The legal marijuana market has projections of $91 billion by 2027. If you are thinking about jumping onto the marijuana bandwagon but aren’t sure about marijuana tax or what the difference is between marijuana and cannabis tax, read on.
We are going to fill you in on federal and state taxes. Plus you’ll know the difference between paying a medical marijuana tax or a recreational cannabis tax.
When you are trying to figure out what taxes you need to pay for your marijuana business, the product difference is easy.
Cannabis is the term for flowering plants in the cannabaceae family. This covers about 170 plant species that are split into categories:
Both marijuana and hemp are cannabis plants.
Cannabis genus of plants contains varieties of different marijuana and hemp species. Marijuana is the only plant containing THC and CBD (cannabidiol).
Different strains of marijuana produce different amounts of THC and CBD. The difference between cannabis and marijuana is that cannabis is the genus, which is a biological ranking of a family. Marijuana is the species.
This means that all marijuana plants are part of the cannabis family, but not all cannabis plants are marijuana. Long story short, if you are paying cannabis taxes, make sure it is on a marijuana plant.
There are three types of marijuana taxes in the states where it is legal.
Some states tax using a combination of these taxes.
A percentage tax is paid on the purchase price of marijuana. The seller then remits that tax to the state. Some states allow their local areas to administer an additional tax on the percentage as well.
Weight-based taxes are based on product weight. Each state may set different rates for different marijuana products. You will likely pay one tax if you purchase flowers, one if you buy marijuana leaves, and another if you buy fresh plant material.
A potency tax is levied due to the amount of THC in the product. For example, if the product is 10-35% THC you may pay one tax. If the product is higher than 35% THC the tax will be higher.
When you are dealing with changing laws, running a business, and a variety of regulations regarding taxes, you need a business tax attorney. They will make sure you cross your t’s and dot your i’s to hopefully prevent the IRS from knocking on your door.
According to federal law, Marijuana falls under 21 U.S. Code § 812 schedules of controlled substances. Effective June 23, 2021, the following states impose marijuana taxes on businesses:
The State of Alaska collects an excise tax of $50 per ounce for flowers. Leaves and stems are $15 per ounce, and taxes of $25 per ounce for immature buds and flowers. Taxation is handled by the Alaska Department of Revenue and the Licensing and Tracking Marijuana Control Board.
Arizona collects a 16% marijuana sales tax, plus a use tax and a transaction privilege tax. The Arizona Department of Health Services regulates businesses. The Department of Revenue collects taxes.
The state of California has several levels of taxation for businesses. In addition to a 15% excise tax on the retail sales and a 7.25% state retail sales tax, you will pay local taxes. You will also pay tax on your plant material as follow:
The regulations are managed under the CalCannabis Cultivations Licensing. This is handled by the California Department of Tax and Fee Administration and the California Department of Food and Agriculture.
Colorado was the first state to take the plunge and legalize retail sales of cannabis in January 2014. The state taxes businesses up to an 8% local option retail tax in addition to a 15% retail tax and a 15% excise tax of the average market rate. The Colorado Department of Revenue administers the rules.
The state of Connecticut has approval for selling and possessing recreational marijuana according to SB 1201 but has not yet begun. Expectations are retail sales will start in 2022.
The taxes the state will collect include a 6.35% retail sales tax and a 3% municipal sales tax. They will also collect taxes of 0.625 cents per milligram excises tax on the THC for cannabis flower, 0.9 cents per milligram excise tax for other products, and $2.75 per milligram for edibles.
The Connecticut Department of Consumer Protection and the Connecticut Department of Revenue Services oversees this process.
In Illinois, there is an optional tax of up to 3% and a 7% sales tax to dispensaries. In addition, excise taxes are collected of 10% retail excise on marijuana with a THC of 35% or less, 20% on cannabis-issued products, and 25% for marijuana with a 35% or higher THC.
Control is overseen by the Illinois Department of Financial and Professional Regulation and the Illinois Department of Revenue.
The state of Maine collects a 10% retail sales tax. They also collect excise taxes of:
Regulations are administered by the Maine Revenue Service, the Office of Marijuana Policy, and the Maine Department of Administrative and Financial Services.
This state charges a 3% local option excise tax. They also collect a 6.25% retail sales tax and a 10.75% retail sales excise tax. Regulations are managed by the Massachusetts Department of Revenue and the Massachusetts Cannabis Control Commission.
Michigan taxes are very minimal in comparison with other states. There is a 10% retail excise tax and a 6% sales tax being collected for recreational sales. When collecting for medical marijuana the state only collects the 6% retail tax.
Administration of taxes is handled through the Michigan Department of Treasury and the Michigan Department of Licensing and Regulatory Affairs.
Retail sales will not begin in the state of Montana until 2022. At that time marijuana taxes will be 4% of the retail price on medical marijuana and 20% of the retail price on marijuana and marijuana-infused products. There is also up to 3% local option tax.
In addition to the sale of the product, the Montana Department of Revenue handles regulations for transportation, cultivation, and manufacturing of marijuana. You can sign up to receive updates on laws and/or apply for a license.
The State of Nevada collects a 15% wholesale excise tax, a 6.85% sales tax plus local taxes, and a 10% retail sales tax. The Nevada Department of Taxation oversees all regulations.
