Some of the most well-known cannabis companies in Colorado are petitioning the state’s Marijuana Enforcement Division (MED), the Colorado Department of Revenue Division of Taxation, and the Governor’s office for an excise tax “holiday” and a moratorium on cultivation licenses in the state. MED, on its own, can initiate a license moratorium and implement a tax holiday, but cannot eliminate the tax overall.
One signatory to the license moratorium and tax holiday requests is Silver Stem Fine Cannabis, a vertically integrated firm and multi-state operator. Stan Zislis, Chief Business Development Officer for Silver Stem, spoke with Cannabis Benchmarks about the industry’s requests to Colorado officials.
Regarding the request for a holiday from the state’s wholesale excise tax, Zislis expressed a good bit of flexibility in how it might be implemented. He suggested the state might replace the lost revenue through sales taxes at retail, pointing out the first $40 million of the wholesale excise tax is earmarked under the state constitution for the BEST (Building Excellent Schools Today) fund. When asked how long the tax holiday might be in force, if implemented, Zislis said, “possibly years, depending on how much time it takes to fix the AMR system.” AMRs – or Average Market Rates – are calculated quarterly by the Colorado Department of Revenue and are used to levy taxes on internal transfers from adult use cultivators to commonly-owned retail and product manufacturing operations.
Zislis, like many in Colorado’s cannabis industry, has issues with the how AMRs are calculated, especially during periods of rapidly falling prices. The “averages the AMR are using lag the market,” he noted, and thus do not reflect current wholesale prices. AMRs are calculated on data taken from the most recent two quarters to apply to the current quarter. For example, AMRs that will go into effect for Q4 2022 were calculated based on wholesale transactions that took place between June 1 and August 31, 2022. In instances of sharply falling prices, AMRs might be set at rates well above current market prices, resulting in higher tax responsibilities, thus adding to the financial pressure inflicted on firms amid falling prices.
While Zislis is not married to any particular alternative to the AMR approach, he did point out there is no “market rate for internal transfers to, for instance, the firm’s retail outlets.” He suggested one alternative might be to “base the excise tax on the cost of production,” for vertically integrated businesses, and noted the state is charging “taxes on taxes.”
Regarding the proposed moratorium, Zislis referred to cannabis price history in his state. “This isn’t the first time Colorado cannabis has been in a downturn,” he pointed out. He further asserted that a cultivation license moratorium “should have been implemented in 2017, which would have resulted in a more stable market today.” Zislis said the state was “already headed toward oversaturation then,” referring to the sell-off in 2017.
Cannabis Benchmarks Colorado Spot Index recorded that, at its lowest point, the 2017 market was down 18% and fell an additional 30.4% in 2018. The current June 2021 to present sell-off is very nearly 39%. Notably, demand in the state’s legal market was still on the upswing in 2017 and 2018, but that is not the case today. Zislis noted that “June 2021 was the last month of year-on-year growth” in Colorado cannabis sales.
Meanwhile, “there are over 1,200 cultivation licenses,” he said. Zislis conceded that with medical and recreational licenses co-located, there are actually about 1,000 grow operations, which he considers too many. He added that the number of cultivation licenses is up by over 100 this year, and said “speculators and social equity applicants” were among those gaining licenses. On the number of cultivation licenses in a broader sense, Zislis said “2020 and 2021 was a lifeline” to businesses that would have otherwise had to shut down, speaking of the boom in sales that occurred during those years. If not for the surge of demand during the initial year or so of the COVID-19 pandemic, he feels numerous businesses would have been forced to close, eventually resulting in reduced cannabis supply.
Zislis said discussions of the moratorium are sometimes too narrowly focused, with people asking, “what will the moratorium do for me tomorrow?” He counseled a longer view, citing natural business attrition as reducing cannabis supply over time. The moratorium request is for two years, but Zislis said “social equity and those medical licenses that are about to get recreational permission” should be exempted from the moratorium. As well, he noted that “a change at the federal level” should cause a “review or repeal” of the moratorium.
The proposed moratorium is for cultivation licenses only and Zislis, when asked if retail should be included, emphatically said, “no, we need more retail stores.” He said each jurisdiction, referring to localities that can opt-in or out of cannabis, “has the right to determine time, place, and manner” that cannabis businesses can operate. Zislis noted that, 10 years after voters approved adult use legalization, “more than half of Colorado’s municipalities still prohibit cannabis businesses,” including Colorado Springs, “the second largest city in the state.” Zislis said the cannabis business overall is “limited by state, federal, and local government” and is “not a free market.”
His view is that “to keep taxing and adding licenses would be irresponsible” in the current environment. Ideally, Zislis would like the moratorium to be “for two years and see how it goes,” and noted there are many ideas floating around about how the tax system might be changed to make it more amenable to cannabis businesses by more accurately reflecting actual wholesale prices.