legalization of cannabis
Tax & AccountingNovember 13, 2020

Cannabis Wins Big at the Ballot Box Creating Opportunity and Sales Tax Risk

A Huge Move Forward for the Legalization of Cannabis

Five states with cannabis measures on the ballot in the November 2020 election voted for either medical or recreational adult-use legalization.

New Jersey, Arizona, South Dakota and Montana voters legalized adult-use cannabis. Mississippi and South Dakota voted to allow the medical use of cannabis. The general sales tax applies to recreational cannabis sales in New Jersey, Arizona and South Dakota.

Currently, 35 states have legalized medicinal cannabis, and 15 states have legalized cannabis for adult-use (see the Table below for list of states and whether sales tax will apply). The expectation is that other states (e.g., New York, Connecticut and Pennsylvania) will follow with legislation in 2020 that would legalize cannabis, further increasing the trend.

Further, the U.S. House is planning a December floor vote on the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, legislation that would federally decriminalize cannabis by removing it from the Controlled Substances Act. It will likely pass but faces a difficult road in the Senate (this could change if the Democrats take control of the Senate and Joe Biden becomes President in January).

Here is what occurred on election day state by state:

New Jersey

Public Question No. 1 was approved. It amends the state constitution to legalize cannabis for adults aged 21 and over, as well as the cultivation, processing and sale of recreational cannabis products

The amendment to legalize adult-use cannabis becomes effective on Jan. 1, 2021. However, the New Jersey legislature must now determine how the program will run, including restrictions and regulations, and a licensing process. Officials must also establish and appoint members to the state’s Cannabis Regulatory Commission.

Cannabis industry research firm Brightfield Group projects that an adult-use cannabis market in New Jersey could see more than $352.6 million in sales in 2021 and almost $650 million in sales in 2022.

Arizona

Arizona voters approved adult-use cannabis legalization by voting in favor of the statutory measure, Prop. 207, which allows adults 21 and older to purchase and possess up to one ounce of cannabis, as well as grow up to six plants at home for personal use.

The Arizona Department of Health, which already regulates the state’s medical cannabis program, is now responsible for overseeing the adult-use industry, which must launch by June 1, 2021, under the initiative.

The Brightfield Group estimates that the adult-use cannabis market in Arizona could exceed $288 million in sales in 2021 — and nearly $857 million in sales the following year — not including medical sales projections.

Mississippi

Approximately two-thirds of Mississippi voters passed Initiative 65, the measure from Mississippians for Compassionate Care’s Medical Marijuana 2020 campaign.

Residents must have one of 22 serious qualifying conditions, such as cancer, chronic pain, or epilepsy, to qualify as a medical cannabis patient — which will be regulated “strictly” by the Mississippi Department of Health, according to Jamie Gratham, Medical Marijuana 2020’s campaign coordinator.

fiscal analysis by Mississippi’s Legislative Budget Office estimates the first year of the medical program will cost the state roughly $11.1 million, according to the Medical Marijuana 2020 site. In the following years, the program will bring in approximately $10.7 million in overall annual revenue, which will need to go back into the program.

Montana

Montana voters approved of I-190, the adult-use legalization initiative. Separately, they voted in favor of the legislature establishing the legal age of adult-use cannabis consumption, a formality. The two ballot initiatives are commonly treated as a package deal.

South Dakota

Voters in South Dakota became the first to pass a constitutional amendment (Amendment A) legalizing adult-use cannabis sales without first having an established medical program. The Amendment legalizes the recreational use of cannabis for adults aged 21 and over and allows the possession of up to one ounce of cannabis per adult. It also requires that the state legislature pass laws for a medical cannabis program and hemp sales no later than April 1, 2022.

States Where Recreational Use of Cannabis is Legal

 

 State

 Does the General Sales Tax Apply? 

 Alaska  N/A
 Arizona  Yes
 California  Yes
 Colorado  No
 Illinois  Yes
 Maine  No
 Massachusetts  Yes
 Michigan  Yes
 Montana  N/A
 Nevada  Yes
 New Jersey  Yes
 Oregon  N/A
 South Dakota  Yes
 Vermont  Yes
 Washington  Yes

States and Municipalities Face Increasingly Dire Circumstances

States and municipalities face increasing revenue deficits as the pandemic continues to be a significant problem throughout the country. This “next wave” of the virus has resulted in new stay-at-home orders and other renewed restrictions in many states and cities. To make matters worse, hopes for a post-election agreement on the next round of economic stimulus have been dampened this week.

State Departments of Revenue are ever-more focused on targeting industries that are flourishing during the pandemic in a hunt for tax revenue. Cannabis businesses are particularly attractive targets since they are cash businesses and have seen an upsurge in business since March. Most of these businesses are small and sales tax compliance is the last thing on their minds. State tax auditors in the states that legalize recreational use and have a general sales tax have taken note and are increasingly sending out audit notices to many of these businesses.

Key Steps to Take to Protect Your Business from Sales Tax Liability Nightmares

  • Understand your business and sales tax risk-collection and remittance obligations — get professional help
  • If you receive an audit notice, call your tax advisor
  • Work with sales tax experts and software providers who have particular expertise and specific content dealing with cannabis to ensure accuracy, will integrate tax data and necessary documentation, and keep your company in compliance
Mark Friedlich
Author at Tax & Accounting
Mark Friedlich, a CPA & tax lawyer, is the principal international & corporate indirect taxation analyst for Wolters Kluwer Tax & Accounting. He is a member of the U.S. Senate Finance Committee’s Chief Tax Counsel’s Advisory Board, advisor to 14 state taxing authorities, and a member of the American Bar Association’s Tax Section and AICPA’s Tax Section leadership teams. Prior to joining Wolters Kluwer he was a Managing Tax Partner at PricewaterhouseCoopers.