To best tax marijuana products equitably and stably, policymakers should stay away from ad valorem taxes despite their simplicity. Using weight or potency as a base makes for a more neutral tax while providing a more stable revenue stream Accounting for Churches for governments. The strategy of facilitating affordable accessible marijuana seems to have worked in Colorado, Oregon, and Washington, where legal sales have successfully outcompeted the illicit market—at least to a certain degree.
Pass-Through Business Deduction (Sec. 199A Deduction)
In 2019 a study of California suggested that illegal cannabis sellers outnumbered legal ones by almost 3 to 1. Additionally, cannabis taxes should be levied early in the value chain, similar to alcohol and tobacco excise taxes, to limit the number of taxpayers. Excise tax revenue should be appropriated to relevant spending priorities related to the external harms created by marijuana consumption, such as public safety, youth drug use education, and cessation programs. While the recommendations presented in this paper are relevant for all states, some will find changing current marijuana tax policy very difficult. Because most of the legalizations are approved by voters, lawmakers often have limited options when designing tax policy.
The Grinch Stole SAFE Banking from the Cannabis Industry This Christmas, Yet Again!
- It also eliminates the valuation problem for vertically integrated companies, which, in an ad valorem system, would have to compute the taxable value in the absence of a transaction and contract price.
- The 25 percent rate in the CAOA, on the other hand, would ultimately tax cannabis more highly than beer, wine, liquor, and cigarettes.
- 17 THC content is generally used to define potency of the marijuana product even though there are other compounds in the plant which may influence the effects on the user.
- Meanwhile, Arizona imposes a 16% tax on sales of cannabis, in addition to a transaction privilege tax and a use tax.
- First introduced in 2019, the SAFE Banking Act sought to provide protections for banks that serve legal cannabis businesses by preventing federal regulators from penalizing them for doing so.
Quantity-based taxes also help better align the tax base to the tax’s purpose than ad valorem taxes. Price-based taxes also capture a relatively consistent percentage of overall spending in the market. The rates do not need to be adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
Best Practices for Cannabis Taxation
A small portion of the funds already goes toward a marijuana compliance enforcement position at the Grand Junction Police Department. The move to get Grand Junction into the recreation marijuana market came when voters approved retail marijuana in the city in April 2021. After the first retail recreation marijuana dispensary opened in October 2023, the market in Grand Junction has stabilized. The recommendation includes examples of THC content ranges and multipliers, but these should be reviewed by each legalizing jurisdiction as they may not represent the market situation in a given jurisdiction. Voters approved legalization with Ballot Proposal 1 in November 2018 (56 percent to 44 percent).
Recreational cannabis is on the ballot in five states this November—Arkansas, Maryland, bookkeeping Missouri, North Dakota, and South Dakota—giving voters the ability to join 19 states that have already legalized recreational marijuana. Contrary to popular thought, excise taxes are not great sources for general revenue, as their tax base is much narrower than sales or income tax, and also less stable. A business involved in the sale or disbursement of medical marijuana can be subject to various Pennsylvania taxes, such as a gross receipts tax, personal income tax, corporate net income tax, etc., depending upon its business type and activities. For both a weight and a potency-based tax, it will be necessary to develop and define tax categories to ensure equitability. The tax should be levied early in the value chain similar to alcohol, gas, and tobacco taxes to limit the number of taxpayers.105 Limiting the number of taxpayers is important because fewer taxpayers make less work for both government and industry. There are also increasingly popular products which are either low- or no-THC (for instance, CBD and THCa).
Businesses can do this by regularly consulting with tax professionals, attending industry events, and subscribing to relevant industry newsletters. While federal taxes can pose significant challenges for cannabis businesses, state, and local taxes are cannabis accounting no less complex. Each state has its unique set of rules and rates, making it crucial for companies to fully understand their specific state’s tax requirements. The solution to marijuana taxation is to tax by potency where possible, and weight where THC content is impractical to measure.
Is there a sales tax?
If you are unable to comply with the electronic payment method, you must notify the Pennsylvania Department of Revenue 30 days prior to the payment due date. There is a 5 percent tax on the gross receipts received from the sale of medical marijuana by a grower/processor to a dispensary. Lastly, there is still much we do not know about the impact of different THC delivery methods. For instance, would a tax that encourages vapor liquid with low THC be counterproductive relative to a tax that encourages almost pure THC? If the other ingredients in THC vapor liquid are more harmful than THC itself, then the tax should encourage low-volume, high-THC compounds—not the other way around.