What Is the Supreme Court Cannabis Tax Ruling?

The legalization and taxation of cannabis remains one of the hottest trends in state taxation. As the New Mexico Supreme Court tax ruling declares that cannabis purchases by medical cannabis patients should not be subject to gross receipts tax, you might be interested to know that medical products from weed are also not taxed in several states. But what states, exactly? 

This article will walk you through the legalization and taxation of cannabis in different states in the US. 

States that levy tax on cannabis products 

Cannabis, also known as marijuana, has been used as a drug for both medical and recreational purposes and in various traditional medicines for centuries. Medical cannabis is legal in 37 states, Washington DC, and the US Virgin Islands. 

Most states do not levy a tax on cannabis purchases because they exempt prescription medication purchases from their general sales tax. Each jurisdiction has its own criteria for when cannabis can be prescribed, at what amounts, and the process for issuing medical cannabis licenses to qualified consumers. 

On the other hand, other states may tax cannabis at a lower rate than other items sold at retail. Medical cannabis purchase taxes are generally low and equal to the state’s general sales tax rate. Therefore, these taxes are not classified as “marijuana taxes.” 

This is mainly because cannabis is still federally classified as a prohibited drug in the US. So, while many states have legalized cannabis for medical purposes, prescribing it remains nearly always illegal at the federal level. Moreover, the FDA has only approved a certain number of cannabis derivatives for prescription medication use.

The table below shows how cannabis tax differs across states.

supreme court cannabis tax ruling
The cannabis tax rate in each state (Source: taxpolicycenter.org)

How is cannabis taxed across states?

In general, state and local governments tax medical cannabis in three main ways.

  • Price-based. Price-based taxes are similar to general sales taxes in that the consumer pays a tax on the purchase price, which is then remitted to the state by the retailer. Like other excise taxes, the tax rate is usually higher than the state’s general sales tax rate. Most states impose this tax at the point of sale (i.e., the consumer pays the tax together with the price of the goods at checkout). Meanwhile, a few other states apply their percentage of price tax to wholesale transactions. For instance, the cultivator or distributor pays the tax), and this cost is passed on to the consumer in the final purchase price. Some states also allow local governments to impose a percentage of sales tax, but usually with a limit on the maximum rate. 
  • Weight-based. These taxes are similar to cigarette taxes, but the tax is based on the cannabis product’s weight instead of taxing per pack of cigarettes. The wholesale transaction is subject to this tax. It means that the cultivator or distributor pays the tax, then includes it in the final cost of the consumer purchase. States that apply this form of tax usually have varying tax rates for different types of cannabis. For instance, California taxes cannabis flowers at $9.65 per ounce, cannabis leaves at $2.87 per ounce, and fresh plant material at $1.35 per ounce.
  • Potency-based. Potency-based taxes are similar to alcohol taxes, except that instead of taxing drinks with a higher percentage of alcohol at higher rates (e.g., the tax rate on liquor is higher than beer), the tax is based on the amount of THC in the cannabis product. Currently, Illinois is the only state applying a THC-based tax. It levies a 10% tax on items with a THC concentration of 35% or less, and a 25% tax on those with THC exceeding 35%. All cannabis-infused products are subject to a 20% tax. New York has also established a potency-based tax recently. However, it taxes per milligram of THC, with different amounts applied to different items.

Some states levy more than one of these taxes. Additionally, some states and localities levy their general sales tax on the purchase of cannabis in addition to their excise taxes.

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The bottom line

There is still much confusion regarding the supreme court cannabis tax ruling. Still, as more states open legal marketplaces and more research is carried out to understand the externalities of consumption, business owners will better understand this industry’s taxation. 

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Business Finance 101: Your Complete Guide to Different Types of Taxes in the US

As there are many types of taxes in the US, you might know which taxes you have to pay personally, but things are much more complicated when you file your business taxes. 

If paying taxes has the potential to cause you a lot of headaches, you may want to change your approach. That could mean enhancing your knowledge about taxes, starting filing your taxes earlier, using professional tax solutions, or consulting with a financial advisor. 

In this article, we’ll cover the most common types of taxes in the US and the specific taxes in each category. Let’s find out! 

The most important types of taxes in the US for businesses

Different companies pay different types of taxes because it depends on their products and services. However, most types of taxes in the US fall into three main categories: what you earn, what you buy, and what you own. 

Taxes on what you earn

  • Income tax (individual income taxes, corporate income taxes)

Income tax is a direct tax that a business pays based on its income or profit during the year. Though every state of the US imposes a business (also called corporate) income tax, the tax rates differ from state to state.

Partnerships don’t have to pay income taxes. However, they must file an annual information return to report income, gains, losses, and other important tax information.

  • Employment tax

Employment taxes are levied on employees’ wages and salaries to fund social insurance programs. In the US, the largest employment taxes are a 12.4 percent tax to fund social security and a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of the employment taxes (7.65 percent) are remitted directly by employers, with the other half withheld from employees’ paychecks. Employment tax also covers employees’ federal income tax withholding and federal unemployment (FUTA) tax.

  • Self-employment tax

Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves. Your SE tax contributions ensure your coverage under the social security system. This package includes retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

In general, you must pay SE tax and file Schedule SE (Form 1040 or Form 1040-SR) if either of the following situations applies.

  • You made $400 or more in net self-employment earnings.
  • You work for a church or a qualified church-controlled organization that elected an exemption from social security and Medicare taxes, and you receive $108.28 or more in wages from the church or organization.
  • Estimated tax

Estimated tax is a quarterly payment of taxes for the year based on the filer’s reported income for the period. This type of tax usually applies to small business owners, freelancers, independent contractors, sole proprietors, partners, and S corporation shareholders, those who do not have taxes automatically withheld from their paychecks as regular employees do.

