Congratulations! You’ve taken the leap and have officially opened up your cannabis dispensary, grow facility, processing facility, or another cannabis-related company. Starting a new business is exciting, but the dreaded T-word—taxes—can quickly turn that excitement into anxiety.
In the cannabis industry, taxes are notoriously a minefield of tricky regulations and changeable laws. While hiring a CPA who’s an expert in cannabis taxation law is advisable for any new cannabis business owner, educating yourself on how to calculate cannabis taxes is also essential.
Although this article will provide you with important information, calculating cannabis taxes in Michigan is never straightforward. At MI Tax CPA, we make the process easy and stress-free. Call us today at (248) 600-5506 for your free consultation!
Understanding the Types of Cannabis Tax
Before you even begin calculating cannabis taxes, you have to know exactly which taxes apply to cannabis businesses in Michigan. Understanding the types of taxes will make the process easier and help you explain the regulations to your customers.
Many first-time customers are confused when their total at checkout is 15-20% more expensive than they had expected. When this happens, the best strategy is to explain to them which taxes are applied to cannabis products and what those taxes are used for.
When a business sells a cannabis product, the government adds an excise tax to that product. This tax must be paid for by the customer. In Michigan, the excise tax is usually added to the original price on the receipt. However, some businesses choose to sell products at a price that’s inclusive of the excise tax.
While the amount varies from state to state, Michigan collects a 10% excise tax on all marijuana products. Excise taxes are collected by the state quarterly, and each store will have a separate excise tax.
A 10% increase in price can easily shock a customer at checkout, but the tax goes to initiatives that help your local community. Mental health and substance abuse services, educational programs, and environmental initiatives are all funded by excise taxes.
Sales tax is something all customers will be familiar with. In Michigan, a 6% sales tax is collected from customers at checkout. Like the excise tax, sales tax is typically collected quarterly. However, if your average monthly tax liability is over a certain amount, then sales tax will need to be paid monthly.
As with other businesses, cannabis companies need to file state and federal income taxes every year. Unsurprisingly, cannabis businesses have very specific rules they need to follow when filing their taxes. These rules are especially important when filing federal taxes, but understanding state tax laws always helps.
Wrongly filing your federal taxes or filing the incorrect forms can lead to audits and other legal repercussions. To make matters even more confusing, the cannabis industry, 280E, Inventories—and the regulations associated with it—are constantly changing.
Adding Up Your Taxes Correctly
Once you know the types of taxes and how much they are, adding up your taxes sounds easy enough. Unfortunately, nothing in the tax world is easy. While some states allow you to calculate taxes based on the subtotal, Michigan requires businesses to calculate cumulative taxes.
In addition to calculating cumulative taxes, you need to calculate your taxes in the correct order. In Michigan, this means always following this order:
- Excise Tax
- Sales Tax
Calculating cumulative taxes and calculating them in the correct order is the only way to collect the correct amount of taxes. When businesses calculate taxes based on the subtotal, they run the risk of charging less tax than they are responsible for paying.
Let’s say a customer buys $50 worth of cannabis products. If you were to take that $50 and add $3 for the 6% sales tax and $5 for the 10% excise tax, you would arrive at a total of $58.
When you calculate cumulative taxes in the correct order, you would add $5 for the 10% excise tax and arrive at $55. You would then add $3.30 for the 6% sales tax and arrive at a total of $58.30. Although this doesn’t seem like much of a price difference, such discrepancies add up over time.
Making Deductions on Your Gross Income
Understanding exactly what you can deduct from your state and federal taxes is no easy feat, but it could save you thousands of dollars a year.
Working with an experienced accountant who is knowledgeable about Michigan’s cannabis taxation laws will save you both time and money, but there are certain federal laws cannabis business owners should know. One such law falls under Internal Revenue Code 280e.
Because marijuana is still considered an illegal substance at the federal level, deducting expenses related to buying the plant can still be considered drug trafficking. This means that as a dispensary owner, you might find yourself with very few expenses to deduct come tax season.
However, according to Michigan’s Department of Treasury Revenue Administrative Bulletin 2019-17, the state of Michigan allows marijuana business owners to deduct “ordinary and necessary” business expenses from state taxes.
While things like labor and non-drug-related materials can be deducted from your federal taxes, Michigan allows you to deduct expenses related to buying and selling marijuana from your state taxes. These deductions were made possible under the Michigan Regulation and Taxation of Marihuana Act.
Contact Us for a Free Consultation
Although we tried to cover the basics in this article, there’s still a lot to know when it comes to calculating cannabis taxes. If you’re feeling overwhelmed, uncertain, or just interested in learning more, then we’d love to hear from you. At MI Tax CPA, we offer free consultations to cannabis business owners.
We’re here to help you better understand the tax laws and regulations, save money with smart deductions, submit your annual financial statement, and stay on schedule with all payments. With our CPAs on your team, you can focus on making your business the best it can be.
Call our office today at (248) 600-5506 for your free consultation, and learn what we can do for you and your business!