Starting a Marijuana Business: Tax Issues to Know
The legalization of marijuana has provided a new source of tax revenue for state governments. Now, not only are there legal marijuana businesses, but there are also marijuana business taxpayers.
Business owners know how confusing tax laws are. They are especially complex for those trying to figure out tax obligations of their cannabis business, such as a grower or dispensary. Tax implications vary depending on the different types of cannabis products sold, such as flowers or edibles. But cannabis is still a controlled substance according to federal law. This makes tax compliance even more confusing.
State and federal taxes apply when you start a business in a cannabis industry state that has legalized adult-use marijuana (such as Colorado, California, or New York). State and federal taxes apply to your sales. It is also important to know possible tax credits and deductions that apply to your cannabis business.
State Taxes on Marijuana
States that have legalized marijuana subject marijuana businesses to various taxes. Although marijuana tax rates vary from state to state, each state taxes the retail sale of marijuana in some way. All states impose a sales tax on marijuana. Some states also impose an excise tax. Alaska imposes an excise tax on the transfer or sale of marijuana from a cultivation facility to a retail store.
In Washington, a person who holds a cannabis cultivation, processor, or retailer marijuana business license is subject to a business and occupation tax. This applies to the business's gross receipts. The business owner must also collect sales tax on retail transactions and pay it to the Washington State Department of Revenue.
Colorado requires marijuana retailers to have a sales tax license. If a business sells medical and retail marijuana, then the business must have a sales tax license for each type of marijuana. This applies even when a location sells both medical and retail marijuana. Colorado requires a business engaged in selling medical marijuana to charge a state sales tax plus local sales tax. Selling retail marijuana requires the business to charge a state sales tax, a state marijuana sales tax, and any local sales taxes.
California also imposes taxes on marijuana. A business that sells marijuana must register with the California Department of Tax and Fee Administration (CDTFA) for a seller's permit. It must also file routine tax returns. California imposes a 15 percent excise tax upon purchasers of marijuana. California also imposes a cultivation tax upon marijuana cultivators that grow the crop. This cultivation tax is only imposed on harvested cannabis that enters the commercial market.
It's important to research your particular state's marijuana laws if you're considering starting a marijuana business. States have their own laws and regulations. Check out this state-by-state guide on marijuana tax rates and laws.
Marijuana Business and Federal Taxes
Generally, a business can make various tax deductions for money spent on business operations. A business expense is tax deductible if it's an "ordinary, necessary, and reasonable" expense for the business. These deductions allow a business to lower profits and pay less in taxes. This allows a business to pay taxes on net income instead of gross income.
Operating a marijuana business limits tax credits or deductions. Marijuana businesses cannot use any that are available to other types of businesses. This is because a federal law in Section 280E of the Internal Revenue Code, still enforced by the Internal Revenue Service (IRS), bans all deductions and tax credits for the illegal trafficking of drugs. Since marijuana is still illegal under federal law, selling cannabis as a business is illegal drug trafficking. The IRS has provided some guidance on how marijuana businesses can deduct from the cost of goods sold. Guidance is a suggestion, not a law or precedent.
The IRS doesn't recognize marijuana businesses as legal for tax purposes. However, nuanced laws about medical cannabis products and medical marijuana dispensaries exist. So, why would anyone have to pay taxes on a business that the government doesn't even consider legal? It's still income, and everyone who earns an income must pay an income tax. If a person doesn't report the money they make from their marijuana business, even cash payments, then the IRS can prosecute the person for tax evasion.
- Marijuana and Other Highly Regulated Businesses
- State Marijuana Laws
- State Consumer Tax Laws
- Business Tax Basics
Get Legal Help With Your Marijuana Tax Questions
Many people find taxes complicated. Marijuana business owners know that marijuana industry laws are even more complicated. These highly regulated federal law and state laws are often in conflict with each other. Because of this, getting your marijuana business started can seem daunting. That's why it's a good idea to consult with an experienced cannabis business attorney familiar with the marijuana laws in your area. Reach out to one today to learn more and protect your business.
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