Marijuana in Oregon Likely to be Much Cheaper than in Washington

Thursday, June 25, 2015

Rebecca Randall, GoLocalPDX Contributor

Following a retail rollout in Oregon, marijuana could be half as expensive in Oregon compared to Washington, yet Main Street Marijuana owner Ramsey Hamide doesn’t sound too worried. Located off the first I-5 exit near downtown Vancouver, Hamide sees a lot of Oregonians.

He estimates about 50 percent of his store traffic is either from Oregon or another state or even country. “We see every ID in the country and probably about 20 to 30 different passports,” he said.

But to him competition is a good thing. Portland-Vancouver will be the only place in the country where customers have their pick of two states’ products. “It’s kind of like a Napa Valley,” he said. There are different growers and different processors in each state, so he envisions Oregon customers still coming to Washington for certain brands. “It’s really going to be about brand loyalty and people who like certain growers,” he said.

Yet Washington retailers have faced huge price fluctuations coupled with a heavier tax rate than Oregon has planned.

“Initially there were pretty severe shortages when we first opened,” said Hamide, who added that Oregon regulators should be cautious with timing the opening day.

While Washington state allowed the opening of the first licensed retail stores on July 1, 2014, suppliers had not yet harvested the annual crop leading to shortages statewide. Prices were between $35 and $40 a gram, said Hamide (nearly $1,000 an ounce).

Today the price is around $20 per gram ($567 per ounce) at Main Street Marijuana.

But in Oregon, Legislative economists are projecting the price will be quite a bit lower than Washington’s—around $277 per ounce.

Mazen Malik, a senior economist at the Oregon Legislative Revenue Office, said part of the added cost in Washington is much heavier taxation. Washington imposes tax at three separate points in the supply chain: 25 percent at the grower level, 25 percent at the processor level, and 25 percent at the retail level.

Washington intentionally segmented the market by restricting a person from holding a license for all three roles—grower, processor and retailer—which leads to more transactions and more taxes. Each transaction includes a markup to include the tax and ensure a profit on the behalf of the seller. By the time the product reaches a consumer, the markup can be 45-85 percent, said Malik.

Customers are also paying state and local sales taxes in Washington. Meanwhile, retailers must pay federal taxes on their profit. But because the federal government doesn’t recognize the state’s three excise taxes as deductible, retailers are left to pay tax on the amount that has already been taxed by the state.

“If you don’t clearly know your numbers, you could be in a situation,” said Hamide, who lost $70,000 in the first few months of opening. He quickly learned how much he had to markup prices in order to make a profit. “People are thinking this is a green rush, but they’re not understanding the full ramification of federal tax laws… If you’re going to be a business owner coming into the Oregon market, you better be very, very clear on your numbers,” he said.

But in Oregon, the vision for the new marijuana market is different and as a result will have cheaper prices. While Measure 91 approved by voters last November included a one-time $35-per-ounce harvest tax, which would have been treated by the IRS in the same way as Washington’s excise taxes, legislators are working to revise the tax structure to benefit retailers and ultimately lead to a lower price.

Instead, a point-of-sales tax (not a sales tax) is currently making its way through Legislative approval—17 percent would go to the state, while the bill also gives local jurisdictions the authority to tax another 3 percent. The point-of-sales tax is distinguished from a sales tax because it is only on marijuana not any other merchandise a licensed retailer may be selling.

Unlike Washington’s three-tiered tax structure, the point-of-sales tax should be deductible by the federal government, said Malik, meaning retailers won’t have to pay federal taxes on the amount they collect for the state’s point-of-sales tax amount. Though he added that the federal government still has the upper hand here.

As a result, according to his calculations, the point-of-sales tax would lead to a lower price of approximately $277 per ounce than the harvest tax, which would cause a $300-per-ounce price tag.

In an attempt to learn from the past year, Washington state legislators are considering 30 percent point-of-sales tax to replace the three, segmented taxes since rollout of the marijuana market created such huge fluctuations in price. This would lighten the load for retailers like Hamide.

For Oregon, Malik suggested that the 20 percent point-of-sales tax is the sweet spot. If you increase it too much, you actually lose tax revenue, he said, because you aren’t attracting enough business from the black market.

Oregon already often tops the nation for the street price of marijuana. According to priceofweed.com, medium quality weed in Oregon was $178.17 per ounce as of Wednesday. In Washington it was $187.42 per ounce.

Malik said the illegal market will always drive the price because sellers don’t pay social security, unemployment taxes, follow any regulations or even necessarily have a storefront. As Oregon shifts into a legal market, the idea is to attract customers looking for safe, high quality product because the state can now regulate the testing and safety of marijuana.

He envisions about 10 years before the weed market has transitioned to a legitimate market.

Related Slideshow: 7 Things Oregon Can Learn from Legal Marijuana in Washington

In the wake of what many business owners, lobbyists and advocates call a rocky implementation of recreational marijuana in Washington, Oregon regulators have the opportunity to learn from their neighbor to the north.

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Engage Medicinal Marijuana Industry Experts

Washington has been criticized for not incorporating the medicinal marijuana industry or its experts, in its transition to legalization.

“Give all of the people who are legally in the medical marijuana system an easy path, keep people in place,” lobbyist Geoff Sugerman said.

By being the first state to legalize medicinal marijuana in 1998, Oregon has the advantage of a fully functional supply chain of medicinal growers and retailers

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Connect Growers and Retailers

Washington Retailers say at first it was hard to find newly licensed marijuana growers. The state can help the fledgling industry by helping to better connect producers and retailers, Cannabis City in-store manager Amber McGowan said.

Regulating wholesalers is another way to go between growers and retailers, McGowan said.

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Phase in Retail and Production Permits together

By proportionately phasing in retail and pot farming permits, Oregon can prevent both the short supply and flooded market that Washington experienced. In July, retailers sold out in days, while the approved growers scrambled to meet the demand. According to McGowan, there are too many growers and not enough retailers to sell to now.

“There are too many farmers going out of business because there are not enough people to sell their product,” McGowan said. “To make it super successful, don’t over saturate the market with growers.”

Solstice Grown grower Alex Cooley advocates not putting a cap on the number of licenses issued at all.

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Avoid Heavy Taxation

In Washington, growers pay an excise tax of 25 percent tax between grower and processor, another 25 percent tax between processor and retailer, and another 25 percent between retailer and customer.

This means a gram of marijuana, which goes for less than $10 on the black market, goes for $25 in retail stores, Cannabis City's Amber McGowan said.

This price differential is driving customers to the black market, critics say.

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Don't Use a Lottery System

To limit the number of retail stores per county, would-be retailers entered a lottery through Washington's regulators to determine who was eligible to apply for a permit.

Critics say the lottery system cut out qualified retailers, some who had experience from the medical cannabis industry, while allowing unqualified people to set up shop.

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Talk to Cities and Counties

Taking into account the laws specific to counties and municipalities will be essential to Oregon’s success in implementation, William Simpson of Northwest Producers and Processors Association.

“The single largest mistake we could make is not talking to the attorney generals, cities and counties about moratoriums and what would be allowed,” Simpson said. In Washington, some license holders were unable to open due to county moratoriums and bans.

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Treat the Industry like Agriculture

Grower Alex Cooley argues that because marijuana is a plant, it should be regulated like an agricultural crop, taking into consideration harvest cycles. Washington suffered a short supply in July, and then a flooded market following the harvest of outdoor crops in the fall.

Cooley urges Oregon regulators to allow crops on farm land, as some Washington cities are now banning grow operations within city limits.

“It’s a plant, it should grow in the sun, not in a warehouse in Seattle,” he said.