As of 2019, 33 states and the District of Columbia (DC) have laws that legalize marijuana in various forms. As of 2021, marijuana is legal for recreational use in 19 states and DC.
As of 2022, 37 states, the District of Columbia and four U.S. territories — the Virgin Islands, Puerto Rico, the Northern Mariana Islands and Guam — allow the use of medical marijuana. Meanwhile recreational marijuana is legal in 19 states and the District of Columbia, with the addition of Guam. As state laws change, entrepreneurs and business-savvy people are seeing opportunities to open dispensaries.
One of the keys to business success is understanding the tax rules and how they apply to or affect your company. In states where marijuana is legal for medical or recreational use, there are usually special taxes that apply to the sale of the drug. A state might tax marijuana based on the sale price, weight or potency of the drug.
If you’re considering opening a dispensary or own one already, learn more about the state rules and federal tax laws. Working with a tax attorney can help you comply with any regulations and avoid potential tax penalties.
Federal Tax Rules for Dispensaries
Marijuana is still illegal at the federal level. But, the Internal Revenue Service (IRS) views any source of income as taxable, including income from the sale of marijuana. This means you’ll need to pay federal income tax on sales from your dispensary and file an annual return with the IRS.
It’s important to note that, although you need to file a return and pay taxes, the Internal Revenue Code prohibits you from claiming deductions or tax credits on your return. The prohibition is for any business that sells controlled substances or participates in illegal activities, not just for marijuana dispensaries. Being unable to claim deductions or credits can mean the cost of running a dispensary is higher than the expense of operating any other type of business.
State Tax Rules for Dispensaries
Your obligations for state taxes depend on where you operate your dispensary. Many of the states where marijuana is legal have used the revenue from sales of the drug to fund specific programs. Some states will also impose an excise tax on the sale of marijuana, but all states have a sales tax requirement.
Since it legalized marijuana in 2014, Alaska charges a tax of $50 per ounce on sales of the drug. The revenue raised goes into the state’s general fund and toward programs that reduce repeat criminal offenses.
Marijuana businesses and dispensaries in Arkansas need to pay a 4% special privilege tax on gross receipts from medical marijuana sales in the state. The special privilege tax is in addition to any other sales taxes.
Washington requires a person that holds a retailer, producer, or processor business license for marijuana to be subjected to a business and occupation tax. This applies to the gross receipts of the business.
Also in Washington, the business owner has to collect a sales tax on transactions and remit it to the Washington State Department of Revenue. The excise tax on marijuana is 37% of the retail price. Tax revenue from marijuana sales supports healthcare programs.
In the state of Colorado, marijuana retailers have to have a sales tax license. If a business sells medical and recreational marijuana, the business has to have a license for each of these types.
Also in Colorado, businesses that sell medical marijuana have to charge a local sales tax on top of the state sales tax. Recreational marijuana will have state sales tax, state marijuana sales tax, and local sales taxes applied. Tax revenue from marijuana sales goes toward education programs.
California also imposes taxes on medical and recreational marijuana. A business in California that is selling marijuana or marijuana products has to register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit.
In addition to this, California imposes a 15% excise tax on people that buy marijuana. There is a cultivation tax imposed on cultivators of marijuana as well, but it is only for harvested cannabis that goes into the commercial market.
In Illinois, there’s a retailer’s occupation tax on marijuana and an excise tax on the sale of marijuana. The excise tax is based on the drug’s potency. Products containing less than 35% of THC are taxed at a 10% rate. If THC is above 35%, the tax rate is 25%.
If you open a dispensary in Massachusetts, the state will collect an excise tax of 10.75% on the retail sale of marijuana. There is no tax on marijuana sold for medical use.
The state of Nevada has established a Cannabis Compliance Board that oversees all aspects of the cultivation and sale of marijuana in the state. The state charges an excise tax of 10% on retail sales of cannabis and a 15% wholesale tax.
