WA Commission for Measurement of Tax Preferences - Public Meeting
(September 9, 2021)

Here are some observations from the Thursday September 9th Washington State Citizen Commission for Performance Measurement of Tax Preferences (WA Commission for Measurement of Tax Preferences) Public Meeting.

My top 3 takeaways:

• Earlier in 2021, the commission began reviewing medical cannabis tax preferences and exemptions.
  • HB 2136 (“Relating to comprehensive marijuana market reforms to ensure a well-regulated and taxed marijuana market in Washington state”) created the exemptions in 2015. The following year, Washington State Department of Revenue representatives released a notice on Sales and Use Tax Exemptions for Marijuana Retailers with a Medical Endorsement which stated the exemptions applied to “products determined by the Department of Health (DOH) to be beneficial for medical use to qualifying patients.”
    • The term “beneficial for medical use” was addressed by DOH staff in WAC 246-70-010, which reads: “At this time, the decision of what marijuana products may be beneficial is best made by patients in consultation with their health care practitioners. For this reason, the department will not limit the types of products available to qualifying patients. Instead, the department intends to create standards for products that any consumer can rely upon to be reasonably safe and meet quality assurance measures.”
  • In November 2020, commission staff proposed study questions for a review of the tax exemptions undertaken by the Washington State Joint Legislative Audit and Review Committee (JLARC) in December 2020.
    • The exemptions applied to sales and use tax for medical cannabis patients that registered their authorizations in a state database, medical patient cooperatives, or any adult purchasing low tetrahydrocannabinol (THC) cannabis products.
    • Patients still pay the 37% excise tax assessed against all cannabis purchases. SB 5004 would create a limited exemption for that tax, was heard on March 16th, and remained active through the 2022 legislative session.
    • The review includes exemptions in RCW 82.08.9998, RCW 82.12.9998 and RCW 82.04.756.
  • At the JLARC July 21st meeting, staff gave an overview of the preliminary report as well as a video presentation. The report recommended “The Legislature should continue the preferences because they provide tax relief to medical cannabis patients...The Department of Revenue and the Department of Health should update guidance to reflect 2019 statutory changes.” The preference had an estimated biennial beneficiary savings of $4.9 million but that total could be impacted by a 2019 statutory change allowing the exemption “only to purchases of products that meet” DOH compliant product standards.
  • On August 3rd, JLARC Research Analyst Scott Hancock gave a presentation to the commission on the preliminary findings. He said staff found that the preferences “provide tax relief to patients and cooperatives,” but “after 2019 statutory changes” due to HB 5298 (“Regarding labeling of marijuana products”) “it is unclear how a pending taxpayer guidance may affect beneficiary savings.” 
    • Hancock reported that in fiscal year (FY) 2020 “more than 87% of beneficiary savings were realized under” the sales and use tax preference as applied to all registered patient cannabis purchases - approximately $1.57M. Whereas “less than 1% of beneficiary savings for this preference were for purchases identified as DOH compliant product,” he remarked, saving patients “approximately $7,000."
    • Rulemaking had not been undertaken to implement SB 5298 to apply the exemption “specifically to DOH compliant products”, and there’d been no “guidance to taxpayers,” Hancock reported. The “effects of those revisions are uncertain” he added, but the overall recommendation from the “legislative auditor” was that the preferences “achieve the objective of providing tax relief to medical cannabis patients” and should continue. Additionally, officials “should update guidance to reflect 2019 statutory changes,” he indicated.

