How does sales tax apply to cannabis marijuana
How States Tax Medical Marijuana
Medical marijuana is currently legal in 37 states and the District of Columbia, and while some of these states apply taxes to medical cannabis purchases, these rates are typically much lower than those applied to recreational sales. Because medical programs often require doctor approvals, application fees, and other administrative steps, overall consumption tends to be smaller. As a result, states generate relatively little revenue from medical marijuana taxes compared with recreational cannabis.
Types of Cannabis Taxes: How States Structure Marijuana Taxation
State and local governments primarily rely on three types of cannabis taxes for recreational marijuana:
- Percentage-of-price taxes
- Weight-based taxes
- Potency-based taxes
Some states apply multiple tax structures at once, while others pair these excise taxes with traditional sales taxes.
1. Percentage-of-Price Cannabis Taxes
A percentage-of-price tax is the most common form of marijuana excise tax in the U.S. It functions similarly to a traditional sales tax—calculated as a percentage of the retail price and paid by consumers at checkout—but typically at a much higher rate.
Key features:
- Applied at the retail level
- Remitted by the seller
- Often significantly higher than a state’s general sales tax
- Local cannabis taxes (when allowed) usually fall between 2% and 5%
State tax rates vary widely, from 6% in Missouri to 37% in Washington. Counting states that have legalized but not yet launched sales, 15 states use only a percentage-of-price tax, while five states combine it with another tax structure.
2. Weight-Based Cannabis Taxes
Weight-based taxes apply an excise tax according to the physical weight of the cannabis being sold. This model is used in Alaska, Colorado, Maine, Nevada, and New Jersey.
How weight-based taxes work:
- The cultivator (grower) is responsible for paying the tax
- Tax rates may differ based on the part of the plant
- Flower typically carries the highest tax rate due to its potency
- Trim and other plant material are taxed at lower rates
New Jersey is the only state using a weight-based system that does not differentiate tax rates by plant component.
3. Potency-Based (THC) Taxes
A potency-based tax is calculated according to the level of THC, the psychoactive compound in cannabis. This system mirrors alcohol taxation, where beverages with higher alcohol content are taxed at higher rates.
States using potency-based taxes include:
- Connecticut
- Illinois
- New York
Under this model, cannabis products with higher THC concentrations carry higher tax burdens, providing a more targeted approach to regulating stronger products.
Additional Taxes on Cannabis Purchases
In addition to excise taxes, 17 states apply their general sales tax to recreational marijuana purchases. This layered approach can significantly increase the effective tax rate paid by consumers at the register.
This table is from the Taxpayer Policy Center:
How does sales tax apply to cannabis marijuana?
Which states have sales tax on cannabis and marijuana?