RMJ Lessons Learned in Colorado

Bob Eichem, CFOBoulder, Colorado

Legal to Sell as of January 1, 2014if Properly Licensed

What We Will Cover

• How State of Colorado law is different from the State of Washington

• The specific impacts on the finance department

• How it has impacted budget expenditures and revenues

• Tips, Traps, and Lessons Learned so far

It Has Been A Learning Experience

Standard:• What you know

• What you don’t know

• What you don’t know that you don’t know

Added: What you wish you had known when you started down this path

• It is important to recognize that these state marijuana laws do not change the fact that using marijuana continues to be an offense under Federal law.

• Nor do these state laws change the criteria or process for FDA approval of safe and effective medications.

COB Revised Code RMJ

Chapter 6-16 http://www.colocode.com/boulder2/chapter6-16.htm

Tax code and rateshttp://www.colocode.com/boulder2/chapter3-14.htm

How State of Colorado Law Differs from State of Washington Law

• Washington - The state’s liquor control board grants retail marijuana licenses. In Colorado, the state and each city and home rule county grant licenses

• Washington - Authorities capped the number of possible retail stores at 334, but the stores remain blocked in some local jurisdictions. Local limits are up to the entity

• License issuance has been slow in Washington. Over 7,000 people applied for marijuana licenses in WA. In Colorado, license issuances started slow, but have picked up – over 200 issued to date

• Both states- Must be 21 or older to purchase

• Washington - Edibles must be approved by the state. In Colorado, this is up to the entity.

• Colorado licenses permit people to grow and sell marijuana while Washington separates the activities.

• Only people with licenses can grow marijuana in Washington, while Colorado allows residents to home grow up to six plants for personal usage with no license. Over six and you need a license.

• Washington - Tax rate set, collected, and distributed by the state. Colorado - up to each entity.

S&U Tax Rate RMJ: COB and StateEach entity decides if they will allow or not City Regular Sales and Use Tax Rate 3.56% City RMJ Tax Rate 3.50% Total COB 7.06% State tax rate 12.90%• Total State and City Tax Rate* 19.96%

* State share back of 15.0% of their 10% incremental tax rate based on pro rata/sales

Excise Tax Rate

City - Five percent on the average market rate of unprocessed recreational marijuana that is sold or transferred from a recreational marijuana cultivation facility.

State 15.0%COB 5.0%Total 20.00%

Other Specific Impacts on the Finance Department – Local Level

• Licensing • Collections• Cash Handling

– No bank accounts– Lots of cash so need a place to count it– Counterfeit bills

• Security– Front windowCourier– Larger safe

• Auditing– Forensic auditing, not usual business auditing for tax compliance

How RMJ Has Impacted Budget Expenditures and Revenues

• Could not let RMJ hijack the regular budget process

• Before it made it to the budget process, it had been spent numerous times

• Everyone had an idea of how much revenue there would be and what it should be used for

• Numerous dedicated taxes, the new tax – was consolidated in the GF

Revenue Projections Were Challenging

• Lots of advice, but none based on facts and no empirical evidence

• The network was not as viable this time• Influence diagram based on method Shayne

Kavanagh at GFOA had used on sales tax• Set the two anchors – the high and the low• Had to have one number for revenue– Only guarantee made was it would be wrong

Revenue Projection NMMJ 2014

Medical Marijuana Sales (used as base for non-medical) Current Sales50% Increase over

Current Sales

Current and Projected Sales $ 24,000,000 $36,000,000

Sales and Use Tax at 3.5% $840,000 $1,260,000

Estimated City Excise tax collected

Excise Tax at 5% $480,000 $720,000

Projected Recreational Marijuana Sales Based on Current Sales50% Increase over

Current Sales

Estimated recreational sales $24,000,000 $36,000,000

New state sales tax rate on recreational RMJ 10.00%

City share back from state 15%

Total sales tax received by the city from state share back $360,000.00 $540,000.00

Incremental non-medical amount if projections are met $1,680,000.00 $2,520,000.00

Final Adopted 2014 Budget Incremental RMJ Only

Base tax of 3.5% $382,000

Excise tax on grows $430,000

State Share back $295,000

*Total $2,000,000

* $2 million is about 2% of the General Fund budget

Concerned About Longevity of the Tax

• Proposed and accepted: treat as one-time money until the number of states reach critical mass

• Built-in several contingencies due to multiple unknowns– Youth education– Unknown expenditures at time of appropriations– Revenue: Not a high degree of confidence

Mini Budget Process Supplemental Appropriation

• So it did not hijack the regular budget process• So it was transparent and not buried • New expenditures were vetted and everyone

knew why something was being proposedLink to the agenda memo• https://documents.bouldercolorado.gov/webli

nk8/0/doc/124609/Electronic.aspx– It has worked well, did the same for 2015 due to

timing of revenue receipts– Actual received $2,043,000

Tips, Traps and Lessons Learned So Far

Tips, Traps and Lessons Learned So Far

City of Boulder:• Currently RMJ: 14 dispensaries, 23 grows, 6

MIPs (MIPs have accounted for over 45% of sales)

• Medical: now 15, 21 grows

2015: convert medical to ongoing money

Tips, Traps and Lessons Learned So Far

• Safety issues raise new and old concerns• People who have never handled large amounts

of cash will need training• Still no bank accounts– State law to allow cooperatives, but the Fed does

not• No bankruptcy protection• Banking problem being extended to employees

and suppliers of the business segment

Tips, Traps and Lessons Learned So Far

• Theft and burglaries have occurred though not to the degree of original concern

• Cameras, high security, grow operations dogs• Most want to be known as good business

people • Banking problem being extended to

employees and suppliers of the business segment

Tips, Traps and Lessons Learned So Far

• Odor complaints – grow operations• Smoke complaints – your toking neighbor• Where it can be smoked– Cannot just light up outside

• Hotel rooms same as smoking regulations• Landlords can prohibit• Home conversions – Short term rentals – Impact on affordable housing & parking

Other Things Learned While on the Journey

• University of Colorado at Denver Cost Accounting class

• The affinity diagram is a worthwhile endeavor when confronted with the new and unknown

• State produced study released in July - due to high tax rates people not switching from medical

• MJ Hershey (NYSE: HSY) alleged TinctureBelle violated its trademark by selling products similar in name or appearance to its Reese's, Health, Almond Joy and York peppermint patties.

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