New Oregon Cannabis Business Rule Creates Barrier for Retailers
Reprinted with the permission of Bloomberg Tax
Oregon’s new tax compliance certificate for cannabis businesses adds a challenge to an industry facing decreased demand and substantial competition with illegal operations, say AB FinWright’s Rachel Wright, Abraham Finberg, and Simon Menkes.
To force cannabis businesses to be tax compliant, the Oregon Liquor and Cannabis Commission in June began to require all cannabis recreational retail license renewals to be accompanied by a tax compliance certificate. The ruling, which applies to those retail licenses that expire on or after Sept. 15, will affect over 820 Oregon cannabis licensees.
This ruling doesn’t cover processors, cultivators, wholesalers, or other cannabis licenses. However, the state warns vertically integrated businesses that “non-compliance in any business may affect your marijuana retailer license.”
Oregon’s Cannabis Tax Compliance Rule Poses Challenges for Retailers
The requirement of a tax compliance certificate adds yet another hurdle for retailers that have been challenged by a combination of lower prices, decreasing demand, and illegal cannabis businesses. It may force some operators out of the market and potentially lessen the competition.
Rise and Fall in Cannabis Sales Adds to Tensions
The Beaver State was an early arrival to adult-use cannabis sales in 2015. When the market peaked in 2020, it appeared there would always be enough money for everyone: producers, distributors, retailers, even the tax collector. Although retail prices had begun to drop from 2016’s high of $10 per gram, demand and supply were surging, and efficiencies in the market still promised a bright financial future.
But in 2021, retail prices plunged to around $5 per gram and fell further to $4 per gram in 2022. Sales dropped while cannabis production rose, so that estimated market demand as a percentage of supply was 52% in 2021 and 63% in 2022. Retail licenses have also increased, creating a more competitive market and pressuring prices further downward.
Illegal Operators Hide in The Shadow of Legal Cannabis Tax Compliance
There also are extensive illegal growers and shops. The OLCC, which oversees the state’s roughly $1 billion legal cannabis industry, estimates the number of illicit operations is double that size.
Economists calculate that because unlicensed growers aren’t paying any fees or taxes, they can afford to keep their prices at least 20% lower than legal cannabis—that difference being the pivot point where consumers choose to purchase illegal versus legal products.
The Broader Implications of Cannabis Tax Compliance
This onslaught of economic forces has resulted in a wave of unpaid cannabis taxes. The cannabis industry has one of the worst rates of tax compliance among Oregon businesses, with the Oregon Department of Revenue estimating the amount of unpaid cannabis point of sale tax by retailers at 9%.
Cannabis businesses also have fallen behind in other taxes overseen by the DOR, including the 3% local cannabis tax, state corporate income tax, gross receipts tax, and employer taxes (including transit taxes owed to the DOR and unemployment insurance owed to the Oregon Employment Department).
Cannabis Tax Compliance Certificate Balances the Scales with License Renewals
Gov. Tina Kotek (D) earlier this year directed the OLCC to make state tax compliance a retail license renewal requirement, stating, “This will help ensure that all businesses are operating under the same rules and not getting any competitive advantage if they haven’t paid their taxes.”
The result was the certificate of tax compliance—a letter from the DOR verifying that a business or an individual follows all state and local tax and fee programs the DOR administers. It must cover the retail cannabis business, as well as every applicant listed on the application, including individuals and other business entities.
Cannabis Tax Compliance Certificate Application Process
Oregon Administrative Rule 845-025-1045 describes an applicant to a license as “any individual or legal entity who holds or controls a direct or indirect interest of 20% or more” of the business, or who has an ownership interest in the business, which is defined as “exercising control over, or having the right to exercise control over, the business.”
Tax compliance certificates can be obtained both online or by mailing in a hard copy at no cost. However, the online process requires a state business identification number and federal employment identification number. Individuals requesting a tax compliance certificate must mail in the hard copy request.
As the online portal only covers the business, and the paper mail-in document only covers the business and one owner, all other applicants will need to obtain separate tax compliance certificates.
Consequences of Non-Compliance
The state notes that if it doesn’t receive a tax compliance certificate for a renewal application by the expiration date, the license will be listed as expired, and the retailer would lose privileges to operate. The licensee would then have 30 days to provide the certificate(s), after which the license won’t be able to be reactivated.
Retail cannabis businesses with multiple applicants on their license, and with one applicant out of compliance for tax purposes, will be allowed to remove that applicant from their license. The state taxes covered by this ruling include income tax, withholding tax, and marijuana point of sale tax.
Oregon retail cannabis businesses that can’t pay for renewal immediately should enter into a payment plan with the Oregon DOR as soon as possible. Price compression and mounting regulatory compliance have made it a difficult few years for these retail businesses. The obligation to provide the state with tax compliance certificates will only increase their burden.
Reprinted with the permission of Bloomberg Tax:
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
About Our Authors
Rachel Wright, CPA, MST, co-managing partner at AB FinWright (420 CPA), specializes in cannabis accounting and taxation for multi-state and multinational entities, focused on internal controls and bottom-line implications of mixed local, state, federal, and international statutes of taxation.
Abraham Finberg, CPA, MBA, co-managing partner at AB FinWright (420 CPA), has worked in the cannabis sector since 2009, counseling our clients in all phases of business advisory and tax, from start-up through M&A and IPO.
Simon Menkes, CPA supports AB FinWright’s clients and advisers through accounting and advisory services, and through writing professional articles.
