Taxes & Licenses on Marijuana in Colorado
In addition to the income tax burden on marijuana businesses operating in Colorado, there are additional sales taxes and excises taxes imposed on marijuana retailers and cultivators. Furthermore, a business should carefully obtain the proper licensing with the state in order to ensure sales tax licenses obtained in the correct manner. This article will provide a brief synopsis of the tax and licensing climate in Colorado for a business dealing with retail and medical marijuana.
First, both medical and retail marijuana businesses must withhold and remit a 2.9% state sales tax on the sale of marijuana, which is in addition to any other local sales tax assessed by the municipality in which the facility operates. In addition to the 2.9% sales tax, retail marijuana sellers must withhold and remit an additional 10% special sales tax on marijuana to retail consumers. Given that 2015 sales of marijuana nearly reached $1 billion, total YTD FY 2015-2016 sales taxes for medical and retail operations (the 2.9% tax) were $9.948 million (up 15.6% over the prior fiscal year-to-date) for medical marijuana sellers and $15.557 million for retail sellers (up 64.9% over the prior fiscal year-to-date). The special sales tax on retail marijuana operators (the 10% sales tax) collected for the 2015-16 fiscal year-to-date amounted to $54.161 million through April (an increase of 64.3% over the prior fiscal year-to-date). While there are no sales tax exemptions available to retail marijuana sellers, retail marijuana stores may sell to other retail marijuana stores without incurring or remitting a sales tax since the product is not sold to the end consumer. However, medical marijuana sales are exempt from state sales taxes for sales to patients that are issued a registry card that has tax-exempt status notation from the Colorado Department of Public Health and Environment (CDPHE). A person may qualify for tax-exempt status depending on the number of people in the patient’s family and if their income is below a certain level.
While there are no sales tax exemptions available to retail marijuana sellers, retail marijuana stores may sell to other retail marijuana stores without incurring or remitting a sales tax since the product is not sold to the end consumer.
Second, retail marijuana sellers (non-medical) are assessed an additional 15% excise tax on a monthly basis. For the 2015-16 fiscal year-to-date through April, total excise taxes collected were $32.568 million, which was up 87.3% over the prior fiscal year through April. The excise tax is not complicated, but involves a bit of work. The tax is not calculated on the operations’ sales in dollars, but rather by multiplying the quantity of retail product sold by the average market rate at the time sold. After the product quantity sold is multiplied by the average market rate, the 15% excise tax is then multiplied to derive the tax. For example, let’s assume a cultivator Hybrid CO, LLC transfers 5 pounds of flower, 10 pounds of trim, and 15 plants to the Hybrid CO, LLC store. Taking into consideration the current period (Jan. 1, 2016 through June 30, 2016) market rates are $1,948 per pound for retail flowers, $464 per pound for retail trim, and $9 per retail immature plant, the excise tax is calculated as follows:
Special care and attention should also be devoted to understanding the intricacies of what sales tax license or wholesale tax licenses need to be obtained in order to be compliant. A sales tax and wholesale tax license may be required for a business that both cultivates and sells retail marijuana. If the retail cultivation facility is owned and located at the same address as the retail or medical marijuana store, and, the retail store already has a retail sales tax license, no additional sales tax license is required for the cultivation portion of the facility. On the other hand, if the retail marijuana cultivation facility’s location is not at the same address as the retail or medical marijuana store, a wholesale license is required. For an additional resource, see the licensing diagram for assistance.
If the retail cultivation facility is owned and located at the same address as the retail or medical marijuana store, and, the retail store already has a retail sales tax license, no additional sales tax license is required for the cultivation portion of the facility.
Last, marijuana businesses are entitled to the marijuana business deduction on their Colorado income tax return. For Colorado licensed marijuana businesses, an expense that is eligible to be claimed as a federal income tax deduction, but is disallowed under Code Sec. 280E of the Internal Revenue Code, a deduction is permitted under Colorado statute. In order to calculate the deduction a pro-forma federal schedule of business income must be prepared as if the federal government would have allowed all expenses as if the Internal Revenue Code Sec. 280E did not exist. The Colorado deduction (subtraction modification) is the difference between the actual federal taxable income on the federal return as filed and the federal taxable income on the pro-forma schedules. It is paramount that a business work with an accountant that is knowledgeable of federal tax law surrounding the sales of marijuana in order to accurately prepare and file a Colorado income tax return.