That’s why it was an “effective” tax rate. The actual tax rate on the books is much lower.
I’d like to know how the accountant in the article is computing effective taxes - on profits or on gross income or some other measure. It does make a difference, but it wouldn’t make for a great headline if it wasn’t a big number.
ok I think I figured that part out. But I can’t understand an over 100% effective tax rate, is that even possible?
Also, did none of these businesses know about this when they started up?
To expound on the above, take personal income taxes.
You might be in the 25% tax bracket, but that doesn’t mean you are paying 25% of your income in taxes (a mistake commonly made by a lot of people about taxes, even in several threads on this board).
Assuming income purely from hourly or salaried employment, part of income is basically untaxed (due to exemptions, deductions, etc), part of it is taxed at 10%, part of it is taxed at 15%, and part of it is taxed at 25%.
Overall, your effective tax rate will be greater than 0% and less than 25%, depending on the actual income.
Another problem is how the accountant is determining the “effective” rate. There’s not exactly a set formula, but for a corporation it’s usually based on the pre-taxed profits. For example, if the accountant was computing based on the profits, maybe all the profits and then some are eaten by taxes. Or there could be some other number tricks the accountant is pulling. The number is clear not based on gross income.
The issue could well be the result of a poorly managed tax code. Or it could just be a business that is poorly managed or in a bad market. At the very least, it’s not the government (via Congress, the IRS, or other) setting such a high tax rate. That’s just not happening.
So the effective rate cannot be higher than the tax rate if all income was taxed, correct?
And I agree, some underlying math that shows how the numbers in the article were derived would be nice.
Imagine you buy 1,000 widgets a month at $100 each, and sell them at $150 each. You are collecting $150,000 every month but you only pay income tax on $50,000 of that, because the other $100,000 is being spent on the costs of earning that income and thus counts as a tax deduction.
The reason the OP and others are complaining is because not all costs of doing business qualify as tax deductions. You can’t claim a tax deduction for money spent bribing government officials, for example, or a tax deduction for the fines you are required to pay for breaking the law. One of these exceptions is that you can’t claim tax deductions for the cost of trafficking illegal drugs. So because your business violates federal laws against trafficking in illegal drugs and you are buying 1,000 units of weed instead of 1,000 units of widgets, you have to pay tax on the full $150,000 instead of just the $50,000.
Yeah, I got it now. I can see how the tax you owe is more than the profit you made (once business expenses are paid). That kind of sucks.
But again, seems like this would be something that was discovered before starting the business.
This is a problem with an extremely simple solution: you need to not be illegally trafficking in illegal drugs. And I don’t mean nudge-nudge, wink-wink complicity of the people whose job it is to enforce the law you’re violating, the law has to be on your side. Even if the exception had a sunset clause and would be revisited once this experiment is over, that would give you what you want.
Except these people are legally trafficking in legal drugs.
Yes, there’s a disagreement between Federal and State governments over legality. And a ton of different ways the complex interaction between federal and state laws is involved. But that’s not the fault of the businesses themselves, which are conducting themselves as above board as it is possible to do in this particular market segment.
Another simple solution is that Congress should allow these tax deductions if the business is properly established in Colorado.
It seems you don’t like the legalized marijuana trade. That’s fine. But it doesn’t lead to much of a nuanced analysis of the situation.
So what do you think was the consensus when these businesses were formed? They didn’t think that law applied to them? That it would be changed before tax time rolled around? They just didn’t know about it?
I would guess they just didn’t know about it.
The Constitution is quite clear about what happens when the Federal and State governments disagree about things like this: Federal law trumps state law. Being in denial about the fact that it is really against the law only cripples your willingness to actually fix the problem.
This is basically the problem with opening a business that deals in a product that is illegal according to federal law. Regardless of what the state law is, there is no incentive for the Feds to make it easy for you, and complaining that they don’t is a little naive.
I’m pro legalization, but I think that saying that people of a state can violate Federal law just because a referendum passes sets a bad precedent. I don’t want states passing a referendum that says that Federal environmental laws don’t apply to them and giving polluters free reign.
Hopefully, as with Gay marriage, the political will is heading in the direction of legalization and that in the next decade or so it will gain enough support to pass at the national level.
In the meantime, I doubt that this will destroy the legal marijuana trade, it will probably just mean higher prices. I mean its not as if illegal dealers of the past could deduct their bushiness expenses, and they still managed to make money.
Yes, this is it. It is in the interest of the states that have legalized pot to iron these details out. They want the revenue stream from the taxes and are now in the market to attract customers from the formerly illegal trade.
The tax issue is secondary and tied to the actual problem on banking the money. So far most major banks will not allow these business transactions due to fear that the money might be seized at the federal level. So all these new pot businesses are operating on a cash only basis.
This cash only system is a bad thing. It leaves the industry attractive to the criminal element, it makes securing the business a big deal, and, and, the reason this will be solved is because it makes the tracking and taxing of the revenue stream much more difficult for the state.
Keep your eye on the banking. That is the issue that will determine the industry as having fully arrived.
It took Washington state awhile to get their industry up to speed due to grower to processor to retail requirements and they are still getting up to full speed. And as they do, the prices are dropping. They are still at least twice, maybe three times as high as the illegal market but they are steadily dropping.
I had the pleasant experience of crossing the river a few weeks ago and the store looked very professional with display cases and various utensils. “I’ll take 2 grams of that and 4 grams of the other.” And the women who served me looked like your average soccer mom or school teacher. Paid, walked out, no questions asked.
Never thought I’d see the day.
To you, perhaps, but if you didn’t mean what you said, or say what you meant, then expect people to point out the flaws in it anyway.
Alternatively, people should follow federal law, or expect problems if they violate it. Also, anyone on the leading edge of something changing from illegal to legal should expect a few surprises.
Not that I’m saying I agree with the tax code in this regard. I hope Congress manages to fix it, but with R majorities in both chambers, it’s not likely.
Interesting idea. The nonprofit could be a distributor only, providing a market for growers and a point of sales for the public. What are the rules to be a nonprofit? Do you have to claim to be doing some public good?
Or, the state could copy the ABC route and form the MPC (Marijuana Product Commission.) [ABC is Alcoholic Beverage Commissions, in some US states, that serve as the sole distributor and point of sale for liquor. Stuff like this took hold at the end of Prohibition. It’s an idiotic system, IMHO, but it’d avoid the IRS issue for Colorado!]
Some dispensaries are now “taking the fifth,” refusing to file state sales and income taxes on the grounds that doing so admits to their commission of a federal crime.
It’s in everyone’s best interests to get this kind of stuff worked out. Well, everyone except those who don’t want to see a fair trial succeed.