Types of Taxes Imposed on Cannabis, and Compliance Requirements of Various Entities

There are different kinds of state taxes imposed on cannabis, including sales and use taxes and excise taxes. In addition, cannabis businesses, like producers, distributors, retailers, etc., are subject to a myriad of compliance requirements including registration and licensing.

Types of Taxes Imposed on Cannabis

States that legalized either or both medical and recreational adult-use cannabis usually impose taxes on cannabis business transactions.

The types of taxes imposed on cannabis include:

  • sales and use tax;
  • excise tax;
  • privilege tax;
  • cultivation tax.

Sometimes, a state will exempt medical cannabis from tax and impose a tax on recreational cannabis.

Sales and Use Taxes Imposed on Cannabis

Some states impose a sales and use tax on the sale of cannabis. When a person buys cannabis from a dispensary in a state that state applies a sales and use tax on those transactions.

Generally, a sales and use tax is applied broadly, i.e., all sales of tangible personal property and certain services are subject to sales and use tax unless an exemption applies. The amount of sales and use tax is a percentage of the sales price.

A state can choose to impose one or more type of tax on cannabis.

Example: California’s Cannabis Tax Structure

California imposes:

Also, although California sales and use tax applies to retail sales of cannabis and cannabis products, it does not apply to sales of medicinal cannabis and cannabis products if the purchaser provides proper identification.

Excise Taxes Imposed on Cannabis

Some states impose an excise tax on cannabis. An excise tax:

  • is imposed on specific goods, like cigarettes and alcohol; and
  • is a flat tax.

Privilege Taxes Imposed on Cannabis

What one state calls a “cultivation tax,” another state may call a “privilege tax.” A privilege tax is a tax levied on the privilege of doing business, usually a specific business.

Example: Illinois Cannabis Cultivation Privilege Tax

Illinois imposes a cannabis cultivation privilege tax on the cultivator for the privilege of cultivating cannabis. The Illinois medical cannabis cultivation privilege tax is also a tax imposed on the privilege of cultivating medical cannabis.

Compliance Requirements for Different Types of Cannabis Businesses

Cannabis businesses need to follow state tax laws, including registration and licensing requirements. Cannabis businesses include:

  • Collective or cooperatives;
  • Cultivators;
  • Distributors;
  • Manufacturers;
  • Nurseries;
  • Processors;
  • Retailers; and
  • Testing facilities.

Registration

Cannabis businesses that make sales in a state that imposes sales and use taxes on cannabis are generally required to register with the state department of revenue, and collect and remit the taxes collected. Registration requirements are state-specific.

Example: Maine Registration Requirement for Cultivation Facilities

A cultivation facility licensee operating in Maine is required to:

(36 M.R.S.A. Sec. 4922)

Licensing

Cannabis businesses are subject to licensing requirements. Each type of cannabis business must get their own specific type of license. Moreover, there are usually fees that go with the licensure. Although license fees are not taxes per se, they are levied on the different types of cannabis actors, like growers and dispensaries.

Example: Pennsylvania Licensing and Registration Requirement

The Pennsylvania Department of Health administers all licensing/permitting related to the production and/or sale of medical marijuana. Part of the process in applying for a license/permit requires a tax clearance review from the Department of Revenue. However, the Department of Health will request the tax clearance check from Revenue on behalf of the applicant. Once an in-depth review of the company, its partnerships, and corporate officers is completed and cleared, a Clearance Certificate will be issued directly to the Department of Health.

Example: Massachusetts Licensing for Marijuana Businesses

When a taxpayer completes the licensing process through the Cannabis Control Commission, and receives the final license (not the provisional license), the taxpayer must then register with the Massachusetts Department of Revenue to file returns and pay taxes.

By Carol Kokinis-Graves, J.D.

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CCHTaxGroup

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