An excise exploration: Unpacking Minnesota’s cannabis taxation
By Ari Hoffnung
May 26, 2023
Minnesota is poised to become the
23rd state to legalize cannabis use for those 21 and older. The
bill legalizing cannabis use spans more than 300 pages and encapsulates a wealth of information.
It includes the formation of the Office of Cannabis Management to oversee industry regulation, a mechanism for those with marijuana convictions to expunge their records and a framework for 15 different cannabis license types. Businesses can apply for these licenses, which include cannabis cultivation, manufacturing and retail.
The bill also introduces a Gross Receipts Tax of 10% as an excise tax on the sale of cannabis products. Furthermore, the state's prevailing
sales tax of 6.875% will also be applicable to cannabis sales. Consequently, consumers will effectively pay a cumulative tax of 16.875% at the point of purchase. This means that an outlay of $100 for cannabis products will, with taxes included, amount to a total payment of $116.88.
Here’s some additional background information on cannabis excise taxes.
What is the purpose of cannabis excise taxes?
Cannabis taxes, much like those imposed on alcohol, cigarettes and gasoline, fall into the category of excise taxes. The
Tax Foundation advises that states should aim to balance the potential negative outcomes and positive impacts of cannabis taxation. This balancing act involves setting a tax rate that is sufficiently low to allow the emerging legal market to effectively compete with, and ultimately eradicate, the illicit market. Conversely, the tax rate must also be adequately high to generate sufficient funds to cover expenses associated with cannabis regulation, such as licensing and administration. This also covers societal costs stemming from its consumption, including funding for cessation programs.
How are cannabis excise taxes structured?
According to the
National Conference of State Legislatures, states have adopted three different approaches for cannabis excise taxes:
- Based on price. In most states, including Minnesota, cannabis excise taxes are based on the retail price (ad valorem) and are levied at the point of sale.
- Based on weight. Several states (e.g., Alaska, California and Maine) levy a weight-based excise tax, which is collected by cultivators and/or manufacturers. Most other sin taxes, like alcohol or tobacco, are based on weight or quantity rather than price.
- Based on potency. Illinois and New York tax cannabis based on its potency. Potency-based taxes are based on the tetrahydrocannabinol or THC (the main psychoactive compound in the cannabis plant) content, which is similar to liquor taxes based on alcohol content.
How does Minnesota’s cannabis excise tax compare to other states?
Because different states have different approaches to cannabis excise taxes, it is challenging to compare tax rates. For example, what is higher — a 20% tax on the retail price or a $50 per ounce tax?
Thankfully, the Urban-Brookings Tax Policy Center’s report, “
The Pros and Cons of Cannabis Taxes,” developed a comparison methodology by applying each state’s tax system on the same hypothetical, untaxed purchase of $100 on cannabis flower with a THC level of 20%.
Based on this
analysis, Minnesota’s 16.875% tax rate would rank the
fifth lowest in the country, with only four states — Michigan, Delaware, New Jersey and Maryland — offering lower cannabis tax rates.
How much tax revenue does the state project cannabis will generate?
In March 2023, the
Minnesota Department of Revenue estimated that cannabis tax revenues, which include both the gross receipts tax and sales tax, would exceed $100 million by Fiscal Year 2027. Since this estimate assumes an 8% gross receipts tax, rather than the slightly higher 10% gross receipts tax that appears in the final bill, actual revenue collections may be higher.
Will medical cannabis be taxed?
Medical cannabis will continue to be exempt from the gross receipts tax and the sales tax.
Ari Hoffnung is a partner at Bridge West Consulting, an affiliate of Bridge West LLC, one of the first accounting firms in the world to focus solely on the cannabis industry. Since 2009, the practice has expanded to more than 600 cannabis, hemp and CBD clients nationwide. Ari previously served as the chief operating officer of Vireo Health, the parent company of Vireo Health of Minnesota, one of two licensed medical cannabis companies in Minnesota.
Check out the MNCPA Cannabis Resources page
Are you in need of more information about adult-use cannabis in Minnesota? Head to the
MNCPA Cannabis Resources page to find articles and resources covering topics from human resources to tax implications.
