Cannabis ‘Tax Stacking’ Harms Legal Sellers and Drives Up Prices

SIMON MENKES CPA, RACHEL WRIGHT CPA AND ABRAHAM FINBERG CPA

Reprinted with permission of Bloomberg Tax

Simon Menkes, Rachel Wright, and Abraham Finberg say Missouri’s two cases on cannabis “tax stacking” show how the practice drives consumers to the illicit marketplace.

In her recent article for BloombergTax, “Missouri Cases Test Whether Counties Can ‘Stack’ Marijuana Taxes”, correspondent Leah McBride Mensching discusses the two cases in Missouri that seek to stop some counties from “tax stacking” – a situation where counties place a cannabis tax on top of one already being charged for city sales, thereby creating a situation where cannabis companies and their customers are forced to pay taxes far in excess of what legislators originally intended. Unfortunately, governments in cannabis-legal states see cannabis as a tax goldmine and have pushed through taxes that are burdensome, and in some cases, actually impossible to comply with unless the business comes out of its pocket and pays significantly more tax than it collects from its customers.

These government tax grabs have forced legal cannabis businesses to raise their prices to pay for the inflated taxes, rendering them less competitive and driving consumers to the illicit marketplace. The net result has also been a reduction in the amount of state and local taxes collected.

Missouri’s Situation

Missouri’s Amendment 3 legalized adult-use cannabis sales for the Show Me State on November 8, 2022 and authorized an adult-use cannabis tax of six percent with the option for local governments to enact an additional cannabis tax of three percent. A dispensary in a city that enacted a city cannabis tax would collect three percent from its customers and pay the funds to that city, while a dispensary in an unincorporated area whose county had enacted a county cannabis tax would collect and pay that tax to the county.

A number of Missouri counties that contain cities with three percent city cannabis taxes and which have enacted their own three percent county cannabis tax have required that city dispensaries collect six percent from their customers, not three percent, thereby creating a city and county set of “stacked” taxes.

Missouri Department of Revenue’s Failed Clarification

In February 2023, Missouri Department of Revenue clarified that “a city and a county cannot ‘stack’ the additional up to 3% local tax on recreational marijuana sales.” Pushback from counties caused the DOR to backtrack later in the month stating the guidance was “rescinded” and that “the Department will not advise municipalities or counties regarding the possibility of stacking.” Missouri’s state court system will now have to decide whether this case of tax stacking is unconstitutional or not.

But Missouri’s obvious tax stacking is only the tip of the national stacking iceberg.

Cannabis State and Local Taxes Create Confusion

Bloomberg correspondent Mensching notes that eleven states nationwide have local cannabis excise taxes which can come from a county, a municipality, or a special district. In many cases, these taxes have not been coordinated between the different governments involved. This has created a condition of tax stacking called “tax-on-tax” resulting in confusion and vastly inflated taxes.

Tax-On-Tax, the Ultimate Tax Stacking

The problem arises from the definition of “gross receipts,” the number on which most of the nation’s state and local cannabis taxes are based. Most governments define gross receipts as all monies collected from the sale of cannabis products, less the amount collected for state sales tax.

Los Angeles and California are a case in point. The City of Los Angeles defines gross receipts as all monies collected including the state’s excise tax. Only state sales tax is excluded. Los Angeles warns, “The reported gross receipts will be considered underreported if the business did not include in the gross receipts any excise taxes that was charged to the consumer.”

For its part, the state of California requires that the calculation of gross receipts for their excise tax include all monies collected by a cannabis business including “any expense imposed on you as a retailer that you pass on to your customer, such as a local cannabis business tax.”

The cannabis company is left with a conundrum: does it include the state excise tax in its calculation of the city tax (as the city demands), or does it include the city tax in its calculation of the state excise tax (as the state demands)?

The only way to satisfy both parties is to pay the difference between the city tax it collects from its customers and the actual tax it pays to the city. In the case of cannabis businesses in the City of Los Angeles, this has resulted in a 43% increase in the tax paid over what was collected.

This kind of tax-on-tax tax-stacking is taking place in states all across the country.

The Harm of Tax Stacking and the Effect on State Economies

Tax stacking is a government tax grab, pure and simple, and the harm it causes to the legal cannabis industry, its customers, and to state economies is not hard to spell out. The legal cannabis industry is already in a pitched battle with illegal sellers who pay no taxes whatsoever and who offer customers a low-priced (and less safe) option whose pricing legal sellers cannot match.

To place the additional burden of tax stacking on the backs of the legal cannabis industry is to make it that much harder to compete with the illegals. Millions of dollars in business are driven to the shadow market, depriving states and localities of the legitimate tax dollars they deserve.

As we noted in a recent commentary on New York’s proposal to cut their state’s cannabis excise tax, studies have shown consumers are willing to pay no more than a 10% to 15% premium over the illicit market to purchase state-legal cannabis. Missouri’s tax stacking takes the state’s cannabis taxes from nine percent (6% state, 3% local) to twelve percent, which is right within the threshold of taxation that will drive consumers to the illicit market.

State and local governments should avoid tax stacking at all costs. Even if it means relinquishing the additional taxes they’ve managed to collect and would so desperately like to keep.