Get an overview of government finances, see how marijuana laws vary cannabis accounting between states, and get data like this weekly by subscribing to our free newsletter. Cannabis taxes fund a wide range of public initiatives, from healthcare to law enforcement. The Distributors/Manufacturers/Cultivators page covers topics related to the general application of sales and use tax to purchases and sales by distributors, manufacturers, and cultivators. Julian Daniels is a tax policy specialist in the direct tax section and Irakli G. Mirzashvili is a former revenue estimator and tax analyst for the Texas Comptroller of Public Accounts.

Marijuana tax rates in Utah

These limitations severely impact the profitability and growth potential of cannabis companies, hindering their ability to compete on a level playing field with other legal businesses. As states and localities continue to legalize cannabis use and businesses, federal law appears increasingly discordant, raising a number of practical challenges for federal and subnational policymakers. 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. The maximum local excise taxes are up to 3% for municipalities and 3.75% for counties.

Possible Changes at the State and Local Level

Marijuana is intoxicating, causing behavioral changes and potential long-term negative health effects. These characteristics prompted its prohibition and, where legalized, product-specific “sin” excise taxes. Senate Bill 56, introduced by Sen. Steve Huffman, R-Tipp City, increases the excise tax on adult-use cannabis products from 10% to 15%, with all revenue going into the state general fund. Ohio currently directs marijuana dollars to several different pots, including one to support municipalities with dispensaries.

The Evolution of Tax Laws: A Global Perspective

We discuss why marijuana should be taxed and the various strengths and weaknesses of different tax designs. We then analyze lessons learned from recreational marijuana taxes across the U.S. states. Several of these lessons can inform tax reform in states that already tax recreational cannabis and help form a blueprint for both the adoption of taxes in other states and federal policy. A potency-based tax is calculated based on the cannabis product’s level of tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis. This type of tax roughly mirrors state alcohol taxes where higher tax rates are applied to products containing a higher concentration of alcohol (i.e., a state’s per gallon alcohol Insurance Accounting tax rate is higher on liquor than wine and higher on wine than beer).

A State-by-State Guide to Cannabis Taxes

Colorado’s cannabis sales tax increased from 10 percent to 15 percent on July 1, 2017. The cannabis excise tax is 15 percent, but the average market rates fluctuate quarterly. Before fiscal 2016, the Washington cannabis excise tax was based on a three-tier model levied at 25 percent at the production level, 25 percent at the processor level, and 25 percent at the retail level. Beginning in fiscal 2016, Washington has levied only the excise tax on retail sales at 37 percent. As legalization net sales increases, significant tax differences will be reflected in product pricing — leading consumers to travel across state borders to purchase cheaper cannabis in neighboring states.

Marijuana tax rates in Florida

• With this still unpredictable revenue potential, states should consider setting up trust funds or another mechanism during high-revenue periods to balance low-revenue periods.
• Figure 2 shows the average retail price of marijuana products in Colorado for the past decade.
• Business, wage income, and payroll taxes as well as business and licensing fees are also lost.
• To date, three states—Connecticut, Illinois, and New York—incorporate THC content into their tax regimes.

Some states also dedicate revenue to government programs that can address marijuana’s negative externalities. Cannabis has known negative effects (including impaired decision-making and addiction) and documented benefits (alleviating chronic pain and mitigating various diseases). Alaska, California, Illinois, Montana, New York, Oregon, and Washington use a portion of their cannabis tax revenue to fund programs for substance abuse and drug education and prevention.

• «There’s an awful lot of societal costs that are going to have to be borne by the legalization of marijuana,» McColley told reporters Wednesday.
• Wesley Smith, a political analyst, points out that while such measures can indeed bolster state funds, they must be carefully calibrated to avoid driving customers back to the black market.
• While federal taxes can pose significant challenges for cannabis businesses, state, and local taxes are no less complex.
• Weight-based taxes are akin to other “sin taxes,” like taxes on alcohol and tobacco.

Key Taxation Challenges for Cannabis Dispensaries

Beyond the financial strain, 280E also poses significant operational challenges for cannabis businesses. The inability to deduct common business expenses disincentivizes these businesses from investing in improvements that would otherwise be considered best business practices. This includes providing living wages, offering employee benefits, improving business premises, and contributing to community development initiatives. For more information, check out this analysis of Michigan cannabis taxes and the state Marijuana Regulatory Agency website. Several important lessons emerged from the rollout of marijuana laws and the adoption of legal markets.

Internal Revenue Service

• On top of that there’s a 6.25% statewide retail sales tax, and potentially other local municipal taxes (which may run up to 3%).
• For a full list of municipalities, counties and tribes that will receive marijuana tax revenue, go to Michigan.gov/RevenueSharing.
• It also explains that marijuana companies are eligible for payment plans if they are unable to pay their taxes in full.
• The bill would amend the IRS code to say that, in addition to all Schedule I and Schedule II drugs, businesses that work with marijuana specifically would be barred from taking tax deductions that are available to other industries.

Taxing cannabis sales should help fund government services and address negative consequences of cannabis consumption. The challenge of taxing cannabis is achieving these goals without creating an overly complex tax system. Weight-based taxes are akin to other “sin taxes,” like taxes on alcohol and tobacco. The measurement can vary based on the part of the plant being sold, and the calculation method for these taxes varies among states. A cultivator is responsible for paying the tax following the sale of its product to a distributor or retailer. With interstate commerce prohibited, we don’t yet see problems created by varying tax designs that occur in other legal markets.