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High taxes doom profits for Washington marijuana dispensaries

Washington marijuana

washington marijuana

PORT ORCHARD — Meet Michael Lyman: a native of Port Orchard, graduate of South Kitsap High School and a 2014 accounting graduate of University of Washington.

Having secured an internship at a company in Bremerton after graduation, Lyman settled in for a career as an accountant. Safe and secure, and ensconced in a field about as traditional as a pair of black dress shoes, the then-22-year-old nonetheless found himself restless and vaguely dissatisfied.

Many college graduates, Lyman included, invariably hit the “Is that all there is?” moment as they transition from academia to the business world. But instead of second-guessing his career choice and wondering “What if?,” he decided to keep an eye open for entrepreneurial opportunities where he could use his business skills in accounting, but not as an accountant.

His opportunity came about in short order, thanks to Washington state voters. In 2012, they approved a state initiative legalizing the sale of recreational Washington marijuana by authorized businesses.

Soon after, hundreds of state licenses authorizing retail businesses became available through a lottery system in which selected applicants would pay $600 for the privilege of becoming Washington state’s first generation of pot-shop owners.

For Lyman, an opportunity to own a business was realized in 2013. He was one of 334 successful applicants of 7,000 that initially applied to sell Washington marijuana products. Great news for him, but not so much for his family.

“My whole family was opposed to me getting into this business,” he said from the back room at his retail store, GreenWay Marijuana, at the corner of Sedgwick and Geiger roads.

“My mom was especially opposed to me as a poor student spending $600 for a license, with three months of college still remaining.

“Now, they’re fully onboard. They see this as being the great opportunity I did.”

Despite its relatively small size, Port Orchard has five recreational marijuana businesses within its city limits, making for a competitive market in South Kitsap.

Lyman’s business, which employs eight, is more than meeting expectations; it generated about $2 million in sales last year. Lyman said foot traffic leading into GreenWay is robust and sales are brisk; on a typical day, the store makes 200 transactions. Most of the sales take place on the weekends, he said. Even so, on a recent Monday afternoon, store employees were kept busy with a constant flow of customers, including two visitors in town from the Midwest.

While those sales figures might indicate Lyman and his co-owner wife, Alyssa, are raking in the cash, that’s true only in one respect: all retail pot businesses in the state operate on an all-cash basis. All sales are transacted in cash. Checks, debit and credit cards are not accepted, as dictated by state Liquor and Cannabis Control Board regulations.

And while dollars are overflowing his coffers, state and local government takes most of it back in the form of taxes on marijuana product sales. That includes a 37-percent excise tax on all retail sales at his store, proceeds that are shared with the state, city of Port Orchard and Kitsap County government.

From his 2016 sales of $2 million, $743,000 was paid out in excise tax to the state. That’s on top of other business obligations, such as payroll and unemployment taxes. Including the local taxes that are passed along to customers — and his business’s 45-percent federal income tax rate, he said that ultimately “90 cents of each dollar we get goes to state and federal taxes,” Lyman said.

And unlike other businesses, he’s not allowed by the IRS to expense items as part of the business’s tax filings due to IRS 280e, the regulation that restricts him from declaring any business expenses in association with the sale of federally illegal substances.

The cash-only transactional system is fraught with other complications.

“It’s a bit unnerving having that amount of cash on hand to be responsible for,” he said. Banks won’t transact with money from pot businesses due to conflicting laws between state and federal government.

“Personally, it’s hindered my ability to get a loan,” Lyman said. That includes not being able to obtain a home mortgage due to the nature of his business.

Fortunately, he and his wife have entered into a personal business arrangement with his mother so they could eventually buy a home.

Customers who visit GreenWay are as varied as any random group populating a city’s public sidewalk.

The business owner said that when he opened the store in 2014, most of his customers were in the 40- to 60-year-old age range, many of them attracted to smokeless edibles embedded with marijuana extract.

“Now, we have a well-balanced age range of customers,” he said. “The younger customers like vaping, which is more potent.”

While there likely will be a stigma attached to pot use for years to come, Lyman said the social perception is changing, as illustrated by a gift basket his business was asked to donate to a recent Rotary auction.

“It’s a different scene now with recreational marijuana businesses. There’s no pressure here to buy. People really are interested in becoming educated about what product would best suit them.”

Despite government taking a huge bite out of his business revenues, Lyman said he’s pleased with the direction GreenWay is headed.

“We do well, we’re not losing money,” he said. “We’re a lot busier than last year and are seeing a tremendous amount of growth here in Port Orchard. It’s surprising since we’re such a small town.”

The stereotypical image of a pot transaction taking place surreptitiously behind bushes and in an alley is taking a back seat to that of everyday residents buying Washington marijuana products legally in stores in a safe, nonjudgmental environment.

“Knock on wood, we haven’t had any criminal activity or theft so far,” the young businessman said.

“Just plenty of regular, everyday people buying marijuana products — legally.”

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