Sales Tax Slice: Will Sales Taxes Harsh the Mellow for Marijuana Cultivators?

On Oct. 17, 2018, Canada became the second country in the world to legalize recreational marijuana. While the United States still criminalizes marijuana at the federal level, nine states have legalized marijuana for recreational use, according to Aaron Nicodemus in the Daily Tax Report (subscription required). Additionally, 31 states have enacted provisions allowing for some medical use of marijuana, according to Bloomberg Tax (subscription required).  Alongside the buzz around legalization, the marijuana cultivation industry has blossomed; in fact, “the regulated California cannabis market is a $4 billion-a-year industry” by itself, according to the Washington Post. However, marijuana cultivators should be aware that they may face certain sales and use tax disadvantages compared to other agricultural operations.

While all almost all of the states that impose sales and use taxes allow tax exemptions for certain purchases or sales by farmers, not all of these exemptions are available for marijuana cultivators. Specifically, Washington has indicated that agricultural products do not include marijuana, which results in marijuana cultivators being unable to take advantage of the state’s agricultural exemption. Rhode Island has also excluded businesses that produce marijuana seeds from agricultural sales and use tax exemptions.

Conversely, on Oct. 1, 2018, Oklahoma promulgated regulations allowing licensed commercial marijuana growers to acquire an agricultural sales tax exemption permit. This agricultural sales tax exemption allows marijuana cultivators in the state to purchase machinery and equipment used directly in the production and cultivation of marijuana without paying sales and use taxes on their purchases. These broad agricultural tax exemptions apply to tractors, combines, processing equipment, and even drones used exclusively for agricultural spraying.

Maine has released administrative guidance indicating that marijuana cultivators are “likely” to be eligible for commercial agricultural production tax exemptions. Maine states that machinery and equipment that “may” qualify for exemption include “grow lights and tents, timers, fans, soil mixers, sprayers, various tools, transplant machines, and grading tables.” Unfortunately, the state has yet to provide more concrete direction on this topic.

In California, marijuana cultivators’ purchases of immature plants, clones, and seeds are tax-exempt when the products grown from them will be resold as part of the cultivator's regular business activities. Like Maine, California also declines to definitively state whether cultivators are eligible for the partial sales tax exemptions available generally for farm equipment and machinery. Instead, California administrative guidance states that cultivators “may be able to take advantage” of these partial exemptions.

As more states legalize marijuana, it is an open question as to whether these states will allow for marijuana cultivators to qualify for agricultural tax exemptions.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Should marijuana cultivators be entitled to agricultural sales tax exemptions?

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