Whether you run a business in Canada or the United States, you’ll need to pay taxes. Despite what you might think of taxation, it’s a legal requirement. But if you run a business that has to pay cannabis taxes, things can get tricky.
Below, you are going to learn a few basics about cannabis taxes and how to calculate them. If you run a cannabis business, this is a must-have guide.
What are cannabis taxes?
To put it simply: Cannabis taxes are taxes specifically for businesses who operate in the cannabis industry. Cannabis taxes are different because they typically need to account for three different areas: sales tax, product weight taxes (like cigarettes), and potency taxes (like alcohol).
Cannabis businesses might work with two or three different tax types. Ultimately, these are known as excise taxes, which are taxes applied to specific products. For example, products like soda, alcohol, and cigarettes have taxes levied on them based on health content, weight, and potency.
In Canada, under the Customs Act, those who handle and package cannabis products must pay a cannabis duty tax. But this doesn’t account for the different provincial taxes businesses need to pay.
Because each state and province is still figuring out the best method of taxation, there is a huge variance between different locations. For example, some states (like Colorado) charge up to 15% based on the value of sales while Maine taxes anywhere from 5 to 10% based on the product sold.
Do different cannabis business types have different taxes?
Different cannabis businesses have different taxes, mainly depending on how they handle the product. Business to business sellers do not have to pay sales tax if they are going to resell the product. Meanwhile, those who engage in retail sales don’t pay the duty tax, which is specific to importers in Canada.
Below, you’ll see how taxes break down depending on what part of the cannabis industry you operate in.
What are cannabis dispensary cannabis taxes?
Dispensaries typically pay sales tax, which varies anywhere from 5 to 25% depending on the location, but averages at about 15%. Sales taxes are levied at the point of sale, meaning they are based on a percentage of the retail price.
Unless dispensaries handle the import, production, or manufacturing of the product, they will not need to pay the excise tax. However, some excise taxes are built into the purchase price of the product (see California’s weight-based taxes).
As a cannabis retailer, it's important for you to differentiate between state, provincial, local, and federal taxes. Often, the federal government will tax at rates between 10 and 15%, with an additional 3 to 5% for provincial, state, or local taxes. For example, in Connecticut, taxes break down like so: the state gets 6.35%, the city gets 3%, and an additional tax of 10 to 15% comes from the THC content.
What are cannabis cultivation cannabis taxes?
Cannabis cultivators are producers or manufacturers, which makes them liable for excise taxes. These excise taxes are in place of sales taxes, which are not required for B2B (Business to Business) sales — however, many excise taxes still come from the sales price, meaning cultivators are taxed on the amount they earn.
If there are multiple businesses involved in the transaction (cultivator to producer to retailer), the government still levies taxes between each business. This means that if there are multiple businesses involved in the manufacturing process, each of them has to pay their separate excise tax.
Alaska is an interesting example of this, as they are the only state that taxes different rates for flowers, stems, leaves, and clones. They build these taxes into the final purchase price with an additional percentage-of-price excise tax. Other states typically stick to measuring excise taxes depending on overall weight or potency.
What are cannabis delivery business taxes?
Cannabis delivery taxes will depend on the delivery stage. If a business sells directly to customers, they have the same excise and retail taxes as dispensaries. However, if they only handle the packaging and shipment, they only have to pay a cannabis duty tax.
We will discuss duty taxes later in this article. For now, just know that they relate to the shipment and packaging of marijuana in Canada.
If delivering marijuana in the United States, you might only need to pay the sales tax. However, a few cities within states ask you to apply a surcharge to your product. In the city of Denver, Colorado, this surcharge is $1.
What are medical cannabis taxes?
Because medicinal suppliers differ from the commercial market, cannabis taxes in a medical sense are far more forgiving. United States sales taxes can start around 2 to 5%, which differs from the 10 to 15% that comes with taxes from recreational use.
New Jersey is one state that takes an alternative approach to taxing, as (since July of this year) they tax at a rate of 0%. Other states like Alaska, Delaware, Louisiana, Maryland, and Minnesota also follow this tax-free approach to medicinal cannabis. Of course, those same rates don’t apply if selling recreational marijuana.
The least friendly state for taxation of medical Marijuana is California, which sticks to an excise rate of 15%. And its’ no different when it comes to their taxation rate from retail sales, which isn’t ideal for businesses who sell their products for medical use.
Do different provinces have different cannabis tax rates?
Tax rates in different provinces can vary by large amounts. Looking at sales tax, you can see variances of anywhere between 5 and 15%, which is fairly similar to how the states in the US tax their marijuana goods. This doesn’t account for local taxes, which might add another 3%.
Here is a list of provinces and marijuana sales tax rates:
- Alberta, Nunavut, Yukon, and most northwest territories - 5%
- British Columbia - 12%
- Manitoba - 5% for recreational (13% if medical)
- New Brunswick, Newfoundland, Labrador, Nova Scotia, Prince Edward Island - 15%
- Ontario - 13% (8 to 5% with medical rebate)
- Quebec - 14.975%
- Saskatchewan - 11%
What are the Coordinated Cannabis Taxation Agreements (CCTAs)?
CCTAs are agreements between provinces and the federal government (excluding Manitoba). They are tax agreements controlling the duty rate, to ensure these taxes don’t exceed more than $1 per gram or 10% of a producer’s sales price.
What is the Cannabis Act?
The Cannabis Act is the law that officially made the sale of recreational marijuana legal in Canada. It is important because it defines exactly what is taxed under the standard provincial rates. The important section for taxation is under Schedule 1.
