The laws around the recreational use and sale of cannabis have drastically changed since 2012 when Colorado and Washington became the first states to enact legislation. Now, 23 states have passed similar laws permitting recreational sales and that number could continue to grow in the near future. This new freedom around the sale of cannabis also brings new responsibilities as states are accompanying these laws with excise and sales tax policies to collect their fair share of the industry’s revenue. We recap some of those most recent changes in states cannabis taxes for 2023 and discuss the key issues that producers, retailers, and others in the cannabis supply chain need to understand.
Which States Have Recently Passed Legislation to Tax Cannabis in 2023
In 2023, the following states have enacted or started enforcement of laws to tax the sale of cannabis for recreational use:
- Delaware (HB 2): recreational sales will start in 2024 and retailers will be responsible for collecting a 15% tax on the retail sales price from consumers.
- Maryland (HB 556): Beginning July 1, 2023, the sale of adult-use cannabis is subject to a 9% tax.
- Missouri: Adult-use cannabis is subject to a 6% tax while medical marijuana has a special 4% tax rate applied to its sale.
- Rhode Island: A combined state and local excise tax of 13% applies to all retail sales of cannabis and is in addition to the state’s sales and use tax.
- Tennessee (Notice #23-12): Starting July 1, 2023, a 6% sales tax applies to hemp-derived cannabinoid products, which is combined with the state’s standard 7% rate for a minimum effective tax rate of 13%.
- Virginia: Cannabis sales will be subject to a 21% excise tax beginning January 1, 2024.
In addition to the above states, Ohio is set to vote on legalizing the sale of recreational cannabis this November and would implement a 10% excise tax if the ballot measure passes.
4 Issues to Consider for Compliance with State-Level Cannabis Taxes
The movement toward legalized sales of cannabis in the majority of U.S. states is an exciting time for dispensaries, retailers, and growers. While not as exciting, understanding your tax compliance obligations is a key aspect of operating you or your client’s business. Having a firm grasp on the issues could lower the risk of a state audit and provide useful context for when the help of a professional might be necessary.
1. Know Who Collects and Remits the Tax
States have varying approaches for deciding which level of the supply chain is responsible for collecting excise taxes on cannabis. Some states, like New York, place the burden on the distributor while others enforce the tax at the retail level. For example, California recently shifted the burden of its cannabis excise tax from the distributor to the retailer effective January 1, 2023. While the collection duties of excise tax could vary, the obligation to collect the standard sales and use tax for cannabis purchases will likely belong to the retailer that makes the final sale to a consumer.
2. Determine the Basis for Calculating the Cannabis Tax
Your next issue is figuring out how the state applies the excise tax to the cannabis being sold. Usually, this is done in one of two methods depending on the state’s rules and the type of the cannabis product. The tax rate could apply to the weight of the product or its sale price. The challenge for cannabis businesses here is knowing which basis method the state uses and the specifics of what ancillary charges may or may not be a part of the sale price for the purpose of calculating owed excise tax. The same issue exists in similar markets, such as the sale of tobacco products.
3. Know when the Cannabis Taxes and Corresponding Tax Returns Are Due
Most cannabis excise taxes and accompanying returns will be due the month following the reporting period. For example, the tax return for January’s sales could be due in February. Knowing this cycle is important for your company’s cash flow planning and for limiting the chances of a late payments or filings that could incur unnecessary interest or penalties for the state revenue department.
4. Apply Any Exemptions that Could Reduce Owed Cannabis Tax
A final issue worth mentioning is the potential for excise tax exemptions that could apply to your company’s sales of cannabis and related products. The most important of which is the possible distinction between recreational (i.e., adult-use) and medical sales of cannabis. Some states completely exempt qualifying medical sales while others might only offer a reduced tax rate on the sale (e.g., Missouri). Beyond the exemption for medical use, you may have other exemptions for products that do not meet the state’s definitions of taxable cannabis products. For example, because of the requisite amount of THC the product must contain to be taxable.
Questions About Your Cannabis Sales and Excise Tax Obligations?
The novelty of legal cannabis sales and their accompanying excise taxes will be a period of transition for taxpayers and revenue departments as issues and uncertainty with enforcement are sure to arise. If you have doubts or concerns about your cannabis excise tax responsibilities in a particular jurisdiction, please do not hesitate to contact us for a free consultation. Additionally, if you think you may have overpaid on cannabis taxes, now is the time to confer with a professional about possible refund opportunities before the limitation on refund claims expires.