As the cannabis industry continues to grow, understanding taxes is critical for both businesses and consumers. One of the most significant taxes in the cannabis sector is excise tax, which plays a major role in funding state programs and regulating the industry. Whether you’re a dispensary owner, distributor, or simply curious about cannabis taxation, this guide covers everything you need to know about excise tax on weed, including its purpose, how it’s calculated, and the latest state-specific rates.
What is Excise Tax on Weed?
Excise tax is a special tax levied on cannabis products, typically charged at the point of sale or distribution. Unlike general sales taxes, excise taxes are often included in the price consumers see, making them less obvious but still impactful. These taxes are designed to generate revenue for state governments and fund public services, such as education, healthcare, and substance abuse programs.
Who Pays It?
Cannabis excise taxes are usually paid by either the retailer or the distributor, depending on the state’s tax structure. However, the cost is ultimately passed down to consumers through higher product prices. Retailers and distributors are responsible for collecting and remitting these taxes to state tax agencies.
What is the Purpose of Excise Tax on Weed?
The primary purpose of excise taxes on cannabis is to generate revenue for state programs. These funds are often allocated to areas such as:
- Public health initiatives
- Education and youth programs
- Law enforcement and cannabis regulation
- Substance abuse prevention and treatment
Excise taxes also serve as a regulatory tool, helping to control pricing and curb black-market sales by legitimizing the industry.
The Tax Structure
Cannabis excise taxes vary widely by state, with each jurisdiction setting its own rules for how the tax is applied. Some states base excise taxes on a percentage of the retail price, while others use a weight-based or potency-based system. This variability can create complexities for cannabis businesses operating in multiple states.
How is Excise Tax on Cannabis Calculated?
The calculation of cannabis excise tax depends on the state:
- Percentage of Retail Price: Some states calculate excise tax as a percentage of the final retail price.
- Weight-Based Tax: Others tax cannabis based on its weight, such as per ounce or gram.
- Potency-Based Tax: A few states levy taxes based on the THC content of the product.
Cannabis businesses must carefully track their sales and ensure compliance with state-specific tax calculation rules.
Excise Tax Rates by State
Here’s a breakdown of excise tax rates in states with legal cannabis:
- Alaska: $50 per ounce for flower; $15 per ounce for trim
- Arizona: 16% of the retail price
- California: 15% of the retail price (plus additional cultivation taxes)
- Colorado: 15% excise tax on the Average Market Rate (AMR) of wholesale cannabis
- Connecticut: Based on THC content: $0.00625/mg for flower, $0.00275/mg for edibles, and $0.009/mg for concentrates
- Illinois: 10% of the retail price for flower, 20% for infused products, and 25% for products with over 35% THC
- Maine: 10% of the retail price
- Massachusetts: 10.75% of the retail price
- Michigan: 10% of the retail price
- Missouri: 6% of the retail price
- Montana: 20% of the retail price for adult-use cannabis
- Nevada: 10% of the retail price
- New Jersey: No state excise tax for retail cannabis; local taxes may apply
- New Mexico: 12% of the retail price, increasing to 18% by 2030
- New York: 9% state excise tax plus local and potency-based taxes
- Oregon: 17% of the retail price
- Vermont: 14% of the retail price
- Virginia: 21% of the retail price
- Washington: 37% of the retail price
Recent Changes in Cannabis Excise Tax Laws
Several states have recently updated their cannabis excise tax laws to adjust rates or simplify compliance. For example, California has streamlined cultivation taxes, and New Mexico has implemented a phased increase in its tax rate. Staying informed about these changes is crucial for cannabis businesses to remain compliant and optimize operations.
Exemptions to the Cannabis Excise Tax
Certain cannabis transactions may be exempt from excise tax. For example, medical cannabis sales are often exempt or taxed at a lower rate than recreational sales. Nonprofit organizations or government programs operating within the cannabis industry may also qualify for exemptions, depending on state regulations.
Cannabis Excise Tax Forms
Cannabis Retailer Excise Tax Return (CDTFA Form L-895)
Retailers in California use Form L-895 to report and pay their cannabis excise taxes. This form requires detailed sales information to ensure accurate tax reporting.
Cannabis Distributor Tax Return
Distributors must file specific forms in states where they are responsible for collecting and remitting excise taxes. For example, in California, distributors file separate tax returns to report their transactions.
Registration for Cannabis Excise Tax Permit
Cannabis businesses must register for a tax permit with their state tax agency to collect and remit excise taxes. Failure to register can result in penalties and fines.
Vendor Compensation Claim
In some states, vendors who collect and remit excise taxes may be eligible for compensation to offset administrative costs. This is typically a small percentage of the taxes collected.
Zero Return Filing for Cannabis Retailer Excise Tax
If no cannabis sales occur during a tax period, retailers may need to file a zero return to remain compliant. This ensures there are no gaps in reporting, which could trigger audits.
Frequently Asked Questions About Excise Tax on Weed
Are medical marijuana patients exempt from excise tax?
In many states, medical marijuana patients are either fully or partially exempt from cannabis excise taxes. For example, California exempts medical marijuana purchases from sales tax but still requires excise tax payments. The rules vary by state, so patients should check their local laws for specific exemptions.
Does excise tax vary by state or region?
Yes, excise tax rates and structures vary significantly by state and even by local jurisdictions. Some states calculate excise taxes as a percentage of retail price, while others use weight-based or potency-based systems. Regional taxes may also apply, adding complexity for cannabis businesses operating in multiple locations.
Is excise tax applied to all cannabis products?
Excise tax generally applies to all cannabis products, including flower, edibles, concentrates, and topicals. However, the specific tax rate or calculation method may differ based on the product type, with some states applying higher taxes to products with higher THC concentrations.
How does excise tax affect the price of weed?
Excise tax increases the overall price of cannabis products, as retailers typically pass the cost onto consumers. In some states, this can make legal cannabis significantly more expensive than black-market alternatives, posing challenges for both businesses and regulators seeking to maintain a competitive legal market.
Are there penalties for not paying cannabis excise tax?
Yes, failing to pay cannabis excise taxes can result in severe penalties, including fines, interest on unpaid amounts, and potential revocation of licenses. Cannabis businesses must ensure timely and accurate tax reporting to avoid these consequences.
What is the difference between excise tax and sales tax on weed?
Excise tax is typically applied at the production or distribution level and is often included in the price consumers see on the shelf. Sales tax, on the other hand, is a separate tax added at the point of purchase. Both taxes contribute to the final cost of cannabis products, but their calculation and application differ.
Can cannabis businesses claim excise tax deductions?
Under Section 280E of the federal tax code, cannabis businesses cannot deduct excise taxes as a business expense. However, strategies like structuring as an ESOP may offer potential avenues to mitigate overall tax burdens while remaining compliant with federal and state laws.