By Jeff Bess, second-year student at the University of Washington School of Law.
Oregon has long been known (and loved) for its lack of sales tax. It is one of five states that does not tax the sale of goods. However, Oregon will make an exception to its tax policy when it comes to cannabis.
A major rationale for state-level legalization of cannabis is the promise of tax revenues that can help fund education, infrastructure, drug and alcohol addiction treatment programs, and other social services. Oregon’s northern neighbor Washington is projected to exceed one billion dollars over the next four years in tax revenue from the sale of recreational cannabis. Oregon’s new sales tax, which will apply at a rate of 17-20% (localities have discretion to add up to 3% on top of the 17% state-level tax), is also expected to be a boon to the state’s budget. Effectively implementing and enforcing any tax of that scale and actually realizing these anticipated fiscal benefits, however, presents challenges.
The Oregon Department of Revenue (“DOR”) will implement the state’s sales tax on cannabis beginning next year. The Oregon DOR has the dual challenge of establishing a tax that is both on a new industry and new to the state. There will naturally be a learning curve for those responsible for instituting the tax, and experience from other state-legal tax regimes suggests that diligent, reactive rule making and enforcement will be essential to close loopholes and curb evasive tactics.
Based on publicly available information, the Oregon DOR’s approach seems to be centered on deterrence. Though they are building out facilities and adding personnel to administer the tax, a DOR agency report on the implementation of the sales tax states that the prospect of losing their license will prevent cannabis retailers from skirting the rules. It is true that, unlike most industries, cannabis business owners risk their licensing rights if they are found in noncompliance. Nonetheless, evidence from Washington State suggests creative entrepreneurs will find way to take advantage where they can. Washington experienced problems resulting from “bundling” in cannabis retail stores, a practice intended to minimize the amount of tax a customer pays. For example, a customer buys a cannabis product at or slightly above the retailer’s cost (or even, in some cases, gets it for “free”) that is bundled with a heavily marked up piece of paraphernalia; the buyer pays the higher cannabis tax only on the under-priced cannabis product, thereby resulting in lower tax revenues. The appeal of such a scheme (both for consumers looking to get the best deal and for retailers trying to thrive in a very competitive market) is intuitive, but it also potentially undermines one of the main reasons many support recreational cannabis legalization. In Washington, recently passed legislation (House Bill 2136) prohibits bundling. But, if Oregon’s lawmakers and regulators are not attentive to the issues other state-legal jurisdictions have faced, the cannabis-specific problems posed by Oregon’s only sales tax could be lost in the broader challenge of implementing a kind of tax that is new altogether.
The bottom line is that the Oregon DOR needs to be equipped with the resources and expertise to effectively enforce its new sales tax and its cannabis retailers should fully comply with state taxes in good faith. Otherwise, business owners in the industry will again demonstrate that they are not so different from other rational business owners and structure their operations so as to pay as little tax as possible. The short-term result may be good for customers, but practices like bundling threaten the very benefits that led many to support cannabis legalization in Oregon in the first place.
Author’s note: Special thanks to Bernard Chamberlain of Emerge Law Group for his assistance developing this topic.