How Cannabis Taxes Work: 280E, Excise, and Form 8300

Running a cannabis business means paying tax at four levels at once: federal income tax under a punitive Internal Revenue Code provision, a state excise tax, state and often local sales tax at the register, and city or county surcharges on top. Understanding how cannabis taxes work starts with recognizing that ordinary business deductions most industries take for granted are off the table federally, and that a partial rescheduling in April 2026 changed the picture for medical operators but left adult-use businesses carrying the full load. Effective federal rates on cannabis operations can exceed 70% of net income before any state or local tax is added.¹

Section 280E: The Federal Deduction Ban

Section 280E of the Internal Revenue Code blocks any deduction or credit for expenses incurred in a business that traffics in Schedule I or II controlled substances.² Rent, marketing, employee wages, office supplies, professional fees: all the normal costs of doing business are non-deductible. Federal income tax is calculated on something close to gross profit rather than actual net profit.

The one subtraction the IRS allows is cost of goods sold. A Tax Court decision confirmed that 280E blocks deductions but does not prevent a cannabis business from subtracting the cost of acquiring or producing its inventory when calculating gross income.¹ Everything hinges on that distinction. Every cost you can legitimately absorb into inventory reduces taxable income; every dollar that falls outside cost of goods sold is taxed with no offset.

What Changed in April 2026

On April 28, 2026, a DEA final order moved two categories of marijuana from Schedule I to Schedule III: marijuana in an FDA-approved drug product, and marijuana subject to a state medical marijuana license.³ Because 280E applies only to Schedule I and II substances, state-licensed medical marijuana businesses can now deduct rent, payroll, advertising, and other ordinary business expenses like any other legal enterprise.²

Adult-use cannabis stayed on Schedule I. Every dispensary, cultivator, and manufacturer operating under a recreational license still faces 280E in full.³ Operators holding both medical and recreational licenses need to separate their books cleanly, because only the medical side gets the standard deductions.

Making Cost of Goods Sold Work

For adult-use operators, cost of goods sold is the only lever. The IRS requires businesses to follow inventory costing rules under Section 471, which governs how direct and indirect production costs are capitalized into inventory.⁴ Cultivators benefit most because they have substantial production costs to absorb.

Direct costs that qualify include seeds, clones, soil, nutrients, water, pest control supplies, and packaging materials. Direct labor for employees who plant, trim, harvest, and cure can be capitalized when properly allocated by time spent in production. Indirect production costs are where the real opportunity sits: rent for grow space proportional to production use, electricity and HVAC tied to cultivation areas, equipment maintenance, quality control, and supervisory labor overseeing the grow operation can all be included.

What stays outside cost of goods sold is anything not tied to production. Marketing, distribution, administrative overhead, and general corporate expenses cannot be folded in. Retailers who buy finished product from a distributor have a simpler calculation but far less room to maneuver: their cost of goods sold is essentially the wholesale purchase price. That gap is one reason vertically integrated operations carry a structural tax advantage under 280E.

State Excise Taxes

Every state with a legal cannabis market imposes its own excise tax, and the structures vary. Rates on recreational cannabis run from 6% in Missouri to 37% in Washington, with most states between 10% and 20%.⁵ Three models dominate, and some states combine more than one.

Price-based (ad valorem): a percentage of the sale price, applied at the retail or wholesale level. When a cultivator sells flower to a retailer, the state collects a percentage of that transaction. This is the most common approach.
Weight-based: a fixed dollar amount per ounce or gram, often with different rates for flower, trim, and other plant material. The rate stays constant regardless of the product’s retail price.
Potency-based: a tax on the milligrams of THC in the final product, similar to how spirits are taxed more heavily than beer. A handful of states use THC content in their formulas, requiring laboratory-verified potency data for every product.⁵

Because excise taxes are often levied at the cultivation or distribution stage, they get baked into wholesale prices before product ever reaches a shelf. Producers need detailed ledgers of every wholesale transaction to verify the correct amounts are being remitted, and what you owe can shift significantly depending on whether the state’s tax base is the wholesale price, the retail price, or the weight and potency of the product.

Sales Taxes at the Register

On top of excise taxes, most states also apply their general sales tax to cannabis purchases. In roughly half of legal states, both the cannabis excise tax and the standard state sales tax apply to the same transaction.⁵ Add excise, state sales tax, and local surcharges together, and the total tax at the point of sale can reach 25% to 40% of the sticker price depending on jurisdiction.

Medical cannabis is frequently taxed at lower rates or exempted entirely from state sales tax. Patients with qualifying documentation often pay only the base product price without the recreational excise, and some jurisdictions waive general sales tax on medical purchases too. Retailers serving both markets need separate accounting categories to ensure the right rate is collected and reported for each transaction.

Local Taxes

Cities and counties in many states have authority to impose their own cannabis taxes on top of state obligations. Local rates are typically capped by the state and most commonly fall between 2% and 5%, though some jurisdictions charge more.⁵ The form varies. Some localities add a percentage-based surcharge on retail sales; others levy a gross receipts tax on total revenue earned by any cannabis business within their borders.

Gross receipts taxes hurt because they can apply at multiple points in the supply chain. A cultivator, a distributor, and a retailer in the same city might each owe a percentage of their own gross revenue, and the burden accumulates as product changes hands. Some local governments also charge cannabis businesses annual licensing fees or per-square-foot assessments based on the size of the commercial operation. Missing a local obligation can cost you a business license or trigger additional penalties, so you need to track the specific ordinances in every municipality where you operate.

Form 8300 and Cash Reporting

Cannabis businesses handle far more cash than most industries, and that creates a federal reporting duty many operators miss. Any business that receives more than $10,000 in cash in a single transaction, or in two or more related transactions, must file IRS Form 8300.⁶ The form is due within 15 days of receiving the cash.⁷

“Related transactions” is read broadly. If a customer makes multiple cash payments the business knows or has reason to know are connected, those payments combine toward the $10,000 threshold. You cannot split a large payment into smaller ones to avoid reporting. For a busy dispensary processing hundreds of cash transactions daily, tracking which payments from the same buyer cross the threshold takes a capable point-of-sale system and attentive staff.

Penalties are steep. Civil penalties apply for each missed filing, and intentional disregard carries a penalty of $25,000 per return or the amount of cash involved in the transaction, whichever is greater, up to $100,000.⁸ Criminal penalties are possible as well. Cannabis operators get tripped up here more than most, precisely because so much of the money is physical currency.

Estimated Quarterly Payments

Cannabis businesses structured as corporations owe estimated federal tax payments each quarter if they expect to owe $500 or more for the year.⁹ For the 2026 tax year, quarterly deadlines fall on April 15, June 15, September 15, and January 15, 2027.¹⁰ LLCs and S-corporations pass the obligation to individual owners on similar quarterly deadlines.

Getting the quarterly figure right is harder here than in most industries. Under 280E, the inability to deduct operating expenses inflates taxable income in ways new operators don’t see coming. A business projecting $500,000 in gross profit and $400,000 in operating expenses would normally estimate tax on roughly $100,000 of net income. Under 280E, the taxable amount is closer to $500,000 minus cost of goