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How to Calculate Cannabis Taxes at Your Dispensary

Congratulations! You’ve finally fulfilled a lifelong ambition of opening up your marijuana dispensary. Launching a new business brings excitement, but taxes can soon change that thrill into anxiety. In the weed industry, taxes are undoubtedly a minefield of tricky and variable laws and regulations. Thus, many first-time customers are left confused when their total at […]

How to Calculate Cannabis Taxes at Your Dispensary

Congratulations! You’ve finally fulfilled a lifelong ambition of opening up your marijuana dispensary. Launching a new business brings excitement, but taxes can soon change that thrill into anxiety.

In the weed industry, taxes are undoubtedly a minefield of tricky and variable laws and regulations. Thus, many first-time customers are left confused when their total at checkout exceeds their expected price by 15-20 percent.

As a new dispensary owner, you could do with hiring a certified public accountant with expertise in cannabis taxation law. Nevertheless, you need to learn how to calculate cannabis taxes for your dispensary on your own. 

Let’s look at the types of cannabis taxes usually charged at cannabis dispensaries and how to work out cumulative taxes.

Types of Cannabis Tax

Before calculating them, it is important to know which taxes apply to your cannabis dispensary. This will make the calculations easier. Besides, you’ll know what to tell your customers when they ask why their total at checkout is higher than they anticipated. 

Here are the most common types of cannabis taxes:

Excise Tax

The government includes an excise tax on any cannabis product you sell at your dispensary. This tax is passed on to the customer, who must pay it. Excise tax varies from one state to another. For example, Michigan imposes a 10 percent excise tax on all cannabis products. In contrast, Nevada collects a 10 percent and 15 percent excise tax on retail and wholesale cannabis, respectively.

The taxes collected from cannabis are mainly channeled to various initiatives, including:

  • Mental health treatment
  • Environmental programs
  • Substance abuse initiatives 
  • Cannabis research

Sales Tax

You’re most likely familiar with sales tax because you pay it every time you make a purchase. It is levied on the sales of products and services, including cannabis.

However, the sales tax differs across states and from city to city. For example, Oregon levies 17 percent while Montana collects 4 percent on medical cannabis sales tax. On the other hand, Michigan collects a 6 percent sales tax from buyers. However, medical marijuana patients with valid medical marijuana identification cards are exempt from this tax in Maryland and California.

The sales tax goes to the state’s general fund to fund education, local transportation, health programs, and public safety initiatives.

Local Business Tax

Local governments may also impose taxes in the form of municipal taxes or local taxes. That said, medical patients might pay a lower tax rate or be excused from the local business tax altogether.

Local Business Tax

Adding up Your Cannabis Taxes

As a cannabis retailer, you’re not only expected to collect different types of taxes, but the order of their calculations also matters. Otherwise, you run the risk of charging an erroneous amount.

Some states calculate cannabis taxes based on the subtotal. Examples include Massachusetts, Oregon, and Colorado. Others, like Michigan and California, stipulate that cannabis dispensaries should add up cumulative taxes. 

Either way, cannabis tax calculations conform to a specific order:

  1. Excise Tax
  2. Sales Tax
  3. Local Business Tax

Tax Calculation Based on the Subtotal

Assume your dispensary is in Michigan and a customer buys cannabis products worth $50. The Excise Tax is 15 percent, while the Sales Tax is 7.75 percent, and the Local Business Tax is 5 percent. So if you were to work out the tax on the subtotal, you’d come up with something like this:

Tax RateDollars
Sub Total$50
Excise Tax10%$5
Sales Tax6%$3
Local Business Tax5%$2.5
Tax Total21%$10.5
Grand Total$60.5

Thus, calculating the cannabis tax against the subtotal would lead to a total of $60.5.

Tax Calculation Based on Cumulative Taxes

Now let’s do a cumulative tax calculation on the same cannabis products worth $50.

Tax RateDollarsTax Subtotals
Sub Total$ 50
Excise Tax10%$ 5$ 50 + $5 = $ 55
Sales Tax6%$ 3.3$ 55 +3.3 = $ 58.3
Local Business Tax5%$ 2.915$ 58.3+2.915= $61.215
Tax Total21%$11.215
Grand Total$ 61.215

In a cumulative tax calculation, you calculate the sales tax rate by adding the subtotal to the excise tax. ($ 50 + $ 5 = $ 55). Then calculate 6 percent of $ 55, which gives you $ 3.3. 

Whereas the local business tax is calculated by adding the subtotal to the excise tax and state sales tax. $ 50 + $ 5 + 3.3= $ 58.3). Then calculate 5 percent of $ 58.3, which gives you $ 2.915. 

Best Tax Practices for Your Dispensary

Best Tax Practices for Your Dispensary

Here are three tips to keep in mind as you navigate the complex world of cannabis dispensary taxes.

Learn Your State and Local Laws

Before installing your dispensary POS software, you should know your state and local laws. You don’t want to find yourself in a scenario where you have been collecting cannabis taxes inaccurately. So, talk to an accountant specializing in cannabis taxation law to furnish you with the latest requirements.

Maintain Detailed Records

Retail dispensaries must maintain proof of transactions to verify the accuracy of cannabis sales. This will come in handy during compliance audits. So setting up a dispensary POS system can help you create a paper trail of compliance.

Enlighten Your Customers

Moreover, by printing the tax details on the purchase receipts, you can help your customers know what taxes are being applied. This enables your customers to understand how their total cost at checkout came to be.

Your staff and budtenders should also be knowledgeable about the applicable cannabis taxes. This will help them intelligently respond to customer queries. They can also educate customers about the use of the taxes on cannabis products in community initiatives. 

The Bottom Line

Now that you know the types of cannabis taxes and how to calculate them, you can set up a dispensary POS system to automate the entire tax calculation. 

Some states advocate for compounding cannabis taxes through the order of operations. So with just a few clicks, you can set up the correct order of cumulative taxes on your dispensary POS system. Thus, you have clear visibility of how your dispensary taxes are calculated.