Oklahoma voted to legalize medical marijuana in 2018. Currently, anyone who wants to grow, sell or transport marijuana in Oklahoma needs to apply for a license from the state. Oklahoma has residency requirements for businesses that want a marijuana license. The business will need to have resided in the state for at least two years prior to the date of application or for at least five out of the preceding 25 years.
Before receiving a business license, the company needs to get a sales tax permit from the state. Dispensaries in Oklahoma are responsible for sales tax and a 7% gross receipts tax.
Marijuana retailers in Oregon need to file quarterly tax returns and make monthly payments to the Department of Revenue. They must also register with the department as marijuana tax collectors. The state charges an excise tax of 17% of retail sales and allows retailers to keep 2% of the tax collected to cover administrative costs.
South Dakota passed a measure legalizing medical marijuana in 2020, and as of 2021, it is in the process of rolling out the program. Businesses can now apply for a medical cannabis establishment license, which also requires them to apply for a sales tax ID. Sales tax on medical marijuana in South Dakota is 4.5%.
Michigan imposes a 10% excise tax on marijuana retailers and microbusinesses for all marijuana sold or transferred outside of a marijuana establishment. This excise tax is charged on top of the state’s 6% sales tax and is collected by the state quarterly. Both state taxes are administered by the Department of Treasury.
The Michigan Regulation and Taxation of Marihuana Act states that products subject to the excise tax are not to be bundled with products or services not subject to this tax in a single transaction. All marijuana funds collected under this legislation are distributed as follows:
- 15% to municipalities
- 15% to counties
- 35% to the School Aid Fund for K-12 education
- 35% to the Michigan Transportation Fund for road and bridge maintenance and repairs
Vermont levies a 14% excise tax on the retail sale of marijuana and marijuana products, including any food or beverages containing it. The excise tax is charged on top of the state’s 6% sales tax, and the two must be stated separately from each other on the customer’s receipt. Marijuana businesses and licensees must collect the excise tax from consumers at the time of the sales transaction. Resale buying and selling are not subject to excise taxes.
S.54, Vermont’s marijuana legalization, regulation and taxation bill, states that 30% of the excise tax will go toward substance misuse and prevention programs, while the remaining 70% will go into the general fund.
District of Columbia
The District of Columbia imposes a 5.75% sales tax on medical marijuana and recreational marijuana purchases. However, this territory does not have any additional excise taxes on the sale of marijuana.
Why Do Dispensary Owners Have Fewer Deduction Options?
There are not as many opportunities for deductions when you have your own dispensary. The main reason for this is because of the type of product that you sell. The business (in the eyes of the IRS) is selling or trafficking controlled substances. This is technically prohibited at the federal level or even at some state levels.
For dispensary owners, this means that deducting things like rent, advertising, or payroll is not an option as it would be for other types of businesses. The IRS does allow dispensaries to deduct the cost of growing the actual marijuana, however, because it is considered cost of goods sold. The code that many refer to when speaking on this matter is IRS code 280E. It is one of the great barriers for many that want to get into the cannabis business legally because it creates a tax burden that some are unable to handle.
Do Deductions Really Matter?
While many businesses may just view deductions as something positive they get from the government, they actually can have a huge impact on the business itself. Deductions are designed to help businesses save some money by getting that money in return. They allow businesses to make back some of the cash they had to spend in order to keep making money!
The problem is that when dispensaries are not allowed to have the same deductions, they are actually spending a lot more overall. They don’t get the opportunity to make back that extra money when tax season rolls around, so they spend more than the average business in the long run. In reality, some of these dispensaries could end up having to pay more in taxes than they get in profits. This is going to depend specifically on the business and how it is doing overall.
Tax Help for Cannabis Companies
Owning a dispensary means you can sell a product you believe in, but your taxes might be a bit more complicated than those of the average business. A tax lawyer with knowledge of federal and state tax laws can ensure your dispensary files its returns on time and pays all the taxes required. To learn more about how the tax attorneys at Polston Tax can help you, contact us today.
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