As a cannabis business owner, no matter the vertical you are in, you are pounded by taxes and get little relief with deductions. It is crucial for business owners to understand how different types of taxes can affect their finances. At Redbud Advisors we know taxes can be confusing. This is a big reason why we love to share our expertise with all verticals in the cannabis industry. In this blog, we will cover 5 Common Taxes Affecting Your Cannabis Business.
The five most common taxes you will encounter as a business owner are
Income tax
Sales tax/gross receipts tax
Excise tax
Payroll tax
Business personal property tax
First, to understand these taxes and how they affect your cannabis business it is important to know how the Internal Revenue Code 280E affects your business. Quick history lesson- Remember when Ronald Reagan declared a war on drugs? Have you heard of the landmark tax court case Edmondson v. Commissioner? During that time is when the IRC 280E was developed and in 1981 put into action. Fast forward to today, we are in this complicated gray area within the cannabis industry because of new laws and old tax codes
Let’s Break Down IRC 280E
The TL;DR version
Federally Illegal businesses, such as marijuana businesses, cannot deduct the same type of normal overhead expenses as other businesses if it involves trafficking schedule I or II substances.
The Actual Internal Revenue Code 280E No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Now that we have that out of the way, let’s discuss the 5 Common Taxes Affecting Your Cannabis Business. The experts at Redbud Advisors break it down for you.
All verticals within the cannabis industry are responsible for paying income taxes.
Income Tax
Income tax is one of the most common types of taxes for businesses. This tax is based on how much money you take in from your business activities. It is required to pay income taxes at both the federal and the state levels as a business owner. The entity structure and location of your business will determine the rate your income will be taxed. These rates are typically different.
It is common for businesses to pay income taxes on net profit- gross income less the cost of goods sold. Unfortunately, because of the harsh regulations in this industry marijuana businesses pay income tax on gross profit- total income.
Remember that gray area we mentioned before about marijuana businesses being federally illegal but locally legal? For federal tax purposes, businesses within the cannabis industry must still pay tax on their income from illegal activities. In the cannabis industry, these activities include growing, manufacturing, distributing, and selling marijuana. It is perplexing as a cannabis business, that does not have a federally legal business, income tax still applies but we digress to uncle Sam.
Income taxes are considered a trust tax because the business is collecting taxes and it is the business owner’s responsibility to remit them to the federal or state governments. If you do not do this- well, that is tax evasion.
How does a business pay Income tax? It is paid quarterly. If you have an accountant this is a common service they provide. If you do not have a cannabis accountant the responsibility will fall to whoever is responsible for managing the business taxes. The quarterly schedule to make your income tax payments is typically the dates listed below. These dates are subject to change.
April 15th
June 15th
September 15th
January 15th.
All verticals within the cannabis industry are responsible for paying income taxes.
Sales Tax aka Gross Tax Receipts
If you own multiple businesses in different states you must pay all sales tax/gross receipts to the state or municipality the business resides in. Do you have online sales? This is the same process for all online sales.
The Department of Revenue Service (DRS) is where your business needs to be registered. Registration with DRS is location-based, if you have businesses in multiple states it needs to be registered with DRS in that location. If this is not done additional penalties will incur.
Dispensaries are the hardest hit by IRC 280E incurring many overhead costs that are not deductible. It is imperative POS systems are set up correctly for sales tax and never overpay, or worse, underpay sales tax. Some states have a sales tax exemption for veterans. It is important to collect their tax exemption number and make sure they are not being overcharged.
Did you know sales tax aka gross receipts tax is a trust tax? The business is collecting tax on behalf of the customer and must remit it to the state and/or county.
The rules/regulations for sales tax aka gross receipts vary by state and use type. Hiring an accountant that specializes in cannabis tax will help establish the specific tax setup you will need to be in compliance at all levels. If you choose to go the DIY route it is important to do your due diligence making sure all taxes you are responsible for are being accurately accounted for and paid.
Excise Tax
Excise tax is a product-specific tax that is paid when products are sold or transferred from one person or organization to another. The excise tax is based on the quantity of the product sold or transferred rather than its price. Excise taxes are imposed on products such as gasoline, tobacco products, alcohol, and marijuana. Unfortunately, excise taxes are not uniform throughout the US. This tax can be federal, state, or local.
A cannabis business must pay an excise tax on each item they sell or transfer. This rate can vary depending on whether it's medical or recreational marijuana. Very much like a sales/gross receipts tax, an excise tax is also a trust tax as the cannabis business is collecting tax on behalf of the customer and it is your duty to remit it to the federal, state, or local governments required.
