Cannabis has been legal in Washington State now for 10 years, making Washington among the most mature cannabis markets in the country. In 2020 alone, Washington’s cannabis market generated over 18,000 jobs and over $600 million in tax revenue. So why is the unregulated market still thriving?
Washington State Cannabis Excise Tax
Despite beliefs that California holds the highest, most complex tax structure for cannabis, Washington State has the highest cannabis excise tax in the country at an impressive 37%. When combined with local and State sales tax, the average tax imposed on cannabis sales is 46.2%. In other words, nearly half the revenue generated by cannabis goes back to the State.
Why is Washington’s cannabis excise tax so high? Unlike California, Washington does not tax flower or place any other additional taxes on cultivators. Washington places the excise tax on retailers, who must incorporate the tax rate into their pricing. This tax structure not only exceeds taxes placed on alcohol and tobacco, but also greatly thins profit margins. Further, this tax structure heightens competition between cannabis business owners rather than create an air of teamwork and cooperation and makes it difficult for cannabis retailers in more rural areas to thrive.
The Illicit Cannabis Market in Washington
The general attitude from current and potential cannabis business owners in Washington State is that the high excise tax contributes to the continued illegal market. As with other cannabis regulatory agencies, the Washington State Liquor Control Board (WSLCB) lacks the enforcement capabilities to actively fight the illegal market, but the Washington State Department of Revenue (WSDOR) has no problem notifying the legal market of upcoming or late tax payments. Late or non-occurring tax payments can lead to license suspension which, given combined overhead and tax costs, can shift a business from profitable (or at least breaking even) to failure in a matter of days.
Inflation is also a contributor to Washington’s sustained illegal market. The price of cannabis products must increase to meet already high overhead and tax costs which coincides with an increase in the cost of more essential items. It is well documented that nationwide price increases are a big contributor to crimes on cannabis businesses, as evident on the West Coast, with armed robberies receiving much of the media attention. Inflation lends to increased crime in a number of sectors, cannabis businesses are targeted largely because they hold stores of cash due to the requirement to transact purely in cash.
What Comes Next?
Washington’s cannabis market is ripe for change with respect to its tax structure, but the market’s maturity could make such changes difficult. Placing a tax on flower 10 years after legalization would almost certainly discourage potential and current cultivators, some to the point of closing their business, which would create shortages and drive up the price of flower even more. So, the current structure of placing the tax burden almost entirely on retailers preserves, and may even bolster, sales in the illegal market.
How Can Sapphire Risk Help?
Tony Gallo and the team of experts and consultants at Sapphire Risk Advisory Group have worked in the Washington cannabis market and are familiar with the industry’s unique challenges. Follow us on social media to stay up to date with more Washington cannabis industry updates!
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