices for sales by retail marijuana cultivation facilities to unaffiliated purchasers, the AMRs applicable to the excise tax for affiliated businesses are calculated based upon the median contract price for each category from the previous quarter, as recorded in Colorado’s private vendor-provided Marijuana Enforcement Tracking Reporting Compliance (METRC) system. As explained in this CDOR video on the subject, “transfers between affiliated businesses are not included in the data used to calculate the AMRs.”
Therefore, the AMRs against which the 15% excise tax rate is levied for transactions occurring within vertically integrated recreational cannabis enterprises — set at $703 per pound of bud transferred for the July 1 – September 30 quarter, and subsequently $750 a pound starting October 1 through December 31, for example — are inflated and in fact reflect rates that are much higher than those actually charged in transfers from recreational marijuana cultivators to affiliated product manufacturing facilities or retail stores.
Indeed, the CDOR method of calculating the AMRs based only upon the prices associated with sales by recreational cultivators to unaffiliated manufacturers or retailers excludes 56% of all pounds sold in the state of Colorado, according to industry licensees. Most such pounds are discount pounds sold to the end consumer as discount ounces. The actual excise tax rate on these transfers is thus much higher than 15%.
CDOR Workgroups Regarding the AMR Calculation Method
CDOR has convened two workgroups to address marijuana taxation issues this year. The first, convened in March, discussed the potential promulgation of a revised Retail Marijuana Tax regulation, which among other things, addresses the AMR calculation method by including affiliated transfers in the methodology. Next, CDOR in August convened the Average Market Rate Methodology Workgroup to “discuss the Department’s use of median versus mean prices, answer questions, and discuss possible alternative metrics in compliance with the ‘average market rate’ definition.” To date, however, there has been no solution to the problem.
Why It Matters
As the marijuana industry continues to grow and evolve, so too will its tax landscape. Policymakers will need to continuously monitor the industry and adjust tax rates and regulations as necessary to ensure that they are maximizing revenue while also supporting the growth and sustainability of the industry.
Under that rubric, the CDOR AMR methodology protects the state from unscrupulous affiliated operators charging themselves an artificially low price and sending the state only 15% of that. However, the pendulum has swung to a point approaching double taxation.
Indeed, the Las Vegas Review-Journal reports that in Nevada, where the state wholesale tax operates similarly to Colorado’s recreational marijuana excise tax system, the industry is turning to the state legislature for help with an effective tax rate approaching 25% to 30%.
Further, critics of the system contend that the CDOR AMR methodology creates an incentive for recreational marijuana retailers and retail product manufacturers to sell other companies’ product, making them responsible for that company’s test results — and vice versa. This puts vertically integrated cannabis operations in a difficult bind.
As the CDOR continues to refine the recreational marijuana excise tax system, affiliated company executives are hoping for AMRs that represent all sales by recreational cultivators in Colorado — to affiliated and unaffiliated purchasers. Affiliated companies are also hoping for a methodology that allows them to prove that their per-pound value for an affiliated sales is based on the retail price that the end-consumer would be willing to pay at their stores, which data potentially could be tracked with the METRC system.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.