Table 2 summarizes the marijuana tax revenues (recreational plus medical) collected by states in 2022. Ad valorem rates are applied at the wholesale and retail levels, ranging from 6 percent in Missouri (as a standalone tax, though ad valorem rates go as low as 3 percent in Connecticut, which applies a hybrid tax) to 37 percent in Washington. Specific taxes are levied separately on cannabis seeds, flower (mature and immature), leaves, trim, clones, whole plants, concentrates, and edibles, and can vary by THC content in the product. As the price of cannabis fluctuates, and in Colorado’s case falls substantially, so does funding for any cannabis accounting programs tied to those revenue streams.
Navigating the Maze of Taxation
More states are likely to join the legal recreational marijuana market in the coming years. The calculations below are based on the current system in Colorado, which uses price-based and weight-based elements. However, similar level collections should be possible with a potency- and a weight-based system. Were Colorado to move to such a system, based on demand and consumption data in Colorado, the average rate would be around $35 per ounce.
State Tax Ballot Measures to Watch on Election Day 2022
Seven states legalized adult-use cannabis from 2020 to 2021, but new enactments have slowed in 2022. Delaware’s legislature passed a measure to legalize adult use, but it was vetoed by the governor. Mississippi also passed law firm chart of accounts a measure to implement a medical marijuana program and California passed a measure to reduce and restructure its cannabis tax scheme by eliminating a cultivation tax on growers. For the states that have joined the legal cannabis bandwagon, the decision paid off through the pandemic as revenues experienced consistent growth. In many states, tax collections from cannabis are outpacing alcohol collections, and in a few cases, tobacco tax collections as well. However, according to officials in states like Colorado and California, tax revenues have flattened or slightly declined in FY 2022, as a pandemic-fueled spike in consumption returned to normal.
Understanding Federal and State Taxation in the Cannabis Industry
- These professionals can provide valuable advice on structuring the business to minimize tax liabilities, ensure compliance with all tax laws and regulations, and help prepare for potential audits.
- When all applicable taxes are combined, the effective tax rates on marijuana in many states are quite high; between 20 and 40 percent in most cases, which can keep black market products more desirable.
- Like taxes on alcohol, cigarettes, and gasoline, taxes on cannabis are called excise taxes.
- In the first quarter of 2023, 10 states—Arizona, Colorado, Maine, Massachusetts, Michigan, Montana, Nevada, New Mexico, Oregon, and Washington—generated more revenue from cannabis than from either alcohol (9 states) or tobacco (Washington).
- This move doesn’t do as much for legal cannabis sales as proposed federal legislation like the States 2.0 Act, but rescheduling cannabis has major ramifications for cannabis businesses.
- To date, three states—Connecticut, Illinois, and New York—incorporate THC content into their tax regimes.
- California, Washington, and Alaska provide examples of how states are moving forward.
New Jersey adopted a hybrid tax structure, imposing a weight-based, per-ounce tax on cannabis that is adjusted according to retail selling prices. (Lower taxes are imposed if retail selling prices are higher.) Both New Mexico and New Jersey, are phasing in higher tax rates over time, partly to improve the ability of the legal market to be more competitive with the illicit market as it establishes itself. Two states, Connecticut and New York, joined Illinois in imposing a tax based on the THC content of cannabis products, with more potent products being taxed at higher rates. The discrepancy between state legality and federal restrictions presents a unique legal framework under which cannabis use and sales operate, effectively complicating the domestic market. Cannabis products cannot be transported legally across state borders, so the entire seed-to-consumer process payroll must occur within state borders. This unusual situation has resulted in a wide variety of tax designs and ongoing discourse.
Placing Biden and Trump Tax Proposals in Historical Context
- Twenty-one states have implemented legislation to legalize and tax recreational marijuana sales.
- Further, the system does not consider the ability to extract THC from the flower and create highly potent concentrates from a small amount of plant material.
- Excise tax revenue should be appropriated to relevant spending priorities related to the external harms created by marijuana consumption, such as public safety, youth drug use education, and cessation programs.
- Due to their narrow base, they are not a sustainable source of revenue for general spending priorities.
- Colorado’s cannabis sales tax increased from 10 percent to 15 percent on July 1, 2017.
- Relying on potency as a tax base introduces complexity to the system but also allows the excise tax to do what it is supposed to do—that is, to capture the negative externality.
- Analysts, businesses, and lawmakers alike are still improving their understanding of the complexities of legalization.
An experienced grower can get up to 36 ounces out of one plant.89 When compared with an estimated annual use of 20.5 ounces for heavy users, it could be advisable to limit home cultivation to home consumption. While 19 states have enacted a tax on recreational marijuana, there is no standard cannabis tax in the US the way there is an alcohol tax, cigarette tax, and gas tax. As mentioned above, one resource the IRS issued in conjunction with their new webpage is a Marijuana Industry FAQ.
