How to Calculate Cannabis Taxes for Dispensaries

In 2022, states reported a combined $15.16 billion in tax revenue from the recreational sale of cannabis.

If you own, work at, or have visited a cannabis dispensary then you know buying weed comes with hefty taxes. It’s a selling point to get states to legalize the plant, but it also impacts stores’ bottom line and customer experience.

To help cannabis retailers navigate cannabis taxes, we’ve compiled information on various tax types, state-by-state rates, and how to calculate your own dispensary taxes. 

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What are cannabis taxes? 
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Cannabis taxes are grouped into three categories; excise, sales, and local taxes. The amount and types of tax on cannabis and cannabis-infused products varies by state, county, and city but they are typically a percentage-based tax that’s levied at the point of sale.

Depending on specific adult-use cannabis or medical marijuana state tax laws, either a dispensary, cultivator, or customer is the ultimate taxpayer.

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Types of cannabis taxes 

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Traditional retail taxes at places like coffee shops or clothing stores are more straightforward than in cannabis.

Cannabis businesses navigate a maze of intricate tax laws which can vary considerably depending on local regulations and jurisdiction. The most common cannabis tax types are:

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• • Excise tax: These are levied on the sale or production of cannabis products. Excise taxes are often included in the retail price of cannabis flower, topicals, edibles, and any other cannabis products, and they can vary based on the product's potency, weight, or price. It’s worth noting that many states do not charge excise tax on medical cannabis.
• • Sales tax: Just like traditional retail, cannabis transactions are usually subject to sales tax, also called “use tax”. These are calculated as a percentage of the purchase price, with rates varying by location. However, medical marijuana purchases are often exempt from sales tax. 
• • Cultivation tax: In some places, taxes are imposed at the cannabis cultivation stage, taxing the growers selling to distributors or dispensaries based on the weight or quantity of cannabis plants they produce.
• • Local tax: Local municipalities may impose additional taxes or fees on cannabis sales or cultivation within their jurisdiction.

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Cumulative taxes

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While most states simply calculate cannabis tax against the subtotal (i.e. 10% tax is charged against a $20 sales price), states like California and Michigan calculate each tax against the gross receipt plus applied taxes.

This type of step-based calculation is called “cumulative taxes.”

For example, if a dispensary must charge cumulative taxes on a $20 sale, and the tax rates are:

Excise tax = 10%

Sales tax = 5%

Local tax = 1%

Then each “level” of taxable sales is charged to the total sale + the previous tax amount. So,

10% of $20 = $2.00 (Total = $22)

5% of $22 = $1.10 (Total = $23.10)

1% of $23.10 = $0.23 (Total = $23.31)

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State-by-state cannabis tax rates

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Because cannabis taxes vary greatly by location, it’s important to consult your state’s official cannabis page or department of revenue to learn the specific requirements.

Find your state below for information on cannabis taxes:

• Arizona
• California
• Colorado 
• Connecticut 
• Florida
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Missouri
• Montana
• Nevada
• New Hampshire
• New Jersey 
• New Mexico
• New York
• North Dakota
• Ohio 
• Oklahoma
• Oregon
• Pennsylvania
• Rhode Island
• South Dakota
• Texas 
• Utah
• Vermont
• Virginia
• Washington
• West Virginia

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How to calculate cannabis taxes

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Let’s use an example scenario to show how you can calculate cannabis tax amounts. 

A dispensary operating  in Seattle, Washington just made  a cannabis sale with a total product value of $100.

Washington cannabis excise tax = 37%

Washington sales tax = 6.5%
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Here's how to calculate the cannabis tax amount:

Calculate excise tax:

• • Excise Tax Amount = Total Sale Amount * Excise Tax Rate

• • Excise Tax Amount = $100 * 0.37 = $37

Calculate sales tax:

• • Sales Tax Amount = Total Sale Amount * Sales Tax Rate

• • Sales Tax Amount = $100 * 0.065 = $6.50
  
  

Calculate total tax amount:

• • Total Taxes = Excise Tax Amount + Sales Tax Amount

• • Total Taxes = $37 + $6.50 = $43.50
  
  

Calculate the total amount paid by the customer:

• • Total Amount Paid by the Customer = Total Sale Amount + Total Taxes

• • Total Amount Paid by the Customer = $100 + $43.50 = $143.50
  
  

In this example, the customer would pay a total of $143.50 for $100 in cannabis products. The dispensary is responsible for remitting the collected taxes to the relevant tax authorities in compliance with Washington state regulations.

Note: This example applies to the specific tax rates in Washington state and is not considered tax advice. Consult your accountant or state representative with any tax questions.

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Frequently asked questions

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1. What is out-the-door (OTD) pricing?

Out-the-door (OTD) pricing is the total cost a customer pays for a cannabis product, including taxes, fees, and any additional charges. OTD pricing is designed to provide transparency to customers by ensuring they are aware of the full cost before making a purchase.

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2. Do dispensaries have to pay business tax?

Yes, dispensaries are typically required to pay various types of business taxes, including income tax, excise tax, and other local or state business taxes. These taxes are imposed on the dispensary's revenue, profits, or the value of products they sell. The specific taxes and their rates can vary depending on the jurisdiction and the legal framework governing the cannabis industry in that area.

Note: Cannabis businesses are unable to write off anything from their tax returns besides the Cost of Goods Sold due to Section 280E and the Schedule I designation of tetrahydrocannabinol (THC)-containing products.

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3. What tax exemptions are there for dispensaries?

Tax exemptions for dispensaries are relatively limited and vary by jurisdiction. In some cases, medical marijuana dispensaries may be eligible for certain tax exemptions or deductions, particularly when serving registered medical marijuana patients. However, these exemptions are not universal and depend on the specific tax laws of the state or country where the dispensary operates. It's essential for dispensary owners to consult with tax professionals or legal experts to understand the specific tax exemptions available to them.

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3. Are there taxes in the cannabis industry?

Yes, taxes are a significant aspect of the cannabis industry. There are several types of taxes imposed on cannabis businesses, including excise taxes, sales taxes, and local taxes.

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4. What does the government do with cannabis tax collections?

State governments lay out a framework for how they’ll spend cannabis tax revenue prior to legalization. Each state has different designations for the money earned from cannabis sales, but some common examples include reinvesting into marginalized communities impacted by the War on Drugs, funding drug prevention, reduction, and education, or even public schools.

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Conclusion

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Taxes in cannabis are typically higher than any other industry, but they’re unavoidable. Keep a keen eye on state and local tax rates/requirements and consult with a tax professional to ensure you’re operating in full compliance.  

To remain profitable in the face of tax adversity, make sure your dispensary operations are tight—there’s no room for waste in this industry! Consider adding a revenue boosting cannabis payments solution, like Aeropay to allow customers to pay for cannabis digitally (and compliantly). 

‍Learn more about Aeropay for cannabis.