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September 8, 2021

How to Calculate Cannabis Taxes?

Most times, when consumers buy a cannabis product, and you ring them at checkout, they tend to wonder if there must have been an error. They say things like, how come my total price is so high compared to the cannabis purchased. But alas, from excise tax, state sales tax, and local business taxes, consumers pay 20 to 40 percent in taxes for any cannabis purchase. It's no wonder customers nationwide are feeling range anxiety.

This scenario is all too common, particularly in states like California or Michigan, where multiple types of taxes are multiplied on a single transaction. Your dispensary POS program should make it easy to apply accumulated taxes and post-tax fees.

Before we go entirely into how to calculate taxes, let's briefly discuss the types of taxes we will have. 

Types of Cannabis Taxes

Taxes are paid in conventional retail as a single percent on a subtotal. For instance, if an item costs $50 and the sales tax is 8.5 percent, $50 + $4.25 = $54.25 will be the sum.

That cannabis taxes are higher and more complicated, which is no mystery. You can expect to charge one or more kinds of taxes at your dispensary, depending on local rules.

The most popular types of taxation on cannabis include:

  1. Excise tax: For cannabis goods passed on to the consumer, the excise tax is directly a business tax. Instead of foreign taxes levied across national boundaries, excise taxes are intra-national tax charged within a government infrastructure. For example, in California, the 15 percent state excise tax is usually included in the item's price if a retailer buys wholesale items. The excise tax can be included either in the item's price or applied to the consumer receipt if a retailer is interconnected from its cultivation and distribution.

The excise tax that is received quarterly by the state to be used for various measures such as mental health care, drug abuse services, conservation projects, and cannabis research must be included in all legal cannabis purchases.

  1. Sales tax: When we make transactions, the sales tax is the traditional tax we are all used to paying. The tax rate varies from state and city and is generally between 4% and 17%. For example, the rate is 17 percent in Oregon, while the sales tax in Montana is 4 percent. Medical patients can avoid this tax in states like California and Maryland, but they must provide their legal, medical marijuana ID card.     

The sales tax is added to the state's general fund and is mostly used for public security, health initiatives, local transport, and education.

  1. Local Business Taxes: Local councils determine local taxes. Whether this tax should be enforced or not is up to their discretion. Health patients can be exempted or pay a lower tax rate than adult consumers from the local business tax.

With that explained, let’s get started with how to calculate cannabis taxes. We will be talking about how to calculate the cumulative tax and Normal tax calculation. Tax estimates often obey a particular order in either case; Excise Tax, Sales Tax, Local Business Taxes.

Not only are retailers supposed to collect different kinds of taxes, but the order in which they have measured matters, or you're also going to risk charging the wrong number.

Most counties, such as Colorado, Oregon, and Massachusetts, measure all subtotal taxes. Others measure each tax against the gross receipt plus added taxes, like California and Michigan. This layered calculation is referred to as cumulative taxes.

To then make this calculation easy, let say an assumption for the following tax types and the amount.

Subtotal= $50, Excise tax= 15%, Sales tax= 7.75% and the local business tax= 5%. Now let's imagine this is a small business that is vertically-integrated, and it has been configured to pass the customer's excise tax receipt. The normal tax calculation will give us a grand total of $63.89




The state sales tax rate is based on the amount of subtotal + excise tax, as you can see in the table above. ($50 + $5.25 = $55.25* 7.75% = $4.28)

Similarly, the amount of the subtotal + excise tax + state sales tax is measured as the local business tax. ($50 + 5.25 + $4.28 = $459.53 * 5% = $2.98). 

Conclusion

Navigating the cannabis taxes, you should make sure you keep these four things in mind.

  1. Make sure you do in-depth research of your state and local laws before you embark on your cannabis dispensary journey. 
  2. You will be required by the law to provide the sales details of every transaction taken.
  3. For your tax calculations, make sure you set an exact order of operation.
  4. Lastly, as the owner of a dispensary, make sure you are completely transparent with your customers. Train your workers on each form of tax so that they can address consumer questions intelligently and provide education on how cannabis tax revenue is used to enhance local communities.

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