In 2022, states reported a combined $15.16 billion in tax revenue from the recreational sale of cannabis.
If you own, work at, or have visited a cannabis dispensary then you know buying weed comes with hefty taxes. It’s a selling point to get states to legalize the plant, but it also impacts stores’ bottom line and customer experience.
To help cannabis retailers navigate cannabis taxes, we’ve compiled information on various tax types, state-by-state rates, and how to calculate your own dispensary taxes.
Cannabis taxes are grouped into three categories; excise, sales, and local taxes. The amount and types of tax on cannabis and cannabis-infused products varies by state, county, and city but they are typically a percentage-based tax that’s levied at the point of sale.
Depending on specific adult-use cannabis or medical marijuana state tax laws, either a dispensary, cultivator, or customer is the ultimate taxpayer.
Traditional retail taxes at places like coffee shops or clothing stores are more straightforward than in cannabis.
Cannabis businesses navigate a maze of intricate tax laws which can vary considerably depending on local regulations and jurisdiction. The most common cannabis tax types are:
While most states simply calculate cannabis tax against the subtotal (i.e. 10% tax is charged against a $20 sales price), states like California and Michigan calculate each tax against the gross receipt plus applied taxes.
This type of step-based calculation is called “cumulative taxes.”
For example, if a dispensary must charge cumulative taxes on a $20 sale, and the tax rates are:
Excise tax = 10%
Sales tax = 5%
Local tax = 1%
Then each “level” of taxable sales is charged to the total sale + the previous tax amount. So,
10% of $20 = $2.00 (Total = $22)
5% of $22 = $1.10 (Total = $23.10)
1% of $23.10 = $0.23 (Total = $23.31)
Because cannabis taxes vary greatly by location, it’s important to consult your state’s official cannabis page or department of revenue to learn the specific requirements.
Find your state below for information on cannabis taxes:
Let’s use an example scenario to show how you can calculate cannabis tax amounts.
A dispensary operating in Seattle, Washington just made a cannabis sale with a total product value of $100.
Washington cannabis excise tax = 37%
Washington sales tax = 6.5%
Here's how to calculate the cannabis tax amount:
Calculate excise tax:
Calculate sales tax:
Calculate total tax amount:
Calculate the total amount paid by the customer:
In this example, the customer would pay a total of $143.50 for $100 in cannabis products. The dispensary is responsible for remitting the collected taxes to the relevant tax authorities in compliance with Washington state regulations.
Note: This example applies to the specific tax rates in Washington state and is not considered tax advice. Consult your accountant or state representative with any tax questions.
1. What is out-the-door (OTD) pricing?
Out-the-door (OTD) pricing is the total cost a customer pays for a cannabis product, including taxes, fees, and any additional charges. OTD pricing is designed to provide transparency to customers by ensuring they are aware of the full cost before making a purchase.
2. Do dispensaries have to pay business tax?
Yes, dispensaries are typically required to pay various types of business taxes, including income tax, excise tax, and other local or state business taxes. These taxes are imposed on the dispensary's revenue, profits, or the value of products they sell. The specific taxes and their rates can vary depending on the jurisdiction and the legal framework governing the cannabis industry in that area.
Note: Cannabis businesses are unable to write off anything from their tax returns besides the Cost of Goods Sold due to Section 280E and the Schedule I designation of tetrahydrocannabinol (THC)-containing products.
3. What tax exemptions are there for dispensaries?
Tax exemptions for dispensaries are relatively limited and vary by jurisdiction. In some cases, medical marijuana dispensaries may be eligible for certain tax exemptions or deductions, particularly when serving registered medical marijuana patients. However, these exemptions are not universal and depend on the specific tax laws of the state or country where the dispensary operates. It's essential for dispensary owners to consult with tax professionals or legal experts to understand the specific tax exemptions available to them.
3. Are there taxes in the cannabis industry?
Yes, taxes are a significant aspect of the cannabis industry. There are several types of taxes imposed on cannabis businesses, including excise taxes, sales taxes, and local taxes.
4. What does the government do with cannabis tax collections?
State governments lay out a framework for how they’ll spend cannabis tax revenue prior to legalization. Each state has different designations for the money earned from cannabis sales, but some common examples include reinvesting into marginalized communities impacted by the War on Drugs, funding drug prevention, reduction, and education, or even public schools.
Taxes in cannabis are typically higher than any other industry, but they’re unavoidable. Keep a keen eye on state and local tax rates/requirements and consult with a tax professional to ensure you’re operating in full compliance.
To remain profitable in the face of tax adversity, make sure your dispensary operations are tight—there’s no room for waste in this industry! Consider adding a revenue boosting payments solution, like Aeropay to allow customers to pay for cannabis digitally (and compliantly).
We’re happy to show you our full payments solution and put the best bank-to-bank transfers to work for your business.