Cannabis taxation is hot on the heels of legalization.
In 2012, voters in Colorado approved a ballot initiative legalizing the recreational use and sale of cannabis and its products. In the following ten years, eighteen other states, Washington, D.C., and Guam followed suit despite its use, sale, and possession still being illegal at the federal level. Hot on the heels of legalization, taxation of cannabis is tailgating at a rapid pace, but by no means has it so far been considered a smooth ride.
Here and there, and everywhere…
Cannabis sales are taxed by states at varying rates and can depend on the product and use. Some states have implemented cannabis-specific excise taxes, so called “sin tax,” that are levied on the seller and passed to the consumer by including it in the retail price. Some states have included cannabis in their current sales tax regimes as the sale of tangible personal property. States such as New Mexico have done both.
THERE ARE THREE MAIN WAYS STATES TAX RECREATIONAL CANNABIS:
- Percentage of price. Similar to a general sales tax, the consumer pays a tax on the purchase price and the retailer remits it to the state. The tax rate is typically higher than the state’s general sales tax rate. Most states levy this tax during the retail transaction, however, a few states levy their percentage of price tax on the wholesale transaction. Some states also let localities levy a percentage of price excise tax, but typically with a limit on the maximum rate.
- Weight based. Similar to cigarette taxes, the cannabis taxation is levied on a unit of product. This tax is levied on the wholesale transaction typically at different rates for different categories. For example, California levies a separate rate per ounce tax on cannabis flower, leaves, and fresh plant material.
- Potency based. Similar to alcohol taxes where beverages with a higher percentage of alcohol are taxed at higher rates, the tax is based on the THC level of the product. Illinois is currently the only state with a potency-based tax. Products under a THC content threshold of 35 percent are taxed at 10 percent of retail price and those exceeding the threshold at 25 percent of retail price. New York also establishes a potency-based tax with recently enacted legislation. However, unlike Illinois, New York will levy its tax per milligram of THC with different rates depending on the product form— with edible products taxed at a higher rate than concentrates and the lowest rates applying for the cannabis flower.
What About Cannabis Taxation Exemptions?
Some states have also begun to allow exemptions for sales of medical cannabis while others continue to tax what is prescribed for medicinal purposes.
For example:
- Vermont exempts the sale of medical cannabis from sales and use tax.
- New Mexico exempts the sale of medical cannabis from both excise tax and gross receipts tax, the state’s version of sales tax.
- Hawaii, on the other hand, expressly excludes medical cannabis from the definition of prescription drugs that qualify for an exemption from sales and use tax.
Expect more potholes with the taxation of cannabis—no two states tax it the same way.
There is a myriad of compliance issues with state sales and excise tax in an industry that already faces extreme levels of scrutiny from federal and state governments. Beyond this, the cannabis industry faces regulatory challenges—including issues with access to banking services which make it difficult to remit tax obligations, especially if operating in multiple states.
For help navigating tax compliance with cannabis legalization, contact your trusted state and local tax advisors at REDW below. We welcome your questions.
