On November 8, 2022, the legalization of recreational cannabis was on the ballot in five states. Legalization initiatives in Arkansas, North Dakota, and South Dakota fell short of receiving voter approval at the polls. Meanwhile, voters in Maryland and Missouri voted in favor of amending each state’s constitution to permit the legal possession of recreational cannabis by individuals aged 21 and over.
The lack of federal regulation of the cannabis market and the increasing number of states legalizing cannabis is resulting in different taxation frameworks, varying by jurisdiction. States are currently utilizing one, or a combination, of three factors for taxing cannabis sales. The factors include a percentage-of-price, weight, and potency. Sixteen states impose a percentage-of-price tax, making it the most popular type of tax levied on recreational cannabis sales. The percentage-of-price tax, much like a sales tax, is calculated as a percentage of the retail price paid by consumers in addition to their purchase at retail. Tax collected from the customer is remitted to the government by the retailer. Within a given state, the state standard may differ from the type of tax levied at the local level. For example, local governments in Alaska, Connecticut, and New Jersey levy a percentage-of-price tax even though no state-level percentage-of-price tax is imposed.
Alaska, Maine, and New Jersey impose a weight-based tax on cannabis at the cultivator to wholesale transaction level. In all three states, the cultivator is responsible for paying the tax after selling its product to a distributor or retailer. However, the tax is generally passed on to the consumer through the purchase price. Connecticut, Illinois, and New York levy a potency-based tax on cannabis. A potency tax is based on a product’s level of THC, which is the primary psychoactive compound in cannabis. Illinois’s tax is a percentage of the retail price: 10% for cannabis or cannabis products at or below 35% THC potency, 25% for products above 35% potency, and 20% for cannabis-infused products such as edibles. The taxes in Connecticut and New York are per-unit potency taxes based on the amount of THC in the product, measured in milligrams.
In addition to the cannabis-specific taxes discussed above, general state and local sales tax may apply to the sale of cannabis and cannabis products, depending on the jurisdiction. In Colorado, recreational cannabis sales are exempt from the state’s general sales tax but eligible for a general sales tax at the local level in certain districts, municipalities, and “home-rule” cities, which have the authority to impose their own local sales and use taxes. Alaska does not have a general state sales tax, but local governments are authorized to levy a local sales tax on cannabis. These are just two examples of the complexities of state taxation of recreational cannabis within existing sales tax frameworks.
Following the popular framework of a percentage-of-price tax, Missouri’s approval of Amendment No. 3 establishes a 6% tax for recreational cannabis sales, a higher rate than the 4.225% general state sales tax rate. Local jurisdictions may also impose a tax up to 3%. Maryland’s tax approach remains to be seen, as ballot measures direct state lawmakers to establish rules and regulations governing the production and sale of cannabis, including taxation, during the 2023 session.
Recreational cannabis has proven to be a profitable industry, and strategic choices by lawmakers can impact the tax revenue generated from recreational cannabis sales in a given state. Earlier this year, the 2022 U.S. market for medicinal and recreational cannabis was projected to be $33 billion.1
1 MJBizDaily: U.S. Cannabis Retail Sales Estimates: 2015-26 (updated June 2022), available at https://mjbizdaily.com/us-cannabis-sales-estimates/.
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