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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