It’s official: cannabis has made its way from the back room to the boardroom, and investors are rushing into this bull market. Built on a new approach to the drug business, and fueled by a previously untapped customer market, there’s no doubt that cannabis is today’s “it” commodity. Of course, anyone who invested in the dotcom boom knows too well that rapidly rising valuations can cause asset bubbles. And just as optimism about cannabis abounds, so does regulatory uncertainty. This extends to cannabis tax policy, which will continue to evolve with this new asset class.
Which US States Have Legalized Cannabis?
Currently, 30 states and Washington, DC, have legal medical cannabis, which means you must have a doctor’s prescription to purchase it. A growing body of evidence supports that cannabis can help with a range of medical conditions, from Parkinson’s to anxiety to pediatric epilepsy and more. And as of July 2019, nine states and Washington, DC, have also legalized cannabis for recreational use for adults over 21. A recent Gallup poll showed that 64% of Americans favor legalization efforts.
The cannabis market is growing – and states recognize it as an important source of tax revenue. For example, the legal cannabis market grew to $9.7 billion in North America in 2017, according to a report from Arcview Market Research and BDS Analytics. That represents a 33% increase over 2016. Impressive? It’s even more significant given that, though legal at the state level, cannabis is still technically under federal prohibition. A complete map of the states that have legalized medical or recreational cannabis can be found here.
Is There a Format for Taxing Cannabis?
States tax cannabis differently. Even within a state, it’s not uncommon for cannabis sales taxes to vary by region. Depending on which market you’re in, you may want to understand how your cannabis is being taxed – and what your state is doing with that tax revenue. The truth is, states are finding many exciting uses for cannabis tax funds – from cleaning up the environment to supporting school districts and more.
What are types of taxes for Cannabis?
Excise Taxes are business taxes. This tax is charged to retailers and paid to distributors. Excise tax is typically applied to both medical and adult-use recreational cannabis sales. The most popular and “best practice” for excise taxes seems to be including them in the purchase price, or rolling them into the sales tax. Communities can use excise taxes toward state spending on programs that benefit communities, including environmental cleanup or drug prevention programs.
State Sales Tax rates typically vary between 8 and 10%, depending on where you are. These taxes are on top of the product sales price, and on top of the cannabis business tax. In California, medical patients with a state-issued medical marijuana card are exempt from sales tax. But in Colorado, medical cannabis is also taxed. State sales tax revenue goes to the state’s general fund and can also be used toward local transportation, public safety funds or social services.
Cannabis Business Taxes may be levied by local communities on cannabis sales at their discretion. These local tax rates might range from five to 15 percent. They’re charged at point-of-sale on top of the product’s selling price. These funds are put towards local community services.
What are Some Ways States are Using Cannabis Taxes?
Cannabis tax revenue is causing its own social revolution of sorts, as enterprising states discover new ways to fund projects that aid their communities in many ways:
In Colorado in 2017, sales taxes from cannabis contributed $118 million to a wide range of government functions. Approximately $41 million went to education and public health. And the Department of Human Services was able to allocate $32 million to substance abuse and mental health problems. And it gets better: another $16.5 million went for affordable housing, local construction and a local government retail cannabis impact grant.
In Washington State more $262 million dollars in 2018 cannabis tax revenues went to the state’s Medicaid program, which provides health insurance to nearly 1.8 million low-income residents. A portion also went to fund substance abuse education and treatment programs.
California allocates a significant portion to social, environmental and medical programs, including local health departments and qualifying non-profit organizations. A portion is allocated to universities to study the effects of cannabis, and for important medical cannabis research.
Cannabis tax revenues are a promising source of funding for public welfare programs. This is especially important in an era when the federal government is cutting social safety net, environmental and public education spending.
And as more states bring cannabis tax funds into their revenue stream, the future benefits for communities from this evolving market look very green indeed.