Cannabis: taxation
Cannabis faces different tax issues at the federal — despite its illegality — and state levels.
There’s no real consensus among states as to how to tax medical and adult-use marijuana. Approaches taken by states include an excise tax (most popularly around 15 percent) on adult-use, wholesale or cultivation taxes, and tax based on the level of THC present in the product. Additionally, some states exempt their medical marijuana from a specific tax or from state sales tax, while some apply them. Some states also apply an additional tax as well as state sales taxes on marijuana-related products (for example, rolling papers or glassware). Many states have specific designations as to where in the state budget marijuana tax revenue is allocated.
At the federal level, IRS Section 280E stipulates which deductions cannabis business may take when paying federal income tax. Because marijuana remains a Schedule I substance, businesses must pay income tax but their allowed deductions are more limited than those of other businesses.
FAQs
While as with all things cannabis, it varies state by state, medical and recreational tax rates are rarely the same. In some states the same excise tax applies to both, but for the most part a medical patient and an adult-use customer will experience different tax rates on a product.
In many, but not all states, yes. Exceptions exist in some states for medical marijuana purchases.
Section 280E of the IRS tax code stipulates which business expenses are eligible for federal deductions. Because marijuana remains a Schedule I substance, businesses are much more limited in what they are able to deduct.
Under 280E, a cannabis business typically may deduct only the cost of goods sold, the definition of which falls into the realm of tax lawyers and accountants.