Two Missouri cases currently in progress are contesting the legality of “tax stacking”, a practice occurring when counties charge a cannabis tax atop an already existing city sales tax. According to Bloomberg Tax, this approach forces cannabis sellers and their customers to pay more taxes than lawmakers originally intended. When this “stacking” occurs, duly registered cannabis businesses must increase their prices to cover the excessive taxes, pushing consumers towards the illicit sector and consequently reducing the amount of state and local taxes accrued.
Legal experts are scrutinizing Missouri’s Amendment 3, which was passed on November 8, 2022, and sanctions adult-use cannabis sales alongside a 6% cannabis tax. Additionally, local governments were given the option to implement an extra 3% tax. For example, a dispensary located in a city that imposed its cannabis tax would collect 3% from its customers and forward those funds to the city; a dispensary in a county that passed a county cannabis tax would collect and remit those taxes to the county. However, multiple Missouri counties have cities with 3% city cannabis taxes and have also enacted their 3% county tax, culminating in city and county “stacked” taxes.
Confusion arose when the Missouri Department of Revenue clarified in February 2023 proclaiming that a city and a county cannot “stack” additional 3% local tax on recreational marijuana sales. However, negative backlash from the counties led the Department of Revenue to retract their guidance later that month, stating that they wouldn’t advise municipalities or counties concerning stacking possibilities. The matter of tax stacking constitutionality will now lie in the hands of the state court system.
But Missouri is not alone in this predicament. An estimated twenty states across the US have localized cannabis excise taxes that could originate from a county, a city, or a special district. Due to poor coordination between the various governing bodies involved, tax-on-tax, resulting in largely inflated taxes and unwarranted confusion, has ensued.
In regard to gross receipts, or the amount on which most US cannabis taxes are defined, complications are numerous. Some states, for example, include the local cannabis taxes that a business has collected as part of the gross receipts on which they calculate their state cannabis excise tax, despite the company only gathering the tax to be relinquished to their city or county. This has resulted in a compounding “tax-on-tax” situation that has inflated the excise tax the state can obtain.
State and local governments should venture to circumvent tax stacking, even if that requires forfeiting the additional taxes they’ve managed to accumulate. It is imperative to maintain the competitiveness of the legal cannabis industry against the illicit sector to ensure the continuity of tax revenues for the states and localities. On this note, some states like New Mexico have dropped their previous policy of including excise tax collected within gross receipts, thus following a more sensible approach.
Written by Rachel Wright, Abraham Finberg, and Simon Menkes, the article provides a compelling analysis of the complex taxation issues faced by the cannabis industry and how these could potentially stimulate illegal activities or hamper the growth of legal businesses in the sector.