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The below figures do not include local sales and special taxes established by municipalities across the state. Additionally, cannabis taxes should be levied early in the value chain, similar to alcohol and tobacco excise taxes, to limit the number of taxpayers. 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.

New HSR Rules Threaten M&A Activity Vital to Small Businesses

A 2020 study estimated the cost of testing compliance in California markets.[9] The equipment and startup costs for a new lab exceeded $1.5 million and the annual costs of operations, maintenance, and salaries required more than $1 million. For more information, see the full text of Measure 65, the state’s medical marijuana legislation. Ad valorem systems are also susceptible to tax avoidance schemes, where consumers can get “free” marijuana if they buy a T-shirt, pay a cover fee to enter an establishment, or donate a certain amount. They can also result in tax cuts for discounts unrelated to externalities, like standard commercial quantity and employee discounts. For a detailed description of these taxes, plus an analysis of the pros and cons of each type of cannabis tax, see the Tax Policy Center’s 2022 report, « The Pros and Cons of Cannabis Taxes. » A community connecting cannabis consumers, patients, retailers, doctors, and brands since 2008.

Montana (pop. 1.1 million) Tax rate: 20% excise tax on sales

Due to the lack of federal recognition over the legality of cannabis, state laws and regulations vary, meaning there’s no single model for revenue collection from medical or recreational dispensaries. Cannabis taxes fund a wide range of public initiatives, from healthcare to law enforcement. Additionally, cannabis/marijuana business owners should be aware of nefarious investors who will try to put funds into these new businesses that could cause them to lose their entire business. For example, if one of these silent investors gives initial money, say $5,000 or $10,000, and it grows to where they can then claim ownership, these businesses can become complicit in laundering money for drug traffickers. Declassification could make some marijuana companies instantly profitable, a priority in Massachusetts as regulators have aimed to spread the proceeds of the industry to communities targeted by the war on drugs.

d Missouri judge rules counties can stack taxes at marijuana dispensaries

The first section presents the marijuana market data and tax design from U.S. states. The second section discusses tax design options for states and the federal government as well as some of the factors impacting tax policy design in the marijuana space. For a detailed description of how each state spends its cannabis tax revenue, see the Tax Policy Center’s 2022 report, « The Pros and Cons of Cannabis Taxes. »

• Any federal taxes would pyramid on top of state taxes, compounding the effects of taxation.
• So, rough total out the door, expect your cannabis leaf to be taxed at 16%, edibles at 26%, and concentrates at 31%.
• As the price of cannabis fluctuates, and in Colorado’s case falls substantially, so does funding for any programs tied to those revenue streams.
• Whereas 280E governs the expenses that are not allowed for Cannabis companies, Section 471 governs the rules around inventory, and which expenses are includable as cost of goods sold and inventoriable costs.
• I also want to point out that there is no difference in paying income taxes or employment taxes.
• It’s certainly not a one-to-one comparison, but for context, let’s use a non-cannabis retailer as a benchmark, say Target.

Effect of Legalization on the Marijuana Market

Despite this, 23 states and Washington, DC, have fully legalized the drug, with an additional 21 states either fully or partially legalizing medical marijuana. After a recent announcement of support by President Biden, federal https://www.bookstime.com/articles/what-is-a-bookkeeper officials have moved to reclassify marijuana as a less-dangerous drug, a historic shift for the United States. It would shift cannabis out of the category of substances subject to part of the tax code called Section 280E.

Tax Guide for Cannabis Businesses

This count does not include Delaware, Ohio, Minnesota, and Virginia, which have legalized recreational marijuana but not yet begun taxable sales. Recreational marijuana use is also legal in the District of Columbia, but Congress prevents the District from regulating and taxing legal transactions. Along with regular sales taxes – which in some locations approach 12% – people purchasing marijuana for recreational use also pay a special 6% state tax and a local tax of 3% if approved by voters. Reported revenue for the fourth quarter of 2023 returns has been revised to $273.9 million. This includes $159.4 million attributed to cannabis excise tax and $114.5 million to sales tax. These revisions are a result of amended and late returns, as well as other tax return adjustments.

The specific rules and regulations regarding how it is taxed at the federal level provides the IRS an opportunity to promote voluntary compliance, not only through audits, but also through outreach and education. At last count, 36 states plus the District of Columbia have legalized marijuana for recreational or medicinal use, or both. These states, such as California, Washington and Colorado provide tax guidance for businesses and we strongly encourage industry medical marijuana accounting members to remain compliant with state taxes as well. And while there are 14 states that still ban cannabis use, we expect both unlicensed and licensed marijuana businesses to grow. Much of the cannabis excise tax revenue goes to the municipal governments where sales take place. The state’s legalization law divides cannabis tax revenue into two funds, one to support public health initiatives and the other for public safety and law enforcement training.

Marijuana tax rates in Montana

• State law directs that revenue to substance abuse recovery programs, conservation efforts, and services for veterans and their families.
• While price could technically act as a proxy for the strength of the products, it is far from a perfect solution.
• For more information, see the full text of Measure 65, the state’s medical marijuana legislation.
• While these amounts are not stratospheric, they are considerable and exceed additional enforcement and regulatory costs incurred by the states.
• It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.