By: Louis J. Terminello, Esq.
The parallels between the developments of the regulatory framework for beverage alcohol post 21st Amendment are strikingly similar to the regulatory efforts underway for cannabis. In fact, although not yet legal on the federal level, certain stakeholders have proposed the involvement of TTB, the federal alcohol regulatory authority, as the main national or interstate oversight agency (when legal). Further, state alcohol regulatory bodies are propounding similar roles for themselves within their borders. At this juncture, however, conflicts exist at every level-not only between the federal and state governments but between state governments and their municipalities. Florida permits the certification and dispensing of medical marijuana for a variety of conditions. Paradoxically, the City of Miami does not permit legally allowable dispensaries from operating within the city limits.
In the face of these contradictions there is one overriding fact as we move towards the inevitable legalization of cannabis-federal and state tax revenue will be significantly enhanced by effective assessment and collection of a uniform and equitably imposed tax. It is here that the beverage alcohol sale and tax model seems to be a scheme worth considering.
Alcohol distribution operates within a three-tier system. Upper tier members consist of importers, manufacturers and distributors (sometimes called the middle-tier”) and ultimately retailers who sell to consumers. This model, and through the permitting and licensing system that undergirds it, effectively allows for the accounting, tracking and remuneration of tax dollars based upon quantities sold. To the initiated reader, this blog post is not an endorsement of overlaying tied-house restrictions, particularly trade practice matters, on the cannabis industry. It is important to also state that channeling cannabis as a commodity through exiting alcohol beverage stakeholders, namely alcohol wholesalers, may not be a good option either-but that is a topic for a different blog post. However, a three-tier cannabis licensing scheme with similar tax nexus is a system worth exploring. Moreover, as with alcohol, taxation rates based on potency appears to be an effective method for the apportionment and collection of tax.
Alcohol tax through the distribution chain is collected as an excise tax-that is a tax on volume with tax rate adjusted for the level of alcohol by volume (poof gallon) also known as ____% a/b/v, a familiar conjoining of letters and symbols to anyone who has merely glanced at a label on a bottle of beer, wine or spirit.
Drilling down to the wine world, importers and producers of wine, excluding tax credits available to domestic producers and importers under the Craft Beverage Modernization Act (CBMA), currently pay $1.07, $1.57, or $3.15 per proof gallon with alcohol contents at less than 14%, 14%-21%, or 21%-24% respectively to the federal government. Importers pay the excise tax when the wine clears customs and enters the stream of commerce within the United States. Domestic producers remit excise tax when the wine leaves the bonded winery premises and among other things, makes its way to a licensed state wine distributor. These distributors also pay excise tax dollars imposed and collected by state governments when the bottle leaves their warehouse and makes its way to a licensed retailer. In Florida, the a/b/v tax rate is $2.25 per gallon for wine below 17.25% a/b/v and $3.00 per gallon above that number. Finally, when purchased by a consumer at retail, sales tax, in most states, adds additional revenues to state coffers.
Proof gallon taxation and remittance at the two tiers, in conjunction with effective permitting, makes for a reportable, collectable and verifiable system of taxation. Also, labeling requirements revealing alcohol by volume, allow drinkers of beverage alcohol to know, more or less, what they are getting-they can be informed consumers. That is to say, they can make reasonably informed and ideally responsible decisions on consumption. This basic regulatory tenant should likely apply to cannabis sale and consumption as well. In fact, virtually all states, where legal, require that THC content be disclosed on labels. This is practice worth replicating in each state as legalization comes to pass.
Currently, there is no uniform approach at the state level to taxation of cannabis-some states tax on a certain percentage of price, others on weight and a few on levels of THC. For obvious reasons, there currently is no federal tax applied to cannabis products. It does seem to this writer that establishing a uniform tax rate based on THC level multiplied by quantity sold, in effect an excise tax, is an ideal standard to apply at the state(s) level and at the federal level when made legal (which surely will happen). Combine this with the three-tier model licensed growers and producers would and pay excise tax into federal coffers based on potency and volume. Moving down the distribution chain as with alcohol, distributors would pay their portion of the excise tax into state coffers calculated, more or less, identically. This, combined with mandatory and accurate labeling of THC content (as with a/b/v), could lead to informed and responsible consumption which clearly is a win for all stakeholders, including consumers.
The three-tier system the alcohol beverage industry relies on is complex and not always an ideal model. Further, it has helped create powerful camps at the various levels who often are in costly legal and political battles with each other to protect their vested interests. These troublesome issues need to be addressed prior to an enactment of a similar scheme for cannabis. That said the model is worth replicating if only for its effective assessment and collection of tax dollars based on potency and truthful and accurate labeling requirements.
