The United States has quickly become a hub of the legalized cannabis market. In 2017, the U.S. cannabis market was valued to be worth $8.5 billion and responsible for 90 percent of recreational cannabis production globally.
Nine states, the Northern Mariana Islands and the District of Columbia have legalized recreational cannabis, of which seven states have regulated markets. Other states face challenges for creating a regulated market to bring in tax revenue and economic benefits.
Each state with a regulated market has made several large decisions, including whether to impose excise or sales taxes, at what points the cannabis product is taxed, and then how the revenue will be spent in each state.
Here’s a breakdown of the sales and excise taxes that apply to the cannabis industry of each state, district or territory:
Alaska voted to legalize cannabis for recreational consumption with Ballot Measure 2 in 2014, and levied a wholesale tax on cannabis sold in the state. The tax is collected from the licensed cannabis cultivation facilities when the cannabis is transferred from the cultivator to the retailer or a cannabis product manufacturing facility. Cannabis flower is taxed at $50 per ounce, and trim, stems or leaves are taxed at $15 per ounce.
Alaska has no retail state taxes at the point of sale, but several municipalities do. For instance, Anchorage passed Proposition 2 in 2016 and imposed a five percent sales tax on cannabis and cannabis products in the city. Industrial hemp is not subject to the sales tax.
According to the Alaska Department of Revenue – Tax Division, the state collected over $1,700,000 in tax revenue in 2017, and as of June 30 of 2018 had collected over $11 million from the cultivators in tax revenue.
As of Jan. 1, when California’s Proposition 64 took effect, taxes on retail and cultivation operations also took effect. Cannabis cultivators, processors, manufacturers, retailers, microbusinesses and distributors in California must register with the California Department of Tax and Fee Administration (CDTFA) and receive a seller’s permit. Distributors must also obtain a cannabis tax permit from the CDTFA.
For both medical and recreational cannabis, a 15 percent excise tax is imposed at the point of sale. Recreational consumers pay the state’s general 7.25 percent sales tax plus the excise tax. The sales tax is made up of six percent state tax and 1.25 percent municipality or county tax. Medical patients are exempt from the state sales tax.
The cultivation of cannabis is taxed at $9.25 per ounce of dried bud or $2.75 per ounce of dried leaves. The state excise tax revenue goes toward cannabis research, health department programs and a portion will go towards research on testing for impairment while driving under the influence of cannabis.
Colorado residents pay for local, state and excise taxes on recreational cannabis. Colorado’s state sales tax on general goods is set at 2.9 percent, but on July 1, 2017, the state announced that recreational cannabis companies would be exempt from the general sales tax and replaced with an increased cannabis sales tax. Colorado raised its state retail cannabis sales tax from 10 percent to 15 percent also on July 1, 2017.
The state levies a 15 percent excise tax on cultivators and collects the tax when cannabis is shipped out to manufacturing facilities or dispensaries. Most consumers don’t see the amount of excise tax in the price they pay because it’s already been added. The state keeps 90 percent of the tax revenue while 10 percent goes to the local government. In addition, and effective on Dec. 1, “sales tax must be collected and remitted based on the jurisdiction’s tax rate at the point of delivery,” when cannabis is delivered to another location outside of the retailers’ jurisdiction, according to the Colorado Department of Revenue.
The average local sales tax for the state is just above 6 percent, but the highest local sales taxes in the state is Winter Park at 11.2 percent. Denver has a more reasonable 7.65 percent sales tax rate. Medical cannabis customers just pay the state’s general 2.9 percent state sales tax and any local sales taxes that apply.
Maine legalized cannabis for recreational consumption in 2018 with Question 1, overriding Gov. Paul LePage’s veto, but still has not established a regulated market. With the new legislation, the state imposed a 10 percent sales tax on recreational cannabis. Maine imposes a 5.5 percent sales tax on general purchases, so the combined tax rate on cannabis is 15.5 percent. Medical patients pay no taxes. Maine also has set excise taxes at the cultivator level, taxing $335 per pound of cannabis flower or mature plants, $94 per pound of trim, $1.50 per seedling and 30 cents per seed.
The state recently announced that consultants who want to write the rules and regulations for recreational cannabis sales could submit proposals before Nov. 1, with the rules taking effect before next May.
