Starting a Marijuana Business: Tax Issues to Know
One thing that nobody seems to enjoy, but everyone has to do, is to pay taxes. Taxes are imposed on individuals and on businesses. With the legalization of marijuana, state governments have found a new source of tax revenue: the marijuana industry and subsequent marijuana businesses.
Taxes can be complicated to navigate, especially for those trying to figure out the tax obligations of their cannabis business, such as a weed farm or dispensary. Throw into the mix a business that is legal in a particular state, but illegal according to federal law, and taxes become even more confusing. This is the case for people who have started marijuana businesses after the state they live in legalized the drug. If you live in a state, such as Colorado, California, or Alaska, that has legalized marijuana and you want to start a business, in the cannabis industry, it's important to understand the state and federal taxes that apply.
State Taxes on Marijuana
States that have legalized marijuana have also subjected marijuana businesses to various taxes. Although marijuana taxes and tax rates vary from state to state, each state taxes the sale of pot in some way. While all states impose a sales tax on marijuana, some states also impose an excise tax on the sale of the drug. In Alaska, for example, an excise tax is imposed on the transfer or sale of marijuana from a cultivation facility to a retail store or marijuana product manufacturing facility.
In Washington, a person who holds a producer, processor, or retailer marijuana business license is subject to a business and occupation tax, which applies to the business's gross receipts. The business owner must also collect sales tax on retail transactions and remit it to the Washington State Department of Revenue. Washington also imposes an excise tax which, prior to July 1, 2015, was levied on producers, processors, and retailers but is now imposed on retail customers.
In Colorado, marijuana retailers are required to have a sales tax license. If a business sells both medical and retail marijuana, the business must have a sales tax license for each type of marijuana, even if the medical and retail marijuana is sold at the same location. In addition, a business engaged in selling medical marijuana in Colorado is required to charge a state sales tax plus local sales taxes. For retail marijuana, the business is required to charge the state sales tax, a state marijuana sales tax, and any local sales taxes. The Colorado Department of Revenue has a helpful section on its website that provides answers to common questions regarding marijuana taxes in the state.
As with other states in which marijuana is medically and recreationally available, California also imposes taxes on marijuana. A business that sells marijuana (including marijuana products) must register for the California Department of Tax and Fee Administration (CDTFA) for a seller's permit and file sales and use tax returns regularly. In addition, California imposes a 15% excise tax upon purchasers of marijuana. There is also a cultivation tax imposed on marijuana cultivators. The cultivation tax is only imposed on harvested cannabis that enters the commercial market, and the rate is different depending on if it's marijuana leaves or flowers.
Since marijuana taxes differ widely from state to state, it's important that you research your particular state's laws if you're considering starting a marijuana business.
Marijuana Business and Federal Taxes
Generally speaking, a business is able to make various tax deductions - such as rent, utility bills, and employee wages - for money spent on business operations. More specifically, a business expense is tax deductible if it's an "ordinary, necessary and reasonable" expense for the business. These deductions allow a business to legally lower profits and pay less in taxes. Thus, it allows a business to pay taxes on net income instead of gross income.
If a business is engaged in the sale of marijuana, however, it can't take advantage of any of the tax credits or business deductions that are available to other types of businesses. The reason behind this is the 1982 federal law in Section 280E of the Internal Revenue Code - which is still enforced by the Internal Revenue Service (IRS) - that bans all deductions and tax credits for the illegal trafficking of drugs. Since marijuana is still illegal under the federal government, engaging in the sale of pot is classified as illegal trafficking. While the IRS has provided some guidance as to how marijuana businesses can deduct for the cost of goods sold, it's just guidance and can't be cited as precedent.
The bottom line is that the IRS doesn't recognize marijuana businesses as legal for tax purposes. There are also additional nuanced laws regarding medical cannabis products and medical marijuana dispensaries. So, why would anyone have to pay taxes on a business that the government doesn't even consider legal? Because it's still income, and everyone who earns an income must pay an income tax. If a person doesn't report the money he or she makes from his or her marijuana business, 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
Taxes can be complicated for many people, especially when it comes to the highly regulated marijuana industry. With complicated and sometimes conflicting laws at the local, state and federal level, 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.
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