Close this search box.

How do state and local cannabis marijuana taxes work?

Cannabis Taxation

This issue is not unique to marijuana taxation but is important considering a potential multiplier effect in states with high taxes if a federal tax is implemented before retail. This difference in price levels among states impacts the excise tax rates if the strategy is to convert users from the illicit markets. Marijuana flows, like cigarettes, from lower-priced markets to higher-priced markets. Colorado adjusted its tax structure in 2017, which increased rates 2.1 percentage points. The original structure was a wholesale excise tax of 15 percent, a retail excise tax of 10 percent, and a general sales tax of 2.9 percent. This was changed to a 15 percent wholesale excise tax and a 15 percent retail excise tax, while exempting recreational marijuana from the general sales tax.

Tax Policy Center Briefing Book

States taxing different parts of the marijuana plant at different rates offsets some of this issue but does not manage to capture the externality down the value chain. As opposed to weight-based taxes on alcohol and tobacco which are levied on the final product rather than on the ingredient, existing weight-based taxes on marijuana are levied on the plant material, which may or may not be the final product. For instance, taxing by price could drive down prices as consumers and businesses look to lower their tax liability. Taxing based on THC content could complicate tax collection and add significant costs to both tax collectors and industry. Nevertheless, marijuana is an addictive product with certain societal costs, which means that states with legalized marijuana sales desire some control over the market.

  • After reclassification, cannabis businesses will see a substantial bump in their bottom lines.
  • To that end, policymakers would be well-advised to remember that excise taxes should only be levied when appropriate to capture some externality or to create a “user pays” system—not as a general revenue measure.
  • A 2020 study estimated the cost of testing compliance in California markets.[9] The equipment and startup costs for a new lab exceeded $1.5 million and the annual costs of operations, maintenance, and salaries required more than $1 million.
  • While ad valorem excise taxes may look like general sales taxes, there are important differences.
  • By April 2021, more than $100 million had already been distributed to community groups.[20] In 2023, more than $50 million was awarded to community reinvestment grants.[21] The state also invests large chunks of cannabis revenue into childcare services and environmental programs.

Specific State and Local Taxes

The strategy of facilitating affordable accessible marijuana seems to have worked in Colorado, Oregon, and Washington, where legal sales have successfully outcompeted the illicit market—at least to a certain degree. At the same time, the states have raised the revenue required to cover the cost of the system. To successfully legalize recreational marijuana, lawmakers must develop regulatory frameworks and tax structures that can compete with the illegal market. Fortunately, they do not have to start from scratch, taking note of the lessons learned in states already operating legal marijuana markets.

Cannabis Taxation

Marijuana tax rates in South Dakota

Furthermore, the federal government is likely to continue discussions over federal legislation. Nevada voters approved an initiative regulating cannabis for adult use in November 2016. The first adult-use stores were expected to be licensed in 2018, but the legislature and governor allowed medical cannabis dispensaries to sell to adults beginning on July 1, 2017. If the bill passed by voters, Initiative 65, goes into effect, there technically won’t be a tax for patients, but purchases will be subject to a “user fee”—not to exceed state sales tax (7%) – that would be used exclusively to fund the program itself. Cannabis is taxed primarily at the wholesale level in Alaska, although local town or borough taxes may be imposed.

Cannabis Taxation

Tax Design Recommendation

Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services medical marijuana accounting of a competent professional should be sought. Whereas 280E governs the expenses that are not allowed for Cannabis companies, Section 471 governs the rules around inventory, and which expenses are includable as cost of goods sold and inventoriable costs.

This website summarizes the law and applicable regulations in effect when it was published. If there is a conflict between this document and the law, decisions will be based on the law. Lastly, the Resources section provides links to useful information, including special notices, publications, statutory and regulatory information, cannabis inspection information, and access to assistance from our Customer Service Representatives. For additional information regarding gross receipts, please see our Cannabis Tax Fact — Gross Receipts Subject to Cannabis Excise Tax. We may inspect any business that sells or stores objects of any kind bearing the universal cannabis symbol for commercial activity in violation and any objects deemed contraband may be seized by us. USAFacts is a not-for-profit, nonpartisan civic initiative making government data easy for all Americans to access and understand.

  • More states are likely to join the legal recreational marijuana market in the coming years.
  • It is important to note that the financial impact of legalizing and regulating cannabis for adult use is one of the many benefits of legalization.
  • In its second full year of sales, Montana generated over $51 million in cannabis excise taxes.
  • Downtrading effects do not reduce harm and have no relation to any externality the tax is seeking to capture.
  • If retail prices are in line with the above chart, that would place them around twice the illicit market prices.

Percent of people 12+ who used illicit drugs in the past month

Another Missouri judge approves cannabis ‘tax stacking’ – Marijuana Business Daily

Another Missouri judge approves cannabis ‘tax stacking’.

Posted: Fri, 31 May 2024 16:03:21 GMT [source]

  • One element of federal legalization may impact taxation revenues indirectly by limiting access to medical marijuana regulation.
  • While there has been increasing attention and interest in this issue on Capitol Hill, in the near term the federal tax treatment of cannabis-related business remains fraught with risks.
  • If production is done to a product, more costs may be allocable under Section ; however, nearly everything else is subject to 280E.
  • As part of a large-scale spending bill covering Military Construction, Veterans Affairs, and Related Agencies (MilConVA) for the 2025 fiscal year as well as the separate National Defense Authorization Act (NDAA), lawmakers filed several cannabis- and psychedelics-related amendments.
  • These business owners should always pay their taxes on time to avoid interest and penalties.

Labor Share of Net Income is Within Its Historical Range