Marijuana taxes are complicated. Each state has different tax rates, including sales, excise, and cultivator taxes. Here is our guide to how marijuana taxes work.

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. Excise tax on marijuana hit one billion dollars, for the first time, in 2019. $99.18 million worth of taxes were collected in Nevada alone! 

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 is a relatively new addition to the marijuana industry, first becoming 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. 

Often times, 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 that the marijuana is sold or transferred to

How medical marijuana is taxed 

Since medical marijuana and recreational marijuana are two separate programs, they are taxed differently. In many of the 33 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:

StateSales TaxExcise TaxCultivation Tax
AlaskaNoneNone$50/oz. on flower, $15/oz on the remainder of the plant.
CaliforniaNone15%$9.25/oz. on flower,
$2.75/oz. on leaves.
Colorado15%15%None
Maine10%$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
Massachusetts6.25%10.75%None
Michigan6%10%None
NevadaLocal tax rate10%15%
Oregon17%NoneNone
Washington6.5%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.

Here is how the nine states with legalized recreational marijuana are spending (or are planning on spending) their 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

47% of revenue went to schools in the 2017-2018 fiscal year.
41% of revenue was allocated to state services.
12% of the revenue went to the general fund.

Maine

Marijuana tax revenue has been put into the general fund and used to support educational services as well as train law enforcement teams in the Maine Criminal Justice Academy.

Massachusetts

Information is not currently available.

Michigan

Under the new proposed legislation, an unspecified amount of revenue is used to cover the administration of the program. $20 million of revenue is allocated to research on how marijuana can be used in treating military vets and to help prevent veteran suicides until 2022.

Of the remaining funds:
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.

Nevada

Currently, Nevada puts all of its marijuana tax revenue to the rainy day fund. Note that there is currently a bill to divert this revenue to education.

Oregon

40% of revenue is sent to the Common School Fund.
20% of revenue is given to the Mental Health Alcoholism and Drug Services.
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.

Washington

64% of revenue goes to assisting low-income residents with health care costs.
33% of revenue is put into the general fund.
8% of revenue is used to combat drug and alcohol addiction.
4% of revenue is dispersed amongst towns with marijuana businesses in them.
3% of revenue is given to the state’s Liquor and Cannabis Board and its Department of Health.

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 who have legalized marijuana are reaping the benefits of their recreational and legal programs.

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About the author

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Micah Murray is a freelance writer and editorial assistant for Money Under 30. He enjoys writing about personal finance and educating readers on how financial literacy can change their lives. Micah lives in Maine with his husband, their dog, and three cats. When not writing about finance, he can be found around a campfire, with a glass of wine, and a true-crime podcast. You can reach him on his website or LinkedIn.