New Mexico marijuana recreational sales will begin in April 2022 with the collection of a 12% retail sales excise tax. The tax will increase every year beginning in 2025 until it reaches a total of 18%. They will also collect a retail sax tax.
The issuance of licenses and collection of taxes will be overseen by the Cannabis Control Division of the Regulation and Licensing Department.
In a constitutional amendment on January 1, 2021, the state enacted collection of a 6.25% state sales tax on recreational marijuana. That amendment prohibits additional state sales tax from being applied. Local governments can enact additional sales tax of up to 2% on recreational marijuana sales.
Regulations are overseen by the Cannabis Regulatory Commission.
In New York, sales of recreational marijuana will begin on April 1, 2022. The state will collect a 9% retail tax, a statewide local tax of 4%, plus the following:
Licensing, tracking, and taxes are all overseen by the New York State Department of Taxation and Finance.
The state of Oregon collects a 17% retail sales tax, and up to 3% local option sales tax. Senate Bill 864 was voted down on June 23, 2021. If it had passed, municipalities would have received the option to increase marijuana taxes from 3% to 10%.
The problem is Measure 110 did pass a year ago, which decriminalizes small amounts of hard drugs. Cities need money to fund drug treatment programs. The state is estimating a 73% loss of their projected marijuana tax because of the decriminalization matter.
The problem is many towns in Oregon rely on tax revenue from marijuana to pay for things like parks, law enforcement, libraries, and infrastructure. Now that money is being redirected to fund the addiction program. Because SB 864 did not pass they are unable to raise taxes to fund the programs.
The Oregon Liquor Control Commission and Oregon Department of Revenue are the agencies handling regulations.
The South Dakota Supreme Court issued its ruling in November 2021 that Constitutional Amendment A is unconstitutional. The amendment’s purpose was to create a program for selling medical marijuana and hemp, plus charging a marijuana sales tax of 15%.
The problem is due to Article XXIII § 1 requiring amendments to deal with only one subject. The amendment includes provisions for hemp, recreational marijuana, and medical marijuana. This brought a screeching halt to recreational marijuana sales but does not affect the legalizing of medical marijuana.
In Vermont, the Governor did not sign S.54 and it still indicates sitting in the governor’s office. However, the date is past when it becomes law without a signature. The state will collect a state sales tax plus a cannabis excise tax of 14%.
Licenses, tracking, and taxes will be overseen by the Cannabis Control Board and the Department of Taxes.
Virginia’s marijuana sales will not begin until January 1, 2024. At that time the state will be collecting a 21% retail sales tax plus an additional 3% local sales tax. The process will be overseen by the Virginia Cannabis Control Authority. This organization is in the creation stage and will issue regulations by the 1st of July 2023.
Medical Marijuana is exempt from sales taxes in the State of Washington. For recreational use, there is a 37% tax on retail sales and a 6.5% retail sales tax, plus any local taxes. Regulations are overseen by the Washington State Liquor and Cannabis Board, which is responsible for all taxes, tracking, and licensing.
When it comes to deducting business expenses, you need to look at both the 280e tax code and the case of Jeffrey Edmondson vs Commissioner, 42 T.C.M. 1533 (1981). In that case, the court ruled that a convicted drug trafficker can take ordinary business expenses from his taxable income. That income is from trafficking illegal drugs!
The overturning of the decision a year later means anyone selling Schedule I and Schedule II controlled substances cannot deduct expenses. Marijuana falls under Schedule I controlled substances. The definition is a substance with no medical use but has the potential for abuse.
When selling an illegal substance you cannot deduct business expenses, except for the cost of goods sold. An exclusion in 280e allows businesses to take deductions for the cost of goods sold, even if the federal government considers the product illegal. The allowable deductions for the cost of goods apply to purchasing the cannabis seeds, soil, nutrients, and water for cultivating the plants.
You cannot take deductions for rent, shipping, overhead, insurance, maintenance, or any other standard business deductions. The inability to take standard deductions has a huge impact on your taxable income.
When you are considering the structure of a marijuana business, talk to your tax attorney. If you set up your cannabis business as a C-corporation, you will be able to pay taxes on just dividends and salaries.
You may also want to consider a shared services agreement. This is a business formation where you split your business into two separate entities. This is a method of legally side-stepping the 280e tax code regarding controlled substances.
What you do is set up two businesses. One handles the production and distribution of cannabis. This business must follow the 280e tax code and cost of goods sold requirement for taxes.
The other business takes care of all legal responsibilities This includes managing the retail space, selling the merchandise, care, and counseling. This business takes all standard business deductions for payroll, administration, promotion, utilities, marketing, and sales.
Do not attempt to set this business entity up on your own. You need to make sure your organization is compliant with all laws and tax regulations. Consult with a professional tax attorney, a CPA, or both for guidance.
If you are doing the cannabis and marijuana tax juggle, you don’t want to miss deductions. At Polston Tax Resolution & Accounting we have more than 100 years of combined experience. Our team of more than 100 CPAs, accountants, financial analysts, case managers, tax professionals, and tax attorneys will keep you and your business on track.
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