Massachusetts planned on collecting tax on cannabis in July of this year after its recreational initiative Question 4 passed in 2016, with an increased excise tax on cannabis at 10.75 percent. However, the state only recently began awarding licenses for dispensaries, missing out on an estimated $16 million in tax revenue so far.
On top of that, the state sales tax is set at 6.25 percent and local municipalities can tax up to three percent on retail sales, bringing tax up to 20 percent on cannabis in the state. Boston is one of the cities that will be collecting a local three percent tax on cannabis sales.
Massachusetts has missed out on potentially $16 million in tax revenue from recreational cannabis due to delays, and state officials are counting on $63 million in revenue from cannabis to balance the 2019 budget.
Nevada imposes a 15 percent excise tax on wholesale cannabis paid at the point of retail by cultivators. The state also imposes a 10 percent retail tax on cannabis and cannabis products at the point of sale, plus any local sales tax. Medical cannabis patients pay only a two percent excise tax on cannabis.
Nevada imposes a 6.85 percent sales tax on general goods, and cities and counties with approval can charge an additional tax up to 1.25 percent. Las Vegas imposes 8.25 percent sales tax on top of the cannabis taxes and for all other applicable retail purchases.
Nevada collected $69.8 million in tax revenue during the first year of recreational cannabis sales, almost 50 percent more than expected. Wholesale tax revenue goes mainly to education through the Distributive School Account. Sales tax revenue goes to the state’s Rainy Day Fund, which helps the state protect itself against economic downturn.
Oregon levies a 17 percent sales tax on recreational cannabis in the state. Local governments can also add a three percent tax upon voter approval. Some cities have moved forward and imposed their own taxes. Medical patients are exempt from tax at the point of sale.
The collection of cannabis state tax first overwhelmed the Salem tax office because taxes were often delivered in cash and required an appointment. Per Measure 91, 40 percent of the state tax revenue goes to the state’s Common School Fund, 20 percent goes to Mental Health Alcoholism and Drug Services, 15 percent foes to state police, and 10 percent goes to local governments and law enforcement. Five percent also goes to Oregon Health Authority for drug prevention.
After several previous attempts to legalize or regulate cannabis, Vermont legalized the possession of up to one ounce of cannabis for recreational consumption in July through legislature. Unfortunately, a bill that was created to tax and regulate cannabis in the state died in the House leaving no place to legally purchase cannabis in the state.
Last year, Gov. Phil Scott created an advisory commission to study various concerns about the cannabis industry. The commission so far has announced that it expects $15-20 million in tax revenue per year and could use the revenue to fund education, health and highway programs. Democrats used the promise of regulation and taxation of cannabis in the state as a selling point of their platform for the November election.
Vermont taxes general retail sales at a rate of six percent, with some cities like Dover collecting up to one percent more in local taxes for a maximum seven percent sales tax on retail purchases.
Medical cannabis patients are exempt from the sales tax.
The 37 percent excise tax imposed on medical and recreational cannabis is easily the highest tax rate in the United States. However, it was a desired change by cannabis stores to correct the previous tax structure, which required stores to report some of that as income for federal purposes. Medical cannabis patients are exempt from the addition eight percent sales tax on general goods in the state.
Previously, a 25 percent excise tax was collected from the producers, processors and retailers. Now, the one-time 37 percent tax is collected from retail establishments at the purchase of any cannabis or cannabis products. Recreational consumers pay a total of 45 percent sales tax.
Fifty percent of the cannabis tax revenue goes to the Basic Health Care Trust Fund Account, which helps pay for a portion of the state’s Medicaid healthcare costs. The rest is dispersed to several other several health and government programs.
The Northern Mariana Islands
Tax rates are currently being developed, but some details have been released. Per the passage of House Bill 20-178 on Aug. 30, the territory’s legislature has been directed to enact sales taxes on all cannabis from producers, as well as an excise tax on recreational cannabis at the point of sale. Medical cannabis patients will be exempt from the excise tax.
District of Columbia
Cannabis is legal for recreational consumption and possession of up to two ounces is legal for adults 21 and over after Initiative 71 took effect Feb. 26, 2015. There are no taxes collected from medical cannabis patients and no regulations are set up for the sales and distribution for recreational consumers.
Unfortunately, the United States Congress has oversight of the D.C. local government, so regulating it in stores when it’s still illegal under federal status is nearly impossible.