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“From Prohibition to Profit: The Potential Tax Benefits of Legalizing Marijuana”

April 2, 2024

Jennifer Karpchuk's article “From Prohibition to Profit: The Potential Tax Benefits of Legalizing Marijuana” in The Legal Intelligencer

The Legal Intelligencer

Reprinted with permission from the April 2, 2024, edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

From Prohibition to Profit: The Potential Tax Benefits of Legalizing Marijuana

By: Jennifer W. Karpchuk

Governor Shapiro announced his second budget proposal earlier this month.  He did not seek large tax reform in his budget proposal.  Instead, Governor Shapiro touted his budget as a balanced budget that does not raise taxes.  While the Governor’s budget would not raise current taxes, it would create a new revenue source by legalizing and taxing recreational marijuana.  Pennsylvania’s neighboring states have legalized and begun taxing marijuana, including Delaware, Maryland, New Jersey, New York, and Ohio.  Governor Shapiro noted that Pennsylvania is losing out on an estimated $250 million in revenue every year that it does not legalize and tax the industry.  

If Pennsylvania legalizes and taxes medical marijuana, what are its options?  Governor Shapiro proposed a 20% tax on the wholesale price of cannabis.  The states that have legalized and are taxing marijuana have taken varied approaches, yet they fall into three general categories of excise taxes: (1) percentage-of-price taxes; (2) weight-based taxes; and (3) potency-based taxes.  Percentage-of-price taxes operate similar to a sales tax and are calculated as a percentage of the retail price.  This tax is paid by the consumer and remitted to the state by the retailer.  The marijuana tax tends to be higher than the state’s general sales tax.  Across the country, the rates range from a low in Missouri of 6% to a high in Washington of 37%.  In the states that have begun taxing recreational marijuana, this approach is the most common. 

Some states impose a weight-based tax.  The weight-based tax is imposed upon the cultivator, who is responsible for remitting the tax to the state.  Generally different parts of the plant are taxed at different rates.  Alaska, Colorado, Maine, Nevada and New Jersey employ some version of a weight-based tax.

Finally, the potency-based tax is imposed based on the product’s level of tetrahydrovannabinol (“THC”).  This type of tax system is similar to alcohol taxes, with higher rates applied to products containing higher levels of concentrations.  Connecticut, Illinois and New York use THC potency-based taxes in their marijuana tax systems.

In addition to the excise tax, many of the states that have legalized recreational marijuana also imposed their general sales tax on the retail purchase of marijuana.  For instance, in Colorado, retail sales of marijuana are subject to the state’s standard sales tax, plus an additional 10% marijuana sales tax.  Additionally, a 15% excise tax is applied to the wholesale price of retail marijuana (i.e. the price that businesses pay cultivators).   

Turning to some of Pennsylvania’s immediate neighbors, New Jersey imposes its retail sales tax of 6.625% on sales of marijuana.  Additionally, the state imposes a weight-based tax (currently $1.10 per ounce) that is collected and remitted by cultivators.  Localities can impose an additional 2 percent gross receipts tax on cannabis businesses.

            Meanwhile, in New York, distributors must pay half a cent per milligram of total THC for flower, eight-tenths of 1 cent per milligram for concentrates, and 3 cents per milligram for edibles.  Additionally, the state imposes a 13% excise tax (9% state, 4% local) on retail sales of cannabis, which is paid by consumers and remitted to the state by the retailer.

            Finally, Delaware passed legislation legalizing marijuana during April 2023.[1]  That legislation establishes a 15% excise tax on the purchase of cannabis.  Delaware does not have a state or local sales tax. 

            Valuable tax revenue can be obtained from the legalization and taxation of recreational marijuana. While outside the scope of this article, there are pros and cons to each of the types of tax systems that states have imposed.  With seemingly growing bipartisan support for the legalization of recreational marijuana, the legislature should carefully consider the best way for Pennsylvania to tax this growing industry.

[1] Legal sales of marijuana will not begin in Delaware until 2025.