Cannabis Business Owners: Multi-State Tax Considerations for Multi-State Operators

Cannabis legalization continues to gain momentum across the country, with several new states having legalized marijuana in 2021. As of this post, the number of states in which recreational marijuana is legal is 18, and 16 other states allow for medical use only. Cannabis business owners and investors are hopeful this momentum has set the stage for federal legalization soon.

It is difficult for states and the federal government to ignore that regulated marijuana markets provide a steady and generally growing source of revenue.

“States that have legalized marijuana for adult use have collectively generated nearly $8 billion in tax revenue from cannabis since legal sales first began in 2014, according to a new report from the Marijuana Policy Project (MPP),” reports MarijuanaMoment.net. “This report does not factor in local tax revenue that individual municipalities may impose on cannabis sales, like in Denver where residents pay an additional 5.5 percent tax that has generated hundreds of thousands of dollars for the city.”

As new states come online, more opportunities will be created for operators interested in expansion. And, for the most part, getting up and running is easier for those who have already navigated the complexities of licensure, structure, tax planning and compliance, and myriad other hurdles. However, as each new state/jurisdiction enters the industry, they introduce their own nuanced requirements and limitations—especially as it relates to taxation.

Operators should consider the following when eyeing expansion into a new jurisdiction:

Understand the Nuances of Each State

Operators eyeing expansion must research and follow the unique and evolving compliance requirements in that state. In some states, they may be able to easily replicate operations. In others, there may be subtle difference in limitations and compliance requirements that call for changes to the business model, business structure, processes, and tax compliance procedures.

There are three main ways state and local governments tax recreational marijuana: percentage-of-price, weight-based, or potency based. Some states use more than one of these taxes. Additionally, some states and localities levy their general sales tax on the purchase of marijuana in addition to their excise taxes.

State-by-state rules related to business model/structure also vary. For example, Rhode Island does not allow for Vertically Integrated Operators—that is, having both a cultivation and a retail component to a business. Washington state also prohibits vertical integration. On the other hand, New Mexico’s medical marijuana market actually requires it.

Again, each state has its own rules and its own risk-reward formula for vertical integration.

Invest in Systems to Streamline Collection, Reporting

An efficient dispensary Enterprise Resource Planning (ERP) and Point of Sale (POS) system can help operators automate and alleviate some of the burden associated with multi-state tax compliance. Today’s leading systems can distinguish between state-by-state requirements, and the various levels of taxation on each product. These systems streamline and reduce the administrative burden that comes with the collection, reporting, and tax remittance process.

Less sophisticated systems make replication or expansion in other states more cumbersome.

Carefully Navigate Growing Tax Responsibilities

The administrative burden is significant when it comes to filing, payment, and reporting compliance for businesses involved in the growing, distribution, and sales of cannabis/marijuana. Again, state filing, payment, and reporting requirements and schedules vary.

Multi-state operators must develop effective processes to ensure compliance with Federal and state:

• IRC Section 280E compliance
• Income reporting
• Cash payment options
• Reporting large cash receipts
• Estimated payments
• Keeping good records

Like all businesses, operators are responsible for filing and paying taxes on time to avoid interest and penalties.

There are also systems that can streamline indirect tax compliance and reduce administrative costs. This includes calculating liability, tracking and adhering to advanced payment schedules, and filing of all applicable returns.

Federal legalization will no doubt add new layers of complexity to operators’ already mammoth tax compliance burden.