Marijuana paraphernalia for sale in Uruguay

A new report stating that Uruguay will not tax the sale or production of marijuana has received widespread attention, yet the depiction of the legalization legislation focusing on undercutting the black market and not raising revenue is inaccurate.

According to a May 19 report from Reuters, the tiny South American nation -- which became to the first in the world to legalize the drug in December 2013 and released details of the legislation in early May -- will exempt marijuana from production and sales taxes as it attempts to undercut the black market economy.

"The principal objective is not tax collection. Everything has to be geared toward undercutting the black market," Felix Abadi, a contractor helping develop Uruguay's marijuana tax structure, told the news agency.

Abadi also pointed out to Reuters that while alcohol and cigarettes are heavily taxed, the official marijuana trade will operate virtually tax-free.

InSight Crime Analysis

Fear of the black market undercutting Uruguay's legal marijuana have swirled around the legalization, with Paraguay's anti-drugs chief last year suggesting it would drive production in his own country -- the largest marijuana producer in South America.

And it is true that marijuana will avoid the non-essential goods taxes that drive up the price of alcohol and cigarettes. It will also be considered a raw agricultural product and, as a result, be exempt from agricultural tax (pdf).

However, according to terms of the legislation published by the President's Office on May 12, the up to six commercial growers that will be authorized to produce marijuana will be expected to pay income tax. They will also have to pay both a fixed and variable fee to obtain a growing license.

SEE ALSO: Uruguay: Marijuana, Organized Crime and the Politics of Drugs

Like much of the legislation, the exact details of the variable fee remain undefined, though the press release states it is intended to provide "the most flexible taxation regime possible" in order to guarantee competitiveness with the illegal product. In other words, not classifying these fees as a "tax" is semantics.

According to El Observador, commercial growers will also have to foot the bill for mandatory security provided by the country's military, though sources close to InSight Crime have suggested the employment of private security is a more likely final scenario.

So while the government may be pursuing a favorable tax regime to encourage the development of the legal marijuana economy, the idea that the entire trade will escape any financial contribution to the state is simply not accurate.