Medical marijuana is legal in the majority of the United States. This is a profitable and highly sought industry due to increased accessibility across the country. Cannabis is an expensive industry to break into and many new businesses are failing before they even become established. This is because many entrepreneurs are ill-prepared for the financial burden of tax season.

Saving money throughout the year for taxes is an important part of financial preparation. Medical marijuana businesses will need to estimate the amount that they will owe in taxes. But how do business owners determine the amount they will owe in taxes?

The following guide will help those in the cannabis business determine their taxes owed by estimating their medical marijuana tax. This information can help businesses be prepared for a less stressful, more organized tax season.

Taxes for Cannabis Industry

medical marijuana taxes

The insane rate at which cannabis dispensaries are taxed is a threat to business owners in the industry. There are few deductions that cannabis businesses can take. This is because marijuana is legal on a state level, it is still illegal on a federal level. This is an ongoing injustice suffered by cannabis businesses that will hopefully be resolved in the future.

For now, businesses are forced to find loopholes and prepare for tax season. Not being financially prepared could mean the death of one’s business.

Records are Critical

Businesses in the cannabis industry are watched closely by the IRS. This means that they are more likely to be audited and suffer from hefty fines and penalties for inaccuracies. This is why it is crucial that cannabis businesses keep detailed and thorough records of every aspect of their sales and expenses.

The IRS knows that cannabis businesses are often forced to deal in cash, due to difficulties banking, or local and/or state laws. Not reporting income is a federal offense that can potentially destroy your business. Be sure that all sales are recorded.

You must all keep track of all expenses because this can help your accountant find tax breaks that can save you a substantial amount of money. This means that it is crucial to record everything that is an expense for your business, no matter how insignificant it may seem. Your financial advisor will be able to determine which expenses are relevant.

Cannabis Excise Tax

An excise tax is a tax that is charged on specific products. Cannabis is taxed at a high rate that is determined by state laws in which the business operates. These tax rates are in addition to sales, local, and state taxes, making it easy for these totals to add up.

Medical Marijuana Tax is Significantly Lower

medical marijuana tax regulation

The good news for those with a medical marijuana dispensary is that these purchases are usually taxed at a minimal or no additional tax rate. This is a dramatic difference compared to the high rates charged for adult recreational use, which is often taxed up to 35%.

There are states in which no excise tax is charged for medical marijuana. These are typically states where marijuana is not legally recreationally and is only used for medicinal reasons.

Some customers who were once medical marijuana patients choose to purchase it recreationally to avoid to hassle of getting their marijuana card recertification. This makes them liable for paying the excessive non-medical tax rate.

Tax Rates Vary Greatly

medical marijuana taxes by state

How much is necessary to charge for medical marijuana tax will depend on the location of your cannabis business. Remember that these taxes are in addition to other local and state taxes.

  • In California, medical marijuana is subjected to a 15% cannabis excise tax.
  • Oklahoma charges a 7% cannabis tax.
  • Colorado charges a 2.9% excise tax.
  • Illinois charges a 1% excise tax for medicinal marijuana.
  • Montana charges a 4% excise tax.
  • New Jersey is currently charging a 2% excise tax. This is expected to be eliminated in the summer of 2022.
  • New York charges a 7% excise tax but are not subjected to other taxes.
  • New Mexico and West Virginia both require business owners to pay a gross receipts tax. This is something that business owners should account for when pricing their products. You can find more information about these taxes for New Mexico on their cannabis website. Virginia’s cannabis tax information can be found here.

The following states do not charge a cannabis excise tax for medical marijuana:

  • Connecticut
  • Delaware
  • Hawaii
  • Florida
  • Iowa
  • Maine
  • Maryland
  • Massachusetts
  • Missouri
  • Nevada
  • North Dakota
  • Ohio
  • Oregon
  • Pennsylvania
  • Rhode Island
  • Utah
  • South Dakota
  • Vermont
  • Washington

Although these states do not charge an excise tax, purchases are still subjected to local and state sales taxes.

In Louisiana, Minnesota, New Hampshire medical marijuana purchases are not subjected to any taxes.

Calculating Medical Marijuana Taxes

how to calculate medical marijuana tax

Once you determine the rate at which medical marijuana is taxed in your state you can calculate the total tax rate that is necessary. Each state has a unique sales tax that must be considered and combined as well.

Including this minimum tax rate in your product pricing is the smartest way to avoid any financial issues.

Paybotic Provides Payment Solutions

cannabis payment processing

Remember that it is important to hire a tax professional who is experienced in medical marijuana tax codes in your state. These professionals will know everything they need to know about industry-specific laws to save you money.

Paybotic is the financial solutions leader for cannabis businesses throughout the United States. They offer cannabis-specific technologies, products, and services, including electronic payment options. Reach out to Paybotic today for more information about their services.

Post date: 9/3/2021
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