February 2022

Last year, Governor Cuomo legalized the recreational use of marijuana in New York. Local governments were given the opportunity to ban cannabis stores and consumption lounges in their jurisdiction. This year, Governor Hochul is trying to get the cannabis industry up and running, hoping to soon establish the first retail stores. With retail stores come sales tax.

There will be a 13% sales tax on the sales of marijuana, 9% state sales tax and 4% local sales tax. The tax collections are expected to go towards education, community reinvestment, and drug treatment (nothing like selling drugs, to raise money to get people off drugs???). Sales tax alone is expected to bring in millions of dollars of revenue into the State coffers, although revenue predictions are slightly lower than thought last year. But is a 13% sales tax rate too high? How does New York’s rate compare to other states’ sales tax rates?

Colorado, the first state to legalize sales of marijuana, opened its first retail stores in 2014. Colorado has a sales tax rate of 15% on marijuana.

California began retail sales in 2018. California’s normal sales tax rate applies to sales of marijuana as well. However, it has an additional excise tax of 15%. California tax revenues on Marijuana are much lower than expected. Experts believe that since there is no criminal ramification for carrying marijuana, it has made it easier for illegal drug dealers to sell and avoid paying any taxes on their sales.

Illinois imposes its regular sales tax on the sale of cannabis but created a new, additional excise tax which works on a tiered system:

• 10% tax on cannabis with a THC level of 35% or less
• 20% tax on cannabis infused products
• 25% tax on cannabis with a THC level above 35%

Whether states call it a sales tax or an excise tax, it is still a tax on the retail sales price of marijuana. But the states haven’t learned that if people were willing to break the law to smoke it, they are certainly willing to break the law to avoid paying tax on it.

Guess the tax auditors will be busy… If you or your client need guidance in any area of sales tax, Sales Tax Defense is here to help.

Success Story

A contractor came to us for help on his company’s sales tax audit. The company did both taxable work and nontaxable capital improvement work. A test period was reviewed by the auditor, and she initially calculated additional sales tax due on almost every invoice. However, knowing the nuances of capital improvements, Sales Tax Defense was able to successfully argue that a large majority of sales were nontaxable.

The results of the test period were extrapolated to the entire three-year audit period. However, the extrapolation was done incorrectly. The auditor argued that it was the same extrapolation calculation she does on every audit. In return, Sales Tax Defense argued that the State has wrongly done extrapolations on contractors for years. After further discussions with the auditor and her supervisor, they agreed to our calculations. We were able to further reduce the amount of tax due simply by redoing the State’s tax calculation.

If you need help reviewing an auditor’s tax calculation, contact Sales Tax Defense!