Tax relief

Know How to File: A Guide to Marijuana Tax Law

written by Claudia Grant
reviewed by Robin T Young
May 5, 2021

Filing taxes is already stressful enough without struggling to understand marijuana tax laws. And, if you run a dispensary, the reality is that you need to have a strong understanding of these types of laws.

While recreational and medical marijuana tax law can be a bit complicated, with the right guidelines you’ll be able to file your taxes properly. That will save you costly audits by the IRS!

So, if you’re wanting to get your taxes filed with the IRS correctly right off the bat, you’re in the right place. Let’s jump into marijuana tax law and help you navigate filing your taxes this year.

Where Marijuana Is Taxed

As we all know, marijuana is not currently legal under the federal government. What that means for businesses is that they’ll be taxed under state and local tax laws.

However, several states have made buying and selling marijuana legal. And, with those legalities come taxes. There are currently 33 states that allow for legal sales of marijuana.

Not all states have the same rules though. In the following states you can buy marijuana recreationally:

  • Alaska
  • Arizona
  • California
  • Colorado
  • Illinois
  • Maine
  • Massachusetts
  • Michigan
  • Montana
  • Nevada
  • New Jersey
  • Oregon
  • South Dakota
  • Vermont
  • Washington

Other states won’t let you buy and sell marijuana for recreational use, but you’re still able to purchase it medically. These states still have medical marijuana taxes in place so it’s important to know which states these are. States that allow only for medical marijuana include:

  • Arkansas
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Louisiana
  • Maryland
  • Minnesota
  • Mississippi
  • Missouri
  • New Hampshire
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Utah
  • West Virginia

Understanding which type of marijuana laws are applicable to your home state can help you get a better understanding of what type of tax you’ll need to adhere to. This in turn makes it easier for you to file your taxes going forward.

Evaluate your tax situation

By evaluating your tax situation, you can identify areas where you may be able to reduce your tax burden and make informed decisions about your financial future.

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Methods of Taxing Marijuana

Right now, there are currently three different ways that states may tax marijuana sales. Sometimes, states will combine these three methods, so it’s important to have a solid understanding of the following methods.

Based on a Percentage of Wholesale or Retail Price

The first way that state and local governments may choose to tax marijuana is similar to how they tax other retail sales. In this case, the tax is levied on the purchase price and the seller will then send it to the state.

Some states base the price percentage on the wholesale cost of the product. In this case, the state assumes that the cost will be reflected in the final price presented to the customer. Some localities may also have their own percentage tax, but it usually comes with a maximum amount.

Based on the Weight of a Product

Some states choose to forgo the percentage tax and instead use a weight-based tax. These taxes work similarly to the way that cigarette taxes do.

With this type of tax, the amount of tax that the state or locality levies are based on how much the marijuana or marijuana product weighs. Typically the amount of tax will vary depending on what type of product is being sold.

State and local governments tend to assume this tax gets passed to the consumer in the final sale. That means that they’re anticipating sellers will markup products to account for the tax.

Based on the Potency of a Product

Another type of marijuana tax is based on the potency of the marijuana product. Similar to how some alcohol taxes are based on the alcohol percentage of the drink, this tax is based on the THC content of a product.

As of right now, the only state that uses this method of taxation is Illinois. It taxes 10 percent for products that are 35 percent or less THC and 25 percent for anything higher than that amount.

However, this state uses a blended method of taxation. With anything other than buds or leaves, products are taxed at a flat 20 percent of the final price.

How Marijuana Tax Dollars Are Put to Work

Paying taxes can sometimes feel like throwing money into a black hole. However, the truth is that the government uses the money received from taxes to help pay for important programs.

This is also true at the state level. States that levy tax on marijuana currently dedicate a portion of their marijuana tax revenue to very specific programs. The state programs that are currently being supported by marijuana tax are:

  • Alaska: reducing repeated criminal offenses
  • California: administrative costs of legalizing marijuana, anti-drug youth programs, and other drug use related programs
  • Colorado: funding educational programs
  • Illinois: paying for legalization costs, preventing substance abuse, and supporting criminal justice reforms
  • Maine: supporting law enforcement training and public health programs
  • Massachusetts: supporting public safety programs
  • Nevada: supporting educational programs
  • Oregon: supporting drug prevention, drug treatment programs, and educational efforts
  • Washington: funding health care programs

Understanding where your tax dollars are going as you pay taxes on marijuana products can help you not only feel better about filing your taxes but also to understand what your state is doing to support you.

Many states use marijuana taxes to support anti-drug programs or to directly offset related costs from legalizing marijuana. This means that they’re using your tax dollars to continue supporting your business and the continued economic boosts brought about by marijuana!

Closing Thoughts on Marijuana Tax Laws

Understanding the basics of marijuana tax laws is what makes tax season easy. And, when you have the right information at your disposal, you’re able to quickly get your taxes filed and start planning for the next fiscal year.

If you’re getting ready for tax season or simply want help making sure everything is in check for next year, you’re in the right place. The team at Tax Relief Professionals is here to support you with your finances.

Use our expert tax advice and get the support you need to be successful. Contact us today! We’re here to help you at all costs.

Claudia Grant

Claudia Grant is a seasoned financial expert with a rich and diverse background. Holding a Master of Science in Taxation, Claudia's 15 years as a CPA and ten years as a financial manager have shaped her into a true industry authority. Departing from the traditional office setting, Claudia now thrives as a tax and financial consultant, catering to a wide array of companies. Her passion for sharing knowledge shines through her insightful articles, where she breaks down complex financial concepts into simple pieces. Claudia's expertise and dedication make her an invaluable resource for businesses seeking adept financial guidance in an ever-evolving landscape.
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