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Are you someone who owns a licensed cannabis dispensary? If that’s the case, we bet that you’re tired of calculating how much tax you should charge per sale. Imagine this, it’s a busy day at the shop where customers are filling in to buy their favorite cannabis products.
But wait a second, a customer comes up to the front desk, and buys cannabis worth $25 but gets utterly shocked when you tell them that their total is about $35. There’s no way someone is going to be comfortable while paying this much tax on their original purchase.
In states like California and Michigan, these kinds of price hikes are pretty common as many forms of taxes are imposed on cannabis products either in a subtotal format or a cumulative format.
To help you better understand what exactly these taxes are and why are they imposed in the first place, here’s a brief overview of all cannabis-related taxes in the US.
Historical overview of cannabis taxes in the US
The Marijuana Tax Act of 1937 was the very first legal act that was implemented throughout the US. As per the act, cannabis was officially outlawed within the country, even for medical use.
But things started to shift towards a positive outcome when the state of California legalized cannabis back in 1996. This opened a new revenue stream for the state as the sale of medical cannabis came under the tax net. In more years to come, 37 states also joined California in this initiative and sales of medical cannabis (recreational cannabis as well in about 23 states) came under the state tax net till 2023.
What happens if you don’t pay the cannabis sales tax?
Well, the penalties for not paying cannabis sales tax vary depending upon the state in which your dispensary is operational. But in most cases, you’ll be charged around 50% as a fine for not successfully paying the cannabis sales tax. Failing to do so can further worsen the situation and you can be charged for evading tax under the state’s tax evasion laws.
Different types of taxes imposed on cannabis sales
If you’re working in the cannabis retail industry, the following are some of the taxes that you’ll be dealing with quite frequently,
1. Excise Tax
The excise tax is more of a business tax imposed on cannabis products that are going to be distributed to the customers. The excise tax is a must and the amount collected as a result of it contributes to multiple state funds for mental health disorders, environmental measures, and further cannabis research.
In a state like California, a customer is expected to pay around 15% in excise tax that will be added to their final receipt. The percentage of excise tax varies from state to state.
2. Sales Tax
The sales tax is one of those taxes that we all are used to pay with each of our purchases. In the cannabis industry, customers also have to pay a sales tax on each item purchased. The percentage of the tax depends upon the city or state you’re making the purchase in, as well as whether you’re a medical cannabis user or a recreational cannabis user.
In Oregon, the sales tax percentage is 17% while medical cannabis users in Montana only pay around 4% in sales tax.
3. Local Business Tax
The local business tax is usually charged by the local government in the area. The local governing body also gets the right to exempt the local business tax completely. Usually, medical cannabis users are exempted from paying local businesses or have to pay a very small percentage. The tax collected through this channel usually funds various local government projects and initiatives in favor of the community and its people.
It is important to note that the taxation principles for cannabis-related items are different from conventional everyday-use items. In most cases, the tax won’t be charged on the subtotal but a cumulative tax system will be used to determine the amount of tax you’ll be paying with each of your purchases.
Calculating Cumulative Tax: The Ultimate Guide
Apart from the types of taxes, you’ll be paying with each of your cannabis-related purchases, the mode through which your tax is calculated will also determine the amount of tax you’ll be paying in the end.
States like Oregon, Colorado, and Massachusetts charge taxes against the subtotal while states like California and Michigan calculate tax against the gross receipt plus applied tax, which is called a ‘cumulative’ tax calculation method.
Here’s an example that shows how cumulative tax and subtotal tax affect your final payable amount after a purchase,
Let’s consider that you have purchased cannabis products worth $25. Now, with a subtotal tax calculation method, you’ll be charged, a 15% excise tax ($3.75), 7.75% sales tax ($1.93), and a 5% local business tax ($1.25) totaling the amount payable to $31.93 out of which $6.93 is the total tax.
But now let’s recalculate the tax using the cumulative tax calculation methods. For a cannabis purchase worth $25, you’ll be paying 15% excise tax ($3.75), 7.75% sales tax (($25 + $3.75 = $28.75), and [7.75%($28.75) + $28.75 = $30.97]), and a 5% local business tax (5%($30.97) + $30.97 = $32.52) totaling the amount payable to $32.52 wout of which $7.51 is the total tax.
How to become tax-compliant efficiently?
As a dispensary owner, keeping a track record of taxes and managing everything can be a tricky job. Just keep these few points in mind and we believe that you’ll do an excellent job,
1. Understanding the local tax laws
Cannabis taxes are quite complex and if you’re well aware of them, you can eventually get in legal trouble for not filing your tax returns truthfully. That’s why, it is important to know about the local tax laws and how you should be implementing these laws in your cannabis retail business.
2. Setting an order of operations
When you’re responsible for managing tax-related operations in your dispensary, we would advise you to invest in a dispensary management system that will keep a record of each sale made and will also be responsible for managing the tax-related calculations. Plus, such a system hardly needs any professional help to operate.
3. Keeping a record of transactions
Let’s suppose that you’re not interested in a dispensary management system and like to do things in an old-school way. That is fine as long as you’re keeping a record of each purchase and transaction made. This record will be of huge importance when you witness a conflict in transactions and will need some proof to know the right transaction amount.
4. Be fair and transparent with your customers
As a responsible cannabis dispensary owner, we expect you to be fair and transparent with your customers. When a customer asks, make sure to guide them properly through the local tax laws and how taxes will affect their purchase in total.
5. Stand for what’s right
Even though you’re legally bound to implement state or local government-imposed taxes, do not forget to stand for what’s right. If you think that a certain tax is way too much, raise your voice and register your concerns on the matter. Remember, all it takes is one step at a time to complete a marathon.
Final Note
Cannabis laws within the US can be tricky and for someone who is in the retail business, keeping a record of these taxes is way more important than you think. Do your research, apply effective tactics, keep a record of each transaction, and raise your voice if anything unfair happens, this is all that you need to successfully run a tax-compliant cannabis dispensary.
