Sales Tax Recovery for the Cannabis Industry

Last Updated on November 21, 2022

The cannabis industry is still in its infancy, but with expanded legislation and ever-flowing capital, it stands to grow from a projected $27.7 billion in 2022 to over $149 billion by 2031. The race-to-market and product demand now support over 425,000 jobs, and that’s with only 22 states supporting recreational use. In fact, Maryland and Missouri have become the latest states to pass recreational laws beginning in November 2022.

So far, thirty-seven states have passed legislation to legalize marijuana for medicinal use and twenty-one have legalized marijuana for recreational use.

Which States Have Legalized Marijuana?

Here is a full chart outlining the state legality of cannabis in the United States of America:

State Legal Status Medicinal Recreational
Alabama Mixed Yes No
Alaska* Fully Legal Yes Yes
Arizona Fully Legal Yes Yes
Arkansas Mixed Yes No
California Fully Legal Yes Yes
Colorado Fully Legal Yes Yes
Connecticut Fully Legal Yes Yes
Delaware* Mixed Yes No
District of Columbia Fully Legal Yes Yes
Florida Mixed Yes No
Georgia Mixed CBD Oil Only No
Hawaii Mixed Yes No
Idaho Fully Legal Yes Yes
Illinois Fully Legal Yes Yes
Indiana Mixed CBD Oil Only No
Iowa Mixed CBD Oil Only No
Kansas Fully Illegal No No
Kentucky Mixed CBD Oil Only No
Louisiana Mixed Yes No
Maine Fully Legal Yes Yes
Maryland Mixed Yes Yes
Massachusetts Fully Legal Yes Yes
Michigan Fully Legal Yes Yes
Minnesota Mixed Yes No
Mississippi Mixed Yes No
Missouri Mixed Yes Yes
Montana* Fully Legal Yes Yes
Nebraska Fully Illegal No No
Nevada Fully Legal Yes Yes
New Hampshire* Mixed Yes No
New Jersey Fully Legal Yes Yes
New Mexico Fully Legal Yes Yes
New York Fully Legal Yes Yes
North Carolina Fully Illegal No No
North Dakota Mixed Yes No
Ohio Mixed Yes No
Oklahoma Mixed Yes No
Oregon* Fully Legal Yes Yes
Pennsylvania Mixed Yes No
Rhode Island Fully Legal Yes Yes
South Carolina Fully Illegal No No
South Dakota Mixed Yes No
Tennessee Mixed CBD Oil Only CBD Oil Only
Texas Mixed CBD Oil Only CBD Oil Only
Utah Mixed Yes No
Vermont Fully Legal Yes Yes
Virginia Fully Legal Yes Yes
Washington Fully Legal Yes Yes
West Virginia Mixed Yes No
Wisconsin Mixed CBD Oil Only CBD Oil Only
Wyoming Fully Illegal No No
*States that don’t have sales tax


Cannabis and Sales & Use Tax – What To Do Next

Companies, whether single-state or multi-state operators, are spending millions of dollars on grow houses, R&D and related production costs. Despite regulations and other tax implications, companies should still view their purchases in the same vein as any other type of manufacturer or agricultural company. The word “cannabis” may appear cautionary for refund filing, but it does not change how that purchasing relates to the same activities shared by other manufacturers.

With many companies spending anywhere from $20 million to over $80 million on new production facilities/grow houses alone, it is important to review your business’s sales and use tax amounts. Take great care in applying the same logic and substantiation used elsewhere in the industry.


Common Sales & Use Tax Exemption Area for the Cannabis Industry

Here is a list of areas where some states will allow for sales and use tax exemptions:

  • Agricultural / Manufacturing Exemptions
    • Grow Houses
    • Temperature Control Equipment
    • Computer Hardware and Software
    • Processing Equipment
    • Lighting
    • Utilities
    • Wrapping and Packaging
  • Research and Development
  • New Construction

If you look at the cannabis industry, a single operator could have biotech implications (especially in CBD oils), R&D, processing, wrapping & packaging, and of course, utilities.

Also, in the case of the retail side, i.e. dispensaries, there could be implications for new construction and additions to real property that may lead to material cost savings.


The Cannabis Industry and Utility Taxes

On the utility side, states employ different rules where electricity, lighting and water may either be exempt from sales tax altogether or possibly render the entire bill exempt if over a certain percentage is used in production. Some grow houses may require several thousands of dollars a month in order for lighting and temperature-controlled environments to run around the clock.


How to Get Control Of Your Cannabis Industry Business’s Sales Tax

States generally afford taxpayers anywhere from three to four years of statute to recover overpaid and over-accrued sales and use tax. In some states, like Pennsylvania, New York and Missouri, hard-dollar remedy stems directly from the state. In other states, refunds can be filed directly with the vendor, as in the case of Massachusetts and Maryland.

Sales and use tax refund reviews, also commonly called “reverse audits”, are a great cost savings tool to recoup dollars before the statute runs out and implement process improvements (such as exemption certificates) to mitigate future issues. Many companies do not have proper sales tax oversight with a controller more focused on income tax. The fact is, if the company is paying or accruing a material amount of sales and/or use tax, a refund review is paramount to ensuring that dollars are not left on the table.


Looking for Experienced Cannabis Industry Sales Tax Services?

TaxMatrix is a leading sales and use tax recovery and audit defense firm that works extensively with manufacturing and pharmaceutical companies nationwide. For more information, call us or reach out to our team today.

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