If you don’t read anything else today regarding how to start your marijuana business, you must read this. Today’s lesson on starting your own marijuana business is marijuana tax. Believe us when we say that we can hear you groan from here, and we understand wholeheartedly, but it is a lesson that cannot be skipped.
Marijuana tax is required by both the state and the federal governments. You will have to report and pay both state and federal taxes when starting and operating a marijuana business.
State Marijuana Taxes
We will begin by explaining state marijuana taxes.
Marijuana tax is imposed by each state that allows the legalization of cultivated marijuana. The rate at which you will report and pay state taxes will be determined by the state legislation. Each state will require its own respective tax rate to be reported and paid, so it is important to make sure you research the tax rates and requirements for the state in which you will have your marijuana business.
The Three Marijuana Tax Rates
There are three marijuana tax rates that your state may calculate taxes: percentage of price, weight-based, or potency-based. It is important to research your state to know which method you can use and how you should report it to the state.
- Percentage of Price. The best way to explain this method is to compare it to a sales tax. Most state sales taxes run between 6% and 10%, and this method is similar. When a business charges a sales tax during a transaction, they add that percentage calculated to the total that the customer owes.
The same concept applies to the percentage of price method for marijuana tax. The marijuana business will charge a percentage-of-price tax to the cost of the product and then report this amount to the local state revenue department.
- Weight-based. This method is exactly what it sounds like: you pay a tax based on the weight of the product. Each state varies, so you must research your state’s weight-based requirements to know what tax to charge if weight-based marijuana taxation is applicable.
For example, Colorado charges a flat 15% tax rate for both wholesale transactions as well as retail transactions, whereas other states may charge tax based on the weight of the individual aspect of the plant.
California is a state that charges different tax rates based on the specific part of the plant that is being sold. For example, California charges $9.65 per each ounce of flower that is sold, $2.87 per each ounce of marijuana leaves, and $1.35 per each ounce of fresh plant that is sold.
- Potency-based. The last method of tax rate calculation that a state may allow is a tax based on potency. This is comparable to the method in which tax is calculated and collected on alcohol. Alcohol is taxed based on the percentage, or proof, of alcohol by volume. Marijuana can be taxed the same way, but by using THC levels instead of alcohol levels.
Currently, Illinois is the only state that allows tax to be collected by potency. Illinois imposes a rate that products with THC levels less than 35% have a 10% tax imposed, whereas products with THC levels greater than 35% are charged a 25% marijuana tax.
Federal Marijuana Taxes
First, we should go ahead and warn you that there are currently no deductions, write-offs, or other incentives for marijuana businesses to take advantage of. Unless the federal law changes that eliminates the 1982 law in Section 280E of the IRS which states that businesses cannot take advantage of tax deductions, exemptions, and tax credits pertaining to the illegal trafficking of drugs, there will never be any incentives that business will be able to take advantage of.
Before you argue that marijuana is legal, you have to understand the difference between state and federal law.
States have been given the option of legalizing marijuana on an individual state basis. Until the federal government rewrites the law to recognize marijuana as a legal drug, this law will always stay in place.
Now that we’ve gotten that bit of bad news out of the way, the good news is that there may be state incentives you can advantage of regarding state taxes.
Income is Income… Even if the Federal Government Considers it Illegal
Because the federal government still considers marijuana to be an illegal drug, there are no federal tax exemptions, deductions, or incentives for businesses to take advantage of, but that doesn’t keep the federal government from taxing you on the income you bring in from the business.
For this reason alone, you will need to make sure that you report your income to the Internal Revenue Service down to the last penny. Marijuana is highly regulated as it is, so it would not be surprising if your business were audited simply for this reason. You will need to make sure that your tax records are pristine, available, and filed on time.
Use Seed to Sale Software to Organize Tax Information
Tax information is an area of starting a marijuana business that you do not need to skimp on. You will need a method to keep your records, filings, and costs organized, and seed to sale software is the way to do it.
Seed to sale software will organize each area of your business so that you can publish any records that you may need at any given time.
The last place you want to find yourself as a business owner is standing in front of a federal tax auditor trying to scrounge around for tax documents on a cannabis business that you promise you are conducting legally. Don’t find yourself in that position when you can simply avoid it by using seed to sale software to organize all the information related to your marijuana business.