While it might seem like a new marijuana dispensary opens in your neighborhood every week, marijuana remains federally illegal. Under the DEA’s drug scheduling guidelines, it is classified as a class one substance. This has not stopped several states from legalizing both medical and recreational marijuana at a state level.
One of the largest benefits of legalizing marijuana at the state level is the revenue collected from taxing it. At the state level, excise taxes on cannabis products ranged from 0.3% of total tax revenue in California to as much as 1.7% of total tax revenue in Colorado and Nevada in 2022. These numbers represent a decline from the previous year, but cannabis taxes still amounted to nearly three billion in collections.
What’s Ahead:
Medical vs. recreational marijuana
Marijuana legalization is happening across the country and it doesn’t seem to be slowing down anytime soon. Knowing the difference between medical and recreational programs is an important step in understanding how the marijuana industry is taxed.
Medical marijuana
Medical marijuana typically refers to the legalization of the use and possession of marijuana, when prescribed for medical purposes.
To become a medical marijuana patient, you must meet your state’s qualifying conditions and meet with a state-approved medical professional. The qualifications for marijuana prescriptions vary depending on the state, but generally include:
- Alzheimer’s
- Loss of appetite
- Cancer
- Crohn’s disease
- Eating disorders
- Epilepsy
- Glaucoma
- Multiple Sclerosis
- Muscle spasms
- Pain
- Nausea
- AIDS
- Fibromyalgia
- Parkinson’s disease
- Post-traumatic stress disorder (PTSD)
Recreational marijuana
Recreational marijuana first became legal in Colorado and Washington state in 2012.
Depending on state and local laws, it gives way for marijuana retail stores, where marijuana can be sold under similar guidelines to alcohol. Customers looking to buy marijuana do not have to have a qualifying medical condition to use the plant.
How recreational marijuana is taxed
If you are a medical marijuana patient or recreational user, you might not often think about the tax that you are paying on your purchase. Most dispensaries and retail stores adapt their prices to include taxes, but knowing where your money is going is important.
If you don’t participate in a medical marijuana program, or use it recreationally, you are not paying any taxes on it. Marijuana tax is collected at the time of sale and then paid by the business you buy it from.
Sales tax
Sales tax is simple, it is a predetermined percentage of money that consumers must pay on top of the price of the goods they buy. This tax applies to all goods and varies depending on your state and locality.
Excise tax
Excise tax is a flat rate that is added to the price of specific goods and services, being passed on to the customer at the time of sale. Typically reserved for things like alcohol, cigarettes, firearms, and even indoor tanning, the excise tax is often used to fund programs that are directly impacted by these sales.
Oftentimes, even if a state issues a statewide excise tax on marijuana, local municipalities are allowed to add an additional tax.
Cultivation tax
Cultivation tax is a tax applied to marijuana that becomes a part of the commercial market. This tax is paid by cultivators and must be paid to either the distributor or manufacturer to whom the marijuana is sold or transferred.
How medical marijuana is taxed
Since medical marijuana and recreational marijuana are two separate programs, they are taxed differently. In many of the 37 states with a medical marijuana program, the levied sales tax is close to the normal sales tax rate on all other goods.
Recreational marijuana is typically taxed at a higher rate than its medical marijuana program counterpart. In the nine states that currently have taxable medical marijuana programs, this is what those taxes look like:
| State | Sales Tax | Excise Tax | Cultivation Tax |
|---|---|---|---|
| Alaska | None | None | $50/oz. on flower, $15/oz on the remainder of the plant. |
| California | None | 15% | $9.25/oz. on flower, $2.75/oz. on leaves. |
| Colorado | 15% | 15% | None |
| Maine | 10% | $335/pound of marijuana flower or mature plant $94/pound of marijuana plant trim. $1.50/immature marijuana plant or seedling. $0.30/marijuana seed. | None |
| Massachusetts | 6.25% | 10.75% | None |
| Michigan | 6% | 10% | None |
| Nevada | Local tax rate | 10% | 15% |
| Oregon | 17% | None | None |
| Washington | 6.5% | 37% | None |
How are marijuana taxes spent?
Each state is responsible for determining where the tax revenue made off of the sale of marijuana is diverted. While some have a strong tax plan in place, others, like Massachusetts, are still working out the kinks.
As of 2023, 21 states have legalized the non-medical use of marijuana, and each state makes different decisions about how to put the funds collected from taxes to use. Here are examples of how five states with legalized recreational marijuana are spending (or are planning on spending) tax revenue.
Alaska
- 50% of revenue is split between public safety, health and social services, and efforts to keep people out of prison.
- 25% of revenue goes towards a fund to pay for state services.
- 25% of revenue goes towards a marijuana education program.
California
- 60% of revenue is spent on creating and supporting youth drug prevention and treatment programs.
- 20% of revenue is allocated to environmental protection and restoring environmental damage caused by illegal marijuana growth.
- 20% of revenue is given to state and local law enforcement to reduce public health and safety concerns, as well as to combat impaired drivers.
Colorado
In Colorado, 100% of excise tax on wholesale retail marijuana is put toward the Building Excellent Schools Today program within the Capital Construction Assistance Fund. Of the special sales tax on retail marijuana, taxed at 15%, here is how the revenue is spent.
- 12.59% of revenue goes to the state public school fund for all districts.
- 71.85% goes to the Marijuana Tax Cash Fund.
- 15.56% goes into the General Fund.
Michigan
- 15% of the revenue goes to cities with marijuana businesses.
- 15% of revenue is diverted to counties with marijuana businesses.
- 35% of revenue goes towards the School Aid Fund.
- 35% of revenue goes to the Michigan Transportation Fund.
Oregon
- 40% of revenue is sent to the State School Fund.
- 20% of revenue is given to the Oregon Health Authority to fund mental health services and treatment.
- 15% of revenue is allocated to the State Police.
- 10% of revenue is given to cities for enforcement.
- 10% of revenue is given to the counties for enforcement.
- 5% of revenue is used to prevent alcohol and drug abuse through the Oregon Health Authority.
How will marijuana tax affect me?
If you are not a marijuana user – recreationally or medically – you are not paying taxes on it. What you are affected by is the tax revenue that it creates, which has begun to benefit the economy including everything from schools to public parks and the elderly.
As the marijuana industry continues to grow and become legal across the United States, you can expect to see the effects of this extra revenue even more.
No tax deductions
If you happen to purchase marijuana in either the medical or recreational market, you will not be able to deduct it from your taxes. Since marijuana is still federally illegal, the IRS can not accept marijuana as a valid tax deduction.
Summary
Because the marijuana industry is still growing, laws are constantly adapting and are subject to change.
Sadly, the nation as a whole will not see many benefits from marijuana tax revenue until marijuana is made federally legal. In the meantime, many states and localities that have legalized marijuana are reaping the benefits of their recreational and legal programs.