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Colorado: Legislature approves historic marijuana sales and excise taxes

On May 8, 2013, the Colorado Legislature made history by becoming the first state to pass two bills regulating the manufacture, sale, distribution, and use of recreational marijuana. While both bills were written by a bipartisan committee and received support from both parties in the Senate, the bills were approved along party lines in the House (37 Democrats in favor and 28 Republicans opposed). It is expected that the bills will be approved by Governor John Hickenlooper, a first-term Democrat.

Voter approval of sales and excise taxes

One of these bills, House Bill 1318, imposes certain sales and excise taxes on the sale of recreational marijuana (Tax Bill). Once the Tax Bill is approved by the governor, it will need to be approved by Colorado voters in November. If this Tax Bill is not approved by Colorado voters, the state will be required to use general fund money to pay the costs necessary to enforce the new marijuana laws.

Prior to this Tax Bill’s passage by the legislature, certain lawmakers were so concerned about the cost to regulate this industry that they proposed a resolution for the November ballot that would have asked voters if the sale of recreational marijuana should be suspended if the sales and excise taxes were not approved. Marijuana industry representatives were able to convince lawmakers to remove such ballot resolution prior to the legislature’s passage of the Tax Bill.

Sales and excise taxes

Beginning on January 1, 2014, the bill would impose a 10 percent sales tax on the sale of retail marijuana products sold to consumers by a retail marijuana store. In addition, lawmakers would have the ability to decrease or increase this sales tax, provided the sales tax rate does not exceed 15 percent. This sales tax is in addition to the 2.9 percent state sales tax and any local government sales taxes that are currently imposed on the sale of property.

Also, beginning on January 1, 2014, the bill would impose an excise tax on the first sale or transfer of unprocessed retail marijuana by a retail marijuana cultivation facility, at a rate of 15 percent of the average market rate of unprocessed retail marijuana. Similar to the marijuana retail sales tax, this excise tax may be decreased or increased by lawmakers, provided the excise tax rate does not exceed 15 percent.

Use of revenues collected from sales and excise taxes

According to the Tax Bill, most of the revenues collected from the sales and excise taxes will be deposited in the marijuana cash fund for the enforcement of regulations on the retail marijuana industry and for other purposes of the fund as determined by the general assembly. However, 15 percent of the revenues collected from the sales tax on the retail sale of marijuana products will be distributed to local governments in Colorado that have one or more retail marijuana stores within its borders. In addition, the first $40 million of the revenues collected from the excise tax on the unprocessed retail marijuana product sales will be used for the state’s construction of schools.

Exception for medical marijuana

The sales and excise taxes provided in the Tax Bill do not apply to the wholesale or retail sale of medical marijuana.

Click here for the full text of House Bill 1318.

Kentucky: Out-of-state, out of mind – Taxpayers may be exempt from personal property taxes on property to be shipped out-of-state

In Pinkerton Tobacco Company LP v. Department of Revenue, File No. K11-R-20, Order No. K25033 (March 27, 2013), the Kentucky Board of Tax Appeals (Board) ruled on whether inventory stored at a Kentucky warehouse qualified for the state property tax exemption for inventory-in-transit as set forth in KRS § 132.097.

The exemption in KRS § 132.097 provides:

There shall be exempt from ad valorem tax for state purposes, personal property placed in a warehouse or distribution center for the purpose of subsequent shipment to an out-of-state destination. Personal property shall be deemed to be held for shipment to an out-of-state destination if the owner can reasonably demonstrate that the personal property will be shipped out-of state within the next six (6) months.

In Pinkerton, Pinkerton Tobacco Company LP (Pinkerton) was the owner of manufactured tobacco products (Property) that it had not yet sold to a buyer located out-of-state as of the assessment date. Pinkerton sold the Property to its parent company that took possession of the Property at Pinkerton’s Kentucky warehouse dock. The evidence in the case showed that in order for the Property to be fresh, the Property had to be shipped within six months of manufacture. Also, it was undisputed that 93 percent of Pinkerton’s Property was ultimately shipped (whether or not by Pinkerton directly) to an out-of-state destination and such Property was shipped out within six months from such Property leaving Pinkerton’s warehouse.

After a textual analysis of the underlying law, the Board reasoned that the statute does not require an out-of-state sale to take place in a certain manner, nor does it matter if the actual sale is first consummated in Kentucky, nor does it matter whether the owner is the one actually shipping the property out-of state. All the taxpayer must do, the Board stated, is show that the owner can reasonably demonstrate that the personal property will be shipped out-of-state within six months. The Board ruled Pinkerton made such a showing.

Despite the intervening sale of Pinkerton’s Property to its parent company in Kentucky, all that Pinkerton had to do was reasonably demonstrate that the Products were to be shipped out-of-state within the six month period.

Due to the parent/subsidiary relationship present in Pinkerton, it is not entirely clear how the Board would have ruled if Pinkerton would have sold the Property to an unrelated third party. So while this ruling provides some level of clarification, it also opens up many questions on the issue of permissible exclusion. As with virtually any tax situation, one seeking to exclude personal property in Kentucky under this law should consult with their tax advisor.

Click here to read the final order.

Arkansas: Combined reporting, flat corporate tax rate bill dies

The Multistate Tax Update previously reported on a bill (House Bill 1845) that was introduced by Arkansas legislators, which would have made certain sweeping changes to the state’s tax structure. Two of the primary changes under the bill would have been implementing combined reporting and altering the state’s current progressive corporate tax rate system to a flat corporate rate of six percent. The bill died in the House Committee upon the adjournment of the last regular session of 2013.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.