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NEW YORK (MainStreet) — Reports from Washington state are that the recreational marijuana business is having trouble paying its taxes and sales are moving to the black market. The irony is that the taxation and regulation of pot was a selling point in legalization.

One example is that of a James Lathrop, the owner of Cannabis City, the first recreational marijuana retailer to open in Seattle. He is lamenting the fact that he is not making profits because of taxes.

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Lathrop told MainStreet that in Washington marijuana products are taxed at “a multiple compound rate.” There is 25% tax on what the grower ships to the processor. Then there is another 25% tax from the processor to the retailer. The retailer, Lathrop and his colleagues, then add another 25% tax which is passed on to the customer.

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“Each of these taxes is added to the prior tax,” he said. “Plus another 10% of regular sales tax, city tax, then there is an additional federal tax of another 25%. So on the retailer side alone that is approximately 60% of the product in pure tax, with approximately 30% going to to cost of goods and approximately 1 to 5% left to actually run the business. The growers and processors are in a similar situation.”

He feels that the cannabis businesses in Washington are doomed to failure with this tax scheme. Even those that survive initially will not be able to stay in business very long in his opinion.

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Lathrop has several solutions:

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1) He wants to push the Washington State Marijuana Excise Tax directly on to the customer as a true sales tax. By doing so, retailers would not have to pay federal taxes on the excise tax as they do now. The current structure (called the 280e problem after the relevant federal tax code statute) is that state taxes are not deductible for retailers’ federal income tax returns, because the sale involves a federally illegal substance.

2) He says to “remove the processor and grower distinction entirely.” Currently a grower cannot sell directly to a retailer, but has to send the pot to a processor for packaging and distribution.

“This adds additional cost," said Lathrop. "A grower can be a 'processor' and 'grower' if they pay for each license separately and by doing so they can skip one level of 25% tax.”

True processors like edible companies are at a significant financial disadvantage, because they pay the extra tax making the cost of edibles excessive.

“A set of five cookies of 5 mg THC each, in my store, retails for about $45,” he explained. “To simplify, I recommend two licenses: wholesaler and retailer. And a wholesaler should be able to sell to wholesale processing without additional taxation.”

3) He recommends removing the 25% excise tax from the wholesaler/grower/processor entirely.

4) He also wants to fix the 280e problem, which he says would be hard to do but is easy to fix.

“280e is the IRS code that declares if you have a business that sells a Schedule I or Schedule II substance, and that substance is prohibited at the Federal or State Level, then you cannot take any normal business deductions, including things like the State of Washington Excise Tax,” he elaborated.

Read more: Washington's Marijuana Miasma, Taxes, and Regulation Makes State's Legalization Effort Go to Pot

So is the marijuana black market is going to be the beneficiary of all of this. This would be ironic since legalization was supposed to bring marijuana out of the shadows.

“Absolutely,” Lathrop said. “One of the prime directives of I-502 is to limit spillage of the product over into the very robust black market here in Washington; yet the heavy taxation of the grower/processors by the State and Feds provides significant incentive for them to sell to the black market to stay afloat. This has already happened in Colorado resulting in several Federal raids, and their taxation is much much more reasonable.”

--Written for by Michael P. Tremoglie