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.
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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- Bookkeeping For Cannabis Industry Must-knows 4 Proven Best Practices
- Business Finance 101: Your Complete Guide to Different Types of Taxes in the US
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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