Schedule one dictates that items which fall under the Cannabis Act include:
- Any part of a plant (or what is found in a plant, processed or not)
- Any mixture that contains part of the plant
- Any substance that is identical to the chemical produced in the plant (regardless of how the substance is obtained)
When selling in the marijuana industry, keep these tips in mind.
What is the duty tax and additional duty tax?
Duty taxes are Canadian taxes specifically paid by the importer or owner. They are an excise tax that comes in at a flat rate when packaging a final product. However, the additional tax comes into play when that importer delivers the goods to the purchaser.
The duty tax applies to anyone who packages the product, whether that be dried cannabis, fresh cannabis, or plant seeds. There are two ways to calculate the tax: through the flat rate or ad valorem.
The flat rate applies after packaging the products and before you ship the products. It ensures that regardless of how little you ship, the government receives a minimum payout on taxes for that shipment. You are more likely to pay this duty tax with smaller shipments.
Alternatively, an ad valorem duty is how you calculate your taxes after the goods arrive. This duty tax applies based on the volume of goods shipped, becoming more expensive with larger shipments. You pay this duty tax if it is higher than the flat rate. You can report all of this data using Form B300.
Where can I find tax information for Canadian cannabis companies?
The best place for aspiring Canadian cannabis business owners to start is through the Government of Canada’s Revenue Agency website. Given it's an official source, you know that the information there is accurate. This should help you remain legally compliant.
Do different states have different cannabis tax rates
Much like Canada, the United States has a wide range of tax rates. Sales tax rates in the states typically vary anywhere from 10 to 21% — however, there are some states that are still working on establishing a tax rate.
Below, you’ll see a breakdown of different sales tax rates for each state:
- Alaska - N/A (Excise tax rates up to $50 per ounce)
- Arizona - Pending 16% (waiting on Proposition 207)
- California - 7.25% (plus local taxes)
- Colorado - 15% (plus 8% possible for local options)
- Connecticut - 9.35% (6.35 for retail sales plus 3% municipal sales)
- Illinois - 7% (plus 10 on THC of 35% or less or 25% if above. 20% on cannabis infused products)
- Maine - 10%
- Massachusetts - 6.25% (add 3% for local taxes)
- Michigan - 6%
- Montana - 20% (plus 3% for local option)
- Nevada - 6.85 (plus local, additional retail tax of 10%)
- New Mexico - N/A (excise tax is 12% of sales)
- New Jersey - 6.625% (pending on legislation)
- New York - 9% (plus 4% for local, also pending on legislation)
- Oregon - 17% (plus 3% for local option)
- Rhode Island - 7%
- South Dakota - 15% (pending legislation)
- Virginia - 21% (3% local option)
- Washington - 37%
What is the 280E tax code?
Section 280E of the Internal Revenue Service tax code disallows taxpayers from deducting business expenses from an illegal trafficking business. The trafficking refers to substances under schedule I and II of the controlled substances act. This is important because marijuana isn’t legal in all states.
Basically put, you can’t claim business expenses if you operate a marijuana business in a state that doesn’t allow it. The tax code is often used against marijuana businesses to penalize them, as it is still federally illegal.
To combat this practice, the senate introduced the Marijuana Revenue and Regulation Act in 2019. The act seeks to remove marijuana from the list of Schedule I substances, as this categorization is no longer thought appropriate.
Until then, people can get around the limitations of 280e by costing the sale of goods as a property sale. This raises another challenging tax code.
What is the 471C tax code?
According to tax code 471C, a qualifying taxpayer can choose any method of accounting inventory, the only rule being that it must conform to the taxpayer’s current accounting procedures. This is an issue, because it counteracts the first half of the tax code which historically removed tax freedom from retailers.
For marijuana businesses, it could feasibly be a way to get around the former 280E tax code. Because of this, lawyers are challenging 471A, which will continue to allow them to maneuver around the former tax code.
Where can I find tax information for American cannabis companies?
There are two places you can find information as an American cannabis company. First, check out the IRS’s website, which provides general guidance. Second, you’ll want to take the time to check out your state’s official government website. In combination, both work well together.
What happens if I don’t pay my cannabis taxes?
In the best-case scenario, you get a warning from your government. In the worst-case scenario, you go to jail for tax evasion. Between those two extremes is the potential loss of your marijuana license, a requirement in many states and provinces. So pay your taxes to avoid this.
Are there weed tax calculators?
Because of the continuously changing environment of marijuana taxation, there are no consistent weed tax calculators. However, you can create your own using Excel and a table. Simply use the multiplication functions and search for your local tax rates. If you work in many states, this can be helpful.
How can I make sure my cannabis taxes are done right?
There are two ways you can make sure your cannabis taxes are perfect. First, you can get an accountant that works with cannabis businesses. Alternatively, you can use technology and get some dispensary payroll software to help confirm your numbers.
Get an accountant specializing in cannabis
A Cannabis accounting specialist can help you be sure you are meeting all cannabis taxation regulations. They can help sort your deductions and expenses to be sure you comply with the latest tax codes. These specialists are trained to spot common errors in cannabis accounting.
Use dispensary payroll software
Dispensary payroll software is built explicitly to track the taxes you owe based on the sales you make and the employees you pay. By putting your finances in the hands of technology, you can rest knowing that it’s automated. This provides you with immediate confirmation of financial accuracy.
How can technology help you with cannabis taxes?
The right technology, such as what’s available through KayaPush, can help you with these aspects of your taxes:
- Tax deductions
- Tax remittance
- Compliance (keeps track of the hours your staff works)
- Integration with popular accounting software (like Xero and QuickBooks)
- Let you focus on growing your business
Cannabis taxes can be tricky, and it doesn’t help that every state and province is different. With KayaPush, you can avoid a lot of the pain that comes with remembering and tracking these rules. This way, you can focus on your thriving cannabis company.