• John Kingsbury, Patients United representative and chair of the Patient Caucus of the Cannabis Alliance, offered his view on why the exemption should continue - but apply only to cannabis items certified by the Washington State Department of Health (DOH) as medically compliant (audio - 5m, video, written comment 1, written comment 2).
  • A cannabis patient since 2009, Kingsbury noted his written comments “provide a bit more depth to my testimony” and that his interest was “the sales tax exemption for patients holding recognition cards” outlined in RCW 69.51A.230. “I understand there’s a larger discussion about what the preferences look like under the law, what DOR guidance has been, and how those may relate to the actual practices in the stores,” he said, but his comments would focus on “what policies I support, what I oppose, and briefly why.”
  • Kingsbury supported a “sales tax exemption for medical cannabis as defined by the department of health in line with the changed language in SB 5298 that should have been implemented on January 2020” - an exemption for “compliant product.” As “patients tend to be poor, and as a result of their physical conditions, compliant product is more costly and we need this extra help,” he said. An absence of compliant products on the legal market “continues to be a significant problem” that Kingsbury commented had “for years, been cited among patients as the most significant problem in the current system.”
  • Claiming that “half of the patients” looked outside the legal cannabis market for “cleaner, more appropriate access” to medical-grade cannabis because DOH compliant products were “more expensive than ordinary, recreational product,” Kingsbury reasoned that “incentives should be focused there.” He wanted clearer guidance on the tax preference as it could “incentivize the production, accessibility, and knowledge of DOH compliant products.”
  • “What I strongly oppose is continuing the current practice of applying the tax exemption to all products, including recreational products as is the practice now,” he told the commission, as “to date, Washington state continues to be the only state” without mandatory “pesticide and heavy metal testing for [Initiative-]502 products, making it an inappropriate substitute for medical-grade product.” If “half of the patients are staying in the black market, participation in the patient registry is a small fraction of the participation rates of other states, medical-grade products almost do not exist in the regulated market” then the status quo could not be working, he asserted. Therefore, Kingsbury concluded the tax preference as applied was a “practice that has failed in all aspects.”
  • Kingsbury argued an adult-use cannabis market “geared towards high-THC, low-quality, cheap product” did not provide “the products that patients say they need.” He indicated “price alone is not the issue” as he’d heard patients bought from unregulated markets seeking better product quality. Exempting “low-grade” adult use cannabis “disincentives the production of medical-grade products,” he remarked, feeling that continuing the tax preferences as applied enabled failed policy. Kingsbury asked that “new guidance” on applying the exemptions only to compliant products be issued by state officials.

• Chair Grant Forsyth had a couple of questions for Kingsbury and for WSLCB staff in attendance - although the latter were unable to unmute.
  • Forsyth asked about the accessibility of medical cannabis in other states such as Oregon (audio - 3m, video).
    • Kingsbury said in Oregon patients “rely heavily on their home gardens” and have pesticide “testing on their recreational product and their medical product, which we don’t have.” He assessed that the key difference was the lack of required pesticide testing in Washington, claiming “the idea of DOH compliant product has been ignored” by regulators and retailers with medical endorsements. Additionally, Kingsbury remarked that medical cannabis consultants “don’t seem to know that much so they can’t help patients.” He’d polled consultants and found that “like 77% of them” couldn’t identify what constituted medically compliant items.
    • Forsyth followed up to ask for an example of a “state that you think does it right.” Kingsbury said Colorado did “much better, they allow things like recreational home growing; they have 90,000 patients in their registry” despite having a smaller population than Washington. “We have something like nine to 12,000” registered patients, he added, noting officials hadn’t been certain when he’d investigated the number. He relayed a sense from patients in other states that their medical cannabis programs were “an asset” but Washington patients had “a fear of the State that does not exist in other states” that made a “noticeable difference” and was a “complicated problem.”
  • Forsyth wanted to know patients’ reasons for “going to the black market” despite having “the same information problem about quality” (audio - 2m, video).
    • Kingsbury said that based on independent testing he had a lab perform, “black market flower seemed to consistently test as cleaner than the regulated flower. That’s not a result I expected but it has been consistent over the years.” Additional testing on cannabis concentrates (“because patients are very reliant on those”) showed Kingsbury there were “at least 50% failure rates on products” in both the legal and unregulated markets. He called some of the concentrates in both places “pretty scary right now” even for “a healthy recreational user.”
    • Giving some examples of product types, he said the cure for “filthy” products was testing and that they shouldn’t be incentivised for patients until they could be certified as clean of pesticides and other contaminants by approved labs. “I’m not sure why we’ve struggled so much,” Kingsbury concluded.
      • In August 2018, the Washington State Liquor and Cannabis Board (WSLCB) approved a CR-101 opening a new rulemaking project to address cannabis product testing standards. A supplemental CR-102 was filed in September 2020 and the project was restarted again in 2021 as staff sought an economist to improve the small business economic impact statement. By August 31st, staff had hired economists from Industrial Economics, Incorporated (IEc), who issued a request for interviews with licensed producers and producer/processors.
  • Legislative Auditor Keenan Konopaski notified Forsyth there were WSLCB and DOH officials in attendance “if you have any questions of them.” Forsyth asked if they could speak to how Washington’s cannabis testing standards differed from other legal states (audio - 3m, video).
    • WSLCB Chief Financial Officer Jim Morgan indicated his audio connection was inoperative but that he would follow up with Forsyth and the commission.
    • DOH External Audit Manager Kristina White was mentioned by Konopaski but wasn’t in attendance when prompted.
  • On October 20th, the commission was scheduled to discuss “Commission comments on 2021 JLARC reviews,” including the medical cannabis tax preferences.