Legalization of cannabis and how it would be taxed has been a discussion for many years. But as states continue to pass laws legalizing the sale of cannabis, the businesses trying to capitalize on the market are struggling with the complexities of taxation as it differs from other sales.
States that have legalized the sale of cannabis are reaping the benefits. As of last month, states reported a combined total of $7.9 billion in tax revenue from legal, adult-use marijuana sales, according to one pro-legalization group. Among the first states to legalize marijuana some seven years ago, Washington collected $614 million in marijuana tax revenue last year. And Colorado raked in $362 million in marijuana taxes in 2020, a 30% jump from 2019. Other states doing well with tax on marijuana include Oregon, Nevada, Massachusetts, Illinois, and Michigan.
While states are alike in seeing great revenue growth, there is a complex maze of not just sales taxes that apply but other excise taxes as well.
Ever-changing scene nationwide
For sales tax purposes, states that have legalized cannabis generally categorize it as medical use, recreational/adult use (generally preceded by legalization for medical use) or wholesale vending, or some combination of the three.
[While it's always best to check with individual states and jurisdictions where your company has significant sales of cannabis, the following is according to spring 2021 data from the cannabis information site Leafly.]
California: For adult use retail sales there is a statewide 15% excise tax as well as a statewide sales tax rate of 7.25%. Local sales tax rates apply as well. Additionally, local jurisdictions can levy an additional “business tax” or excise tax of up to 15%. Medical marijuana is sales tax exempt but the statewide excise tax and the local business tax/excise tax applies as well.
Connecticut: Medical marijuana is only subject to the statewide 6.35% sales tax and there is no additional excise tax.
Illinois: Illinois is one of the most complex states with tax rates based primarily on the concentration of THC. Infused food and beverages have a 20% excise tax. All other products containing 35% or less THC are subject to a 10% excise tax while products containing more than 35% THC are subject to a 25% excise tax. State and local sales tax applies in Illinois as well.
Generally speaking, medical marijuana has a lower tax burden than adult use or recreational marijuana. Most of the states that have legalized cannabis subject it to an excise tax like California while fewer apply the standard sales tax rates. Of course the application of taxes varies greatly from state to state.
Sales tax is complex on it’s own, but an outlier like cannabis with its various unique taxes requires an extra level of expertise. In addition to TaxConnex helping you understand the sales tax rules associated with cannabis, the state websites and statutes are a good option to understand the additional excise taxes that apply to your business.
If your business may be impacted by changing sales tax conditions and requirements, you don’t have to go it alone. Contact TaxConnex. We can provide services to become your outsourced sales tax department.