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Tax & AccountingOctober 02, 2020

CCH Tax Talks Explores The Taxation of Cannabis at the Federal and State Level

By: Wolters Kluwer Tax and Accounting

As medicinal and recreational adult use of cannabis is legalized in more and more states, understanding how it’s taxed becomes more and more important for tax and accounting professionals. In a recent episode of  Tax Talks by Wolters Kluwer, two experts —Mark Luscombe, GM and principal analyst, and Carol Kokinis-Graves,senior content management analyst — discussed some of the ramifications. 

Keep reading for highlights from the episode, or listen to the entire discussion on Soundcloud.

Taxation of Cannabis at a Federal Level

“While states have been legalizing cannabis, it remains a controlled substance under federal law," Luscombe explains. "For tax purposes, this means that while illegal receipts are taxable, expenses associated with illegal receipts are not deductible.”

Cannabis businesses are taxed on gross receipts, not net income, with deductions only allowed for cost of goods sold. While a number of marijuana businesses have challenged this tax status in court, but have been largely unsuccessful. And because the federal government also does not allow deductions for marijuana-related expenses, tax preparers can have challenges with state tax returns if the state pulls from the federal tax return adjusted gross income. Those businesses may have to add back the disallowed deductions and claim them on their state return even though they were not allowed on the federal return.

The Status of State Taxation of Cannabis

Many states have legalized marijuana for medical purposes and a growing list are permitting adult recreational usage as well. From a state tax perspective, Kokinis-Graves says, “There is often a rate difference between medical and recreational adult use cannabis, which can cause substantial difficulties in the administrative and regulatory infrastructure that is required.”

  • Excise taxes: a flat tax imposed on very specific goods like cigarettes and alcohol/li>
  • Sales and use taxes: a broadly applied tax that is a percentage of sales price
  • Privilege tax: a tax levied on the privilege of doing business in a state, usually a specific business
  • Cultivation tax: a tax imposed on cannabis cultivators

Cannabis businesses that need to understand state and federal tax laws include collectives and cooperatives, cultivators, distributors, manufacturers, micro businesses, nurseries, processors, retailers, and testing facilities. Kokinis-Graves adds that due to state budget deficits — especially as a result of COVID-19 — it’s likely more states will consider enacting legislation to legalize and tax cannabis and reap the benefits of that revenue.

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