Marijuana is a booming business. Currently legal for medical use in 33 states and recreational consumption in 11. It’s in high demand among a variety of consumers.
The economic impact of marijuana can’t be denied either. According to Leafly’s annual Cannabis Jobs Report, the marijuana industry produced 243,700 full-time-equivalent jobs as of January 2020. Furthermore, data from Arcview Market Research and BDS Analytics suggests that by 2024, California will achieve $24 billion in annual sales.
Huge profits for both THC and CBD products could drive considerable tax revenue. This is great news for state governments, but the resulting tax initiatives place a considerable burden on marijuana businesses.
Taxation awareness is critical, especially given the high costs and risks associated with the modern cannabis industry. The lack of a detailed tax strategy could lead to significant compliance issues, as well as considerable financial concerns.
How do marijuana sales taxes work at the state level?
While tax requirements vary from one state to the next, purchases are nearly always subject to state sales taxes and many states charge significant excise taxes and other fees.
Often, cannabis sales prompt several different forms of state-based taxation. In Colorado, for example, these include:
- Local sales taxes, which average 4.6%
- Local excise taxes, which vary based on the city but often fall between 3% and 4%
- A 2.9% state sales tax
- A marijuana excise tax of 15%
Other states assess fewer charges but impose high tax levels. Oregon, for example, charges a 17% state tax on cannabis sales, while Washington imposes a whopping 37% tax on retail sales. In Illinois, rates vary based on the amount of THC contained in a given product. If the THC concentration exceeds 35%, a 25% tax is assessed.
Beyond sales taxes, significant fees are often imposed on transactions between cultivators, distributors, and retailers. Illinois, for example, imposes a 7% gross receipt tax. Many businesses pass these expenses on to the customer.
Financial restrictions on marijuana businesses
As you lock down your marijuana tax strategy at the state level, keep federal implications in mind. While the cultivation and sale of marijuana remains illegal on a federal basis, the IRS still requires that all cannabis-related income be reported and taxed appropriately. This can quickly get expensive not only due to the general burden of federal taxes, but also because marijuana businesses do not qualify for most exemptions or deductions.
Another notable concern: many marijuana cultivators and retailers are forced to pay the IRS in cash, as FDIC banks are prohibited from working with cannabis-related businesses. As such, it is critical to factor both state and federal tax concerns into long-term business strategies.
Taxes pose a major hurdle for today’s marijuana businesses. Though marijuana tax can be frustrating and expensive, these concerns can be mitigated if addressed upfront and built into the cost of doing business. Your efforts to get in the know about current laws regarding taxes on recreational marijuana could save you countless headaches down the road.