When states legalize cannabis, taxation is often one of the most hotly contested topics. To date, 18 states and Washington, D.C. have legalized recreational cannabis for adult use, while medical marijuana is legal in 37. Because each state has its own regulations, taxation schemes vary significantly.

Types of Cannabis Taxation

Cannabis can be taxed at several different points of the production and distribution process. It can also be taxed at both the state and local level. Should the federal government decide to legalize cannabis, the tax scheme will also likely change to include federal taxes.

At this point, there are several different tax schemes being employed by states that have legalized recreational cannabis. They include:

• Percentage of price: Much like a sales tax, consumers pays a certain percentage in addition to the retail price.  The cannabis retailer then turns the taxes collected to the state.
• Weight-based:  Weight-based taxes are similar to those used for cigarettes. With cannabis, the tax is levied by the weight of the plant rather than a flat tax on each box. Typically, a different amount of tax assigned to different products, i.e., flowers vs. leaves. California uses a weight-based taxation system.
• Potency-based: Potency-based tax schemes resemble those used for liquor. Much like beverages with stronger alcohol content are subject to higher taxes, some states use potency, which is based on THC levels, to set tax rates. To date, Illinois is the only state to use this tax levy system.

Additionally, many states levy a cannabis excise tax in addition to the regular state sales tax.

New Jersey Taxation of Recreational Cannabis

In New Jersey, recreational cannabis will be subject to two state taxes and a local tax. In addition to the state sales tax of 6.625% paid by consumers, cannabis growers will be subject to a gradually increasing excise tax.

For the first nine months of legal sales, the tax will be 33% of 1% of the average retail price per ounce. Thereafter, the tax will depend on the cost per ounce of cannabis, as follows:

• $10 per ounce if average retail price per ounce is above $350;
• $30 per ounce if average retail price per ounce is between $250 and $350;
• $40 per ounce if average retail price per ounce is between $200 and $250; and
• $60 per ounce if average retail price per ounce is below $200.

New Jersey municipalities can also enact by ordinance a local cannabis tax that may not exceed 2% for cannabis cultivators, manufacturers, and/or retailers; and 1% for wholesalers. The tax percentage is based on the receipts for each sale and must be paid directly to the municipality.

Recreational Marijuana Tax in Other States

In a recent report, entitled “Taxing Marijuana: Which Recreational States Levy The Highest Taxes?”, the Chamber of Commerce summarized the taxing structures and rates used by states that have legalized recreational cannabis. Below is a brief summary:

• Alaska: 0% state sales tax and excise tax  of $50/oz. mature flower; $25/oz. immature flower; $15/oz. trim; $1 per clone;
• California: 15% sales tax and excise tax of $9.65/oz. flower; $2.87/oz. leaves cultivation tax; $1.35/oz cannabis plant;
• Colorado: 15% sales tax and 15% excise tax;
• Illinois: 7% excise tax of value at the wholesale level;  10% tax on cannabis flower or products with less than 35% THC;  20% tax on products infused with cannabis, such as edible products;  25% tax on any product with a THC concentration higher than 35%;
• Massachusetts: 10.75% sales tax;
• Michigan: 10% sales tax; 
• Nevada: 10% sales tax and 15% excise tax;
• Oregon: 17% sales tax; and
• Washington: 35% sales tax.

The report also discusses which recreational states levy the highest taxes. While Washington’s taxes are the highest, it’s not the most expensive place to buy legal cannabis. Instead, Alaska holds that title. In Alaska, consumers pay $45 per eighth ounce. Nevada comes in second, with consumers paying $43 per eighth ounce. California charges $41, while Massachusetts and Washington sell an eighth for about $35. 

Key Takeaway

For businesses looking to enter New Jersey’s legal cannabis industry, it is important to understand how products will be taxed.  Of course, taxation is just one issue that businesses must address, with other key considerations including licensing, site construction/purchase/leasing, insurance, employee hiring/training, and marketing. For comprehensive guidance navigating the evolving cannabis industry, we encourage businesses to consult with a member of the Scarinci Hollenbeck Cannabis Law Group.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact Dan McKillop, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

This article is a part of a series pertaining to cannabis legalization in New Jersey and the United States at large. Prior articles in this series are below:

• Sponsors of Federal Cannabis Legalization Bill Flooded With Feedback
• The Cannabis Regulatory Commission’s Initial Rules Are Here, Now What?
• Breaking Down the New Federal Cannabis Legalization Bill

Disclaimer: Possession, use, distribution, and/or sale of cannabis is a Federal crime and is subject to related Federal policy. Legal advice provided by Scarinci Hollenbeck, LLC is designed to counsel clients regarding the validity, scope, meaning, and application of existing and/or proposed cannabis law. Scarinci Hollenbeck, LLC will not provide assistance in circumventing Federal or state cannabis law or policy, and advice provided by our office should not be construed as such.