Although the presidential campaign seemed to dominate headlines earlier this month, there was another proposition that passed in California (as well as a handful of other states): recreational marijuana became legal. What does this mean for the Golden State’s sales tax revenue? And how will it affect other industries? I thought it would be worth taking a look at what other states have done and how California may proceed in the coming months.
How Colorado & Washington Approach Marijuana Sales Tax
Colorado and Washington legalized recreational marijuana in 2012. Here’s how they currently charge sales tax:
Colorado
In 2015, the state of Colorado received $135 million in sales tax revenue from nearly $1 billion in marijuana sales. It’s worth noting Colorado’s population is only about a tenth of California’s.
Recreational marijuana is subject to:
- 2.9% state sales tax (which is the rate for all tangible personal property)
- Any local sales taxes
- An additional 10% state marijuana sales tax
- Recreational marijuana is also subject to a 15% excise tax
In Colorado, the retail cultivator is liable for the excise tax, which is included in the price the consumer pays at the store (which is similar to liquor or tobacco). The sales tax is imposed on the sale from the retailers to the consumer.
Washington
Washington’s marijuana market is even larger than Colorado’s; the state is expected to see more than $2 billion in annual sales by 2020. Here’s how the state breaks down marijuana sales tax:
- As of July 1, 2015, the excise tax of 37% is imposed on consumers
- Recreational marijuana is subject to local sales and use tax
- Retailers are liable for business and occupation tax
Marijuana sales in the state have consistently gone up each year. Already, Washington has seen higher sales and collected more excise tax in 2016 than 2015, and the year isn’t over yet.
How California Will Likely Tackle Marijuana Sales Tax
As you can tell, both Colorado and Washington apply standard sales tax to recreational marijuana purchases, in addition to specific taxes and fees given the nature of the product. What will marijuana sales tax look like in California?
The measure itself (Proposition 64) includes a 15 percent tax on the retail sale or marijuana. Proponents of the bill estimate, “This tax could generate up to $1 billion a year in California, as well as $100 million in saved taxpayer money on an annual basis.”
However, it will likely take a few years for the revenue to begin. Adults 21 and over can legally possess and grow marijuana right away, but only state-licensed retailers will be able to sell it and California has until the January 2018 to begin issuing licenses. Businesses will also need two licenses – one for the state and one local.
Another interesting issue the Los Angeles Times brings up is how California will accept $1 billion in tax revenue as federally-regulated banks won’t accept proceeds from drug sales. Washington and Colorado businesses are also currently struggling with strict banking regulations.
It will be interesting to see what sales tax ramifications unfold as the Golden State figures out the logistics of this new law. In the meantime, stay tuned for more news surrounding multi-state taxes, nexus, online sales tax and more as it unfolds, and please contact us if you have any questions with which we can assist!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