Dispensaries are affected by excise tax for all retail sales. The rate can be different by vertical, state, and type of use- medical or recreational. If you need assistance with excise tax, do not hesitate to contact Redbud Advisors- we are experts at cannabis tax!
Payroll Tax
Bear with us, again, as there is a lot of information to understand here, we promise it is all vital to a marijuana business.
Payroll taxes are assessed on businesses based on the employees’ wages and benefits, essentially employment-related taxes. Employers pay the payroll tax to fund social security and Medicare (FICA) withholding, unemployment insurance taxes, and workers' compensation insurance premiums. Payroll tax is also known as a trust tax.
We cannot tell you how important it is to classify all employees correctly. For example, some employees' wages can be used to deduct the Cost of Goods Sold (COGS) and some cannot. Proper classification will ensure the business is paying the appropriate tax amounts based on each employee.
Redbud Advisors understand the cannabis industry payroll challenges. We know there are cannabis businesses out there operating as cash-only establishments because it is not easy to secure a banking relationship in this industry. Because of this, it means there are marijuana businesses paying employees in cash. This is a very meticulous process and it needs to be done right. We would be happy to walk you through best practices and verify you are accounting for all taxes necessary and paying them on time.
We promise there are solutions to secure a good banking relationship to help ease the burdens of payroll within the marijuana industry. Reach out to us, we have solutions for banking and payroll systems!
Payroll taxes apply to all verticals within the cannabis industry that have employees.
Business Personal Property Tax
Business personal property tax is an ad valorem tax. What is this? It is a fancy way of saying, a tax paid by the value assessed on an item determined, by federal, state, or local governments based on your location. This can be personal property or real estate. Unfortunately, a generalization of business personal property tax is not feasible because, like a lot of taxes, it can vary based on the location of your business. All verticals in the cannabis industry are subject to paying this tax.
What items are included in business personal property tax?
Equipment
Inventory
Furniture
Fixtures
Tools
As with almost all purchases, unless you are exempt, sales tax is paid on business personal property items. Annually the cannabis business will be assessed another round of business personal property taxes based on the current value of the property. All verticals in the marijuana industry are subject to business personal property taxes based on their location.
Business personal property tax is not a flat-rate tax and will vary from one location to another. We will use Oklahoma as an example.
Business personal property tax is a percentage per $1000 of value and it varies by the counties within the state of Oklahoma. Annually, Form 901 is due in January to report and pay business personal property tax on the current value of the business assets.
Another key factor with business personal property taxes is depreciation. As the value of the business property decreases so will the tax bill associated with it. In some areas, you can request a form to pay the total taxes assessed to the item based on the item's depreciation timeline.
What is the best way to try and combat business personal property tax? We have a few tips!
Redbud Advisors always recommends not stocking up on inventory at the end of the year to our clients. Most every business out there can stand to gain something from this tip, marijuana businesses included.
Why do we recommend this? Because any new inventory purchased at the end of the year that is on hand increases your total inventory value. This means your business is paying more in business personal property taxes because of the new inventory purchased. That DOES NOT mean we recommend selling current existing inventory at a loss at the year-end.
To our clients who are cannabis growers and processors, we advise selling as much inventory as possible as the year is coming to an end. This will alleviate paying taxes on additional inventory in stock.⠀⠀⠀⠀⠀⠀⠀⠀⠀
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It is always a good idea to make sure you're working with an accountant that knows the ins and outs so you're not paying tax on items that are not subject to business personal property tax!
Important Takeaways
Taxes are hard. The marijuana industry as a whole faces a shifting regulatory environment, individual cannabis-related businesses have to deal with unique tax challenges. It's certainly not easy to manage the taxes for a cannabis business, especially federal, state, and local taxation. As new rules are put into place, there is an increased likelihood that more tax burdens will fall on cannabis businesses.
We discussed 5 common taxes affecting your cannabis business but it is important to know there are more taxes a marijuana business is responsible for, some are specific to your business, location, and type of use- medical or recreational.
Redbud Advisors consistently dedicates time to keeping up with all the current tax regulations at the federal, state, and local levels. As a full-service cannabis accounting firm, we offer a number of services to ensure your business is compliant and we understand cannabis accounting is not a one size fits all business. Redbud Advisors operate in all legalized states within the US. Give us a call at 866-830-5144 or visit us online at redbudadviosrs.com.
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