States face tax challenges as marijuana sales grow

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Colorado State Auditor Dianne Ray said she’s confident the state is keeping track of the industry because 34% of sales were audited in 2018.

Although 11 states legalized the use of recreational marijuana and most others have legalized its medical use, states have wide variations in how they regulate, audit and collect taxes on the ballooning sales.

That was the message Wednesday at a virtual conference sponsored by the National Association of State Auditors, Comptrollers, and Treasurers.

One example of the growth of the industry is the nearly tenfold increase in Colorado’s marijuana tax revenue to $250.7 million in 2018 from $25.3 million in 2014.

Colorado State Auditor Dianne Ray said she’s confident the state is keeping track of the industry because 34% of sales were audited in 2018.

For Colorado and other states it has been a challenge to follow the money because the industry operates on cash basis. Banks are federally regulated and most cannabis sales are considered illegal under the federal Controlled Substance Act.

In addition to audits, Ray said her state also uses extensive data analytics and investigations that “have provided us assurance that Colorado likely is collecting most of the taxes due from the cash-based marijuana industry.”

Steven Whitney, a senior manager for the accounting firm BerryDunn, suggested that other states should follow Colorado’s example in dedicating a portion of their marijuana tax revenue to fund an enforcement staff.

“It's pretty easy to divert stuff if the manufacturer wanted to,” said Whitney. “And so, the the state needs to stay on top of that, and monitor it, and that makes sure that the manufacturer knows that big brother is looking over their shoulder and and we'll come knocking.”

The state of Colorado employs nine field auditors who spend 70% of their time auditing marijuana businesses.

The field audit unit uses software called “R” that provides a statistical platform for analyzing tax returns and inventory data to identify candidates for audits.

The Colorado Department of Revenue Legal Marijuana Enforcement Division uses three main information systems: Metrc which is used on many states; MyLO, which is a licensing software; and GenTax, which tracks tax receipts.

The state also has a fraud hotline and employs underage staffers who try to purchase marijuana from retailers to determine if they are following the state law prohibiting underage sales.

At the national level, however, state tax revenues from marijuana sales remain a minimal factor in state budgets.

In addition, state legislation to legalize recreational marijuana remains a controversial topic because cannabis-related activities that have been legalized in some states nonetheless violate the federal Controlled Substances Act.

A May report by the nonpartisan Congressional Research Service found “all but three states have changed their laws to permit the use of cannabis for medical purposes.”

“Under the Constitution’s Supremacy Clause, federal law takes precedence over conflicting state laws, and the Supreme Court has held that states laws authorizing medical marijuana use do not affect the CSA’s restrictions,” the CRS report said.

The Controlled Substances Act has influenced the decisions by states to highly regulate the use of marijuana even after it has been legalized at the state level.

Minnesota is among the states that permit medical use of cannabis only for a narrow range of medical conditions and restrict the means of administration.

Minnesota has certified two vertically integrated companies for growing and selling medical marijuana with each using four dispensaries that require in-person pickup. Those eight dispensaries are expected to double to 16 by the end of this calendar year.

Minnesota had 22,233 certified patients as of June 30, 64% of whom were certified by a health professional as suffering from intractable pain.

Another 23% had post-traumatic stress disorder while 12% had severe and persistent muscle spasms, 7% had cancer and 5% had obstructive sleep apnea.

Smaller percentages had seizures, inflammatory bowel disease including Crohn’s, autism, glaucoma, unspecified terminal illness, HIV/AIDs, Tourette Syndrome, Alzheimer’s Disease and ALS.

Chris Tholkes, director of the Office of Medical Cannabis for the Minnesota Health Department, said medical professionals only certify a patient has a qualifying condition and “they aren't prescribing the product.”

Minnesota limits the use to liquid, pill, topical or vaporized delivery, none of which require the use of dried leaves or a plant.

Tholkes said the state has no centralized "seed to sale" software system and relies on the manufacturers use their own software.

But Minnesota does maintain a centralized patient registry.

A price study by the accounting firm BerryDunn found the average cost for a 30-day supply of medical marijuana in Minnesota decreased to $316 in 2019 from $362 three years earlier.

Some patients had more than one qualifying condition such as cancer and intractable pain.

The study also found 73% of the patients spent more than $100 and less than $300 a month in 2019.

Tholkes said the price study was undertaken after some members of the state Legislature heard anecdotal complaints that patients were spending up to $800 a month and that the state needed to add leafed cannabis to the program.

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State tax revenues State and local finance State regulators Marijuana industry Colorado Minnesota Washington DC