Marijuana is the most commonly used federally illegal drug in the United States, with 48.2 million people, or about 18% of Americans, using it at least once in 2019. In states where the drug is legalized, however, cannabis taxes constitute a substantial source of funding for programs ranging from healthcare initiatives to law enforcement.
How do states tax retail cannabis sales?
The federal government recognizes cannabis as a Schedule 1 substance, meaning it’s considered highly addictive and therefore illegal at the federal level. Despite this, 23 states and Washington, DC, have fully legalized the drug, with an additional 21 states either fully or partially legalizing medical marijuana.
Due to the lack of federal recognition over the legality of cannabis, state laws and regulations vary, meaning there’s no single model for revenue collection from medical or recreational dispensaries.
As a result, tallying the total revenues generated from cannabis taxes nationwide isn’t currently feasible. However, several states keep consistent records on their taxation of both recreational and medical marijuana, which illustrate how they tax the drug and distribute the revenues.
| State | Tax rate |
|---|---|
| Alaska | $50 per ounce, or proportionate part thereof |
| Arizona | 16% excise tax |
| California | 15% excise |
| Colorado | 15% retail marijuana tax; 2.9% state sales tax |
| Connecticut | $0.00625 per milligram of total THC for flower products; $0.0275 per milligram of total THC for edibles; $0.009 per milligram of total THC for all other products |
| Delaware | 15% excise tax |
| Illinois | 10% excise tax on cannabis with THC levels at or below 35%, 25% excise tax on cannabis with THC levels above 35%, and 20% excise tax on cannabis-infused products |
| Maine | 10% sales tax; excise tax depending on product weight |
| Maryland | 9% sales and use tax |
| Massachusetts | 6.25% state sales tax; 10.75% state excise tax; up to 3% local option for cities and towns |
| Michigan | 10% excise tax and 6% sale tax |
| Missouri | 6% retail tax |
| Montana | 20% excise tax |
| Nevada | 15% excise on the first wholesale sale, sales tax, and 10% retail excise tax |
| New Jersey | 6.625% sales tax, plus a social equity excise fee of 0.33% |
| New Mexico | 12% excise tax until July 1, 2025, which then increases by one percentage point per year, maxing out at 18% on July 1, 2030 |
| New York | 13% retail tax |
| Oregon | 17% retail sales tax, 3% additional local tax |
| Rhode Island | 10% state excise tax, 3% local excise tax |
| Vermont | 14% excise tax |
| Virginia | 21% excise tax |
| Washington | 37% excise tax |
These tax revenues come from different forms of taxation, which include:
- Excise tax: An excise tax is a special tax on specific goods, including alcohol, tobacco, or fuel, often included in the item’s price and paid by the manufacturer or importer.
- Sales tax: Sales tax is an additional amount added to the price of goods (and sometimes services) the seller collects from the buyer at the point of purchase and then remitted to the government.
- Retail tax: Retail tax, also retail sales tax, usually refers to additional surcharges or fees imposed on retail businesses for operating within a certain jurisdiction, which can vary depending on local regulations.
- Use tax: Use tax is a tax the government imposes on items purchased without sales tax, ensuring they are still subject to taxation. This tax is commonly imposed when consumers buy products in states with no sales tax. Essentially, this serves as a conditional sales tax for items exempt from regular sales tax.
In addition to these statewide taxes, local jurisdictions may be able to charge specific taxes depending on the state regulations on cannabis sales.
Do dispensaries pay federal taxes?
Cannabis dispensaries do pay federal taxes, just like any other business. However, these businesses face a unique challenge since marijuana is still considered illegal at the federal level. So, while dispensaries can operate within their state’s laws, they can’t claim the same tax deductions and benefits as traditional businesses.
In fact, there’s a specific tax provision called Section 280E that prevents businesses involved in illegal drug trafficking, including cannabis, from deducting common business expenses like rent and wages when calculating their federal taxes. This can result in higher tax bills for dispensaries compared to other businesses.
How much money do states make from cannabis taxes?
The records for the first five states to legalize recreational cannabis — Colorado (2012), Washington (2012), Alaska (2015), Oregon (2015), and California (2016) — illustrate how much states have generated from marijuana taxes.
In 2021, these five states collectively generated a record-breaking $2.78 billion in revenue from taxes on cannabis sales, marking the highest income level since tax collection began in 2014.
What do cannabis taxes pay for?
Cannabis taxes support various initiatives and programs but each state decides how to use this money based on its priorities. It’s important to note that funds allocated to local governments often have more independent management, giving jurisdictions flexibility in spending without strict state requirements.
Some state uses for cannabis taxes include:
- General funds: These revenues go into the state’s general fund, providing flexibility for redistribution at the start of the fiscal year or allocated to unforeseen needs like emergency funds.
- Healthcare: State Medicare and Medicaid receive general funding, along with specific programs such as mental health initiatives.
- Substance abuse and drug education: Some states reinvest cannabis sales revenues into state-level programs for drug prevention, reduction, recovery, and education.
- Law enforcement: State police forces receive funding from cannabis taxes, helping support officer salaries and basic operational needs.
- Education: Several states allocate a portion of cannabis revenues to state-run public schools.
- Local governments: A share of cannabis revenues is reallocated to local jurisdictions for specific community needs.
Where did this data come from?
This data is collected from different state agencies that compile and maintain records related to the taxation of cannabis, which includes data on tax revenues, types of taxation, and how these revenues are allocated and distributed at the state and local levels.
Sources include state departments of revenue, state legislatures, health and human services departments, and liquor and cannabis boards, which regulate the product, sale, and distribution of cannabis products, among other individual state sources.
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