Cannabis and Taxes: Everything You Need to Know About Marijuana Tax Law
If taxes and accounting are not with your purview, then you probably dread dealing with them even in the simplest situations. And if you operate or are considering starting a cannabis business, then the situation is certainly not simple.
While states that legalized marijuana happily levied taxes, business owners found themselves in uncharted waters.
Each state has its own set of tax rules and obligations for cannabis growers, retailers, and purchasers. And that is to speak nothing of the complications at the federal level.
To run a successful business while remaining on the right side of the law, you'll need a thorough understanding of marijuana tax law and how it relates to your business. The first step is figuring out what taxes you owe to which level of government.
Marijuana Tax Law at State and Federal Levels
Like any business, cannabis growers and dispensaries pay taxes to the state and federal governments.
But unlike running a burger stand or a coffee shop, cannabis is subject to distinct taxes that vary substantially from one region to another. And the fact that it is still considered illegal at the federal level carries tax implications as well.
Dealing with your taxes as early as possible is a wise decision in any case. But with the complications that can arise in this young industry, you especially don't want to come down to the wire only to realize that you have no idea how much you owe.
The most complicated aspect is...
Navigating State Marijuana Tax Law
There does not exist any unified tax schedule for marijuana. Each state levies its own set of taxes as it sees fit.
Washington, for example, imposes taxes on anyone who holds a license to produce, process or distribute marijuana. All licenses holders are also subject to an excise tax whenever marijuana is transferred from one party to another. Retailers must additionally collect an excise tax on all sales in addition to the standard state sales tax.
Colorado maintains distinct tax guidelines for recreational and medical marijuana. Sales of either require a unique license. This can complicate matters for dispensaries that handle sales under both categories.
Medical marijuana is subject to state and local sales tax. Recreational marijuana is as well, plus its own marijuana sales tax. The dispensary must collect all applicable taxes.
California is another example. Marijuana retailers must acquire a permit to sell marijuana. And in addition to collecting standard sales tax, they must impose an excise tax on each transaction.
Fortunately, most states that have legalized marijuana have made comprehensive guidelines of all permit fees and distinct taxes that business owners are responsible for.
But business owners will be required to maintain stringent point-of-sale records to keep track of the taxes owed. They should also communicate the fees and taxes to customers. Those charges add up and can cause significant sticker shock.
Federal Tax on Marijuana
Though marijuana is still illegal at the federal level, federal income taxes are still owed on all money made from its sale. The reason is that, even if the income is deemed to have come from an illicit source, it's still income.
During Prohibition, prosecutors famously used tax evasion charges to lock up bootleggers like Al Capone. As their business was illegal under federal law, they claimed that they had no legal income. Try to skirt paying federal taxes on cannabis sales and you risk meeting similar consequences.
Further, there is a 1982 law prohibiting tax deductions for trade in illegal drugs. Under this law, marijuana-based businesses are disallowed from writing off business expenses.
Though the IRS has provided guidelines on how marijuana businesses can handle deductions, they're effectively theoretical at this stage and the agency still enforces the aforementioned ban.
Bottom line: selling marijuana is not considered a legal business, and does not qualify for tax credits or deductions. But income is income, and they want their share.
It's Your Responsibility to Know the Law
It's up to you to do your due diligence.
The ignorance that you were supposed to be collecting a certain duty won't spare you that debt. And you can't count on the IRS to be sympathetic if you neglect to report your earnings.
But it is certainly manageable. Taxes are never fun, to begin with, so don't let them scare you away from a burgeoning industry.
For more tips on accounting and getting through tax time, check out our other articles.