You can calculate your estimated tax based on Form 1040-ES’s worksheet. You’ll need to estimate how much money you plan to make this year. If you overestimated your earnings, you can recalculate your estimated tax for the next quarter using a new Form 1040-ES. You need to estimate your income as accurately as possible to avoid penalties. 

Taxes on what you buy 

  • Sales and use tax

Some states charge sales tax on goods and services. However, there are some exceptions, such as if your business sells clothing, medicine, food, etc. Sales tax is a consumable tax that applies to retail sales, leases, and rentals of certain tangible personal property and services. Use tax applies when you buy tangible personal property and services from other states.

  • Gross receipts tax

Gross receipts taxes (GRTs) might look like sales taxes, but they actually tax the sellers rather than the retail buyers. This tax is a state tax applied to a business’ gross receipts (sales) regardless of profitability and without deductions for business expenses. Gross receipts tax is sometimes imposed instead of a corporate income tax or a sales tax.

Because gross receipts taxes are imposed at each stage in the production chain, they result in “tax pyramiding,” The tax burden multiplies throughout the production chain and is eventually passed on to consumers.

Gross receipts taxes are particularly destructive to startups and businesses with long production chains, which often lose money in their early years. Despite being dismissed for decades as a wasteful and unsound tax policy, politicians have recently reintroduced GRTs as a source of additional revenue. 

  • Excise tax

An excise tax, (or a sin tax), applies to goods and services that are regarded as harmful to people or the environment, like tobacco, alcohol, and fuel. If you’re doing business in this field, you have to collect and pay excise tax to the relevant federal and state authorities. The Internal Revenue Service (IRS) and the Alcohol and Tobacco Tax and Trade Bureau (ATFTB) are the two federal agencies that control excise taxes (TTB).

Taxes on what you own

  • Property tax

This type of tax, which is generally levied on immovable properties such as land and buildings, is an important source of revenue for state and municipal governments across the United States. Property tax supports local governments in funding public services (e.g., schools, roads, police and fire departments, and emergency medical services.)

However, the property tax is different in each state. Some states collect property tax from businesses in commercial real estate locations, while others collect “tangible personal property tax,” such as vehicles and equipment owned by businesses.

Overall, taxes on real property are relatively stable, neutral, and transparent, whereas taxes on tangible personal property are more problematic.

  • Franchise tax

A franchise tax is a government levy (tax) that some US states apply to certain business organizations such as corporations and partnerships that do business in another state. A franchise tax doesn’t depend on income but the tax rules within each state, with some calculating the company’s assets, net worth, or capital stock. 

What happens if you don’t pay your business taxes on time

Taxes are a serious matter that every business owner needs to pay close attention to. You must file tax returns on the IRS’s Form 1120, even if you believe that there are no owed taxes. Otherwise, you could be subject to late-filing and late-payment penalties and even have to pay interest. In this case, you could encounter a minimum penalty ranging from $135 to $205 or the amount of tax owed, whichever is smaller.

You may also be unable to claim the company’s net operating loss on your tax return since it must be recorded on Form 1120, which it will not be if you do not file taxes.

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How Shoeboxed can help you prepare for tax season

Shoeboxed is a painless receipt scanning and expense management solution for small business owners and freelance accountants. By using an OCR (Optical Character Recognition) engine and human-verified feature, Shoeboxed helps users scan their receipts precisely and create clear and comprehensive expense reports from their digitized receipts. You can rest assured that the digital versions of your paper receipts are “audit-ready” and approved by the IRS in the event of an audit. 

Sign up today and get yourself prepared for tax season with Shoeboxed

OnePriceTaxes Files your Taxes Online for Only $14.95

As April 17 quickly approaches we want to feature how Shoeboxed works with a few of our great partners to help you make this tax season as easy and painless as possible.

OnePriceTaxes LogoOnePriceTaxes, a local company based in nearby Morrisville, NC, is one such partner that can save you time, money and headache this April.

OnePriceTaxes provides consumers with an easy-to-use solution for filing federal and state taxes online for just $14.95, the lowest cost in the tax preparation industry. OnePriceTaxes’ software offers the ability to file both simple and complex tax returns for “one price” (get it?).

Simple tax returns usually consist of W-2 forms, dependents, and education credits. For the same price, OnePriceTaxes also handles more complex tax return filings, including those that have personal businesses, rental real estate properties, capital assets, itemized deductions, and alternative minimum taxes.

OnePriceTaxes is one of just 17 companies in the nation who handle the electronic filing of returns, and they have been actively e-filing returns with the IRS since 2007. Last year, the software operated in 35 of the 41 states that file income taxes and coverage is being extended to all 41 states within the next year.

There are three things in particular that we at Shoeboxed like about OnePriceTaxes:

1. Their “interview-style” data collection makes it a lot easier to gather the information you need to put in your tax forms, without having to decipher IRS-speak.

2. You can import data from tax returns filed in previous years with OnePriceTaxes or TurboTax. Why re-enter data that you have already entered before?

3. You can import all your expenses directly from Shoeboxed! Whether you have been submitting receipts to Shoeboxed since last year, or you are catching up last-minute by stuffing them all in one of our envelopes, Shoeboxed helps you maximize your deductions by making sure you don’t miss any deductible expenses.

Since Shoeboxed automatically assigns the appropriate Tax Category to each receipt, when you import them into OnePriceTaxes they will pop up at the right time. No hassle, just deductions!

Check out www.onepricetaxes.com, and if you haven’t tried Shoeboxed’s Premium service, make sure to start a 30-day Free Trial today. Only 54 days until Tax Day!

Stay Organized,

The Shoeboxed Team