Cannabis tax brings in hundreds of millions of dollars in state revenue each year, but at what cost to the booming marijuana industry.
A complex taxation system may be a money-maker for the state, but it makes business difficult and the price of cannabis high for consumers.
Since the legalization of cannabis is still in its infancy stage, it is important to understand how it is taxed and the consequences of these laws.
Read on to get a deeper look into the world of taxation on cannabis.
Where is Marijuana Taxed?
There are currently 10 states where consumption and growth of recreational cannabis is legal. But, only 7 out the 10 have a legal market in place to buy and sell it.
There 7 states that are subjected to state-imposed marijuana taxes and vary according to the district laws. Those states are Washington, Oregon, California, Massachusetts, Nevada, Colorado, and Alaska.
Michigan has begun a plan to implement a legal market to start in 2020. Vermont and Maine have yet to put in place a plan for a market, and Washington D.C. does not allow the buying and selling of cannabis.
What are the Different Types of Cannabis Tax?
States enforce taxes in several ways depending on your role in the cannabis industry. These taxes are based on the market value of the cannabis you handle and the profits from your business.
First, there is the business tax, which is a percentage of your profit.
All other industries can make tax exemptions on business expenses, making their taxable amount the net income after expenses.
However, the Federal government still recognizes cannabis as an illegal substance, so these exemptions are not allowed for the marijuana sector.
Yet, cannabis businesses are still taxed because they make a profit and it is their gross income that is subjected to federal taxation.
Also, many states include a business tax that takes a percentage of the gross income. For example, Washington state has a business tax in addition to a sales tax on every transaction.
If you are a distributor, your state may also apply an excise tax. This means you are taxed on the transfer of your product to a retailer or manufacturer.
The tax amount is based on the retail market value of the product, which is calculated by the gross income of the product. This includes transportation, labor, other taxes, and sale price.
The distributor is responsible for determining the value and collecting it from the retailer to include in their marijuana tax filing.
This taxing is based on the weight and type of cannabis entering the market from a cultivator. The tax per weight varies depending on the state standards. It also changes if the product is dried cannabis, untrimmed cannabis, or a fresh plant.
Exclusions to this rule may be immature products, like clones, seeds, or plants that have not budded.
It is the distributor’s responsibility to collect the cultivation tax from the cultivator at the time of transfer. If it goes directly to the manufacturer, then they must collect the tax and pass it on to the distributor for filing.
The most common type of marijuana tax revenue is per transaction called the sales tax. Each time a product is sold a percentage is added on to the total sale price.
This is probably the easiest tax process since it is automatic. It is also the one type of tax that medical marijuana customers can be exempt from, but you, as the retailer, must still pay the taxes on the sale of products.
Taxation and Permit Process
To begin your journey into the world of cannabis taxation, you must first obtain the appropriate permit. There are permits to cultivate, distribute, and sell cannabis. There may also be specific license needed according to your state.
Depending on your role in the supply chain, you must also ensure that you collect taxes from your partners to whom you sell and transfer products. Distributors have the biggest role as they must collect both cultivation and excise taxes.
Making Business More Difficult
After reading through the many ways marijuana is taxed it can be daunting to get a business started and actually make a profit. Hiring an accounting and tax service that is well aware of state laws and procedures can keep you on track.
You should have a formal system of record-keeping that includes all of your transactions between cultivators, distributors, manufacturers, and retailers. During filing time, you will also need help reporting all of your data.
To make matters more difficult, many cannabis businesses must deal with cash-only transactions. This leaves a little paper trail to follow.
Unfortunately, this is because major banks and credit card companies do not support cannabis business in fear of federal laws and regulations.
Penalties are also a huge concern as they can impose large fines and even suspend or revoke your licenses. That is why it is essential to have professional help to keep you organized while you focus on your business.
How Does the Government Receive and Use Taxes?
Despite its lengthy and costly procedures, cannabis tax policies do have a positive impact on the community. Many states use tax money to restore infrastructure, combat criminal activity, and support local schools.
However, there needs to be a medium between community advocacy and support of local businesses. Cannabis business shouldn’t be the only enterprises required to pay such high taxes, some states at over 40%.
So, How Do Cannabis Businesses Stay in Business?
Cannabis tax can ruin a startup if the laws are not known or followed. Being educated in your state tax policies and having an accountant keep your records, is the only way to comply and make a profit.
You can contact us to schedule a free consultation and get your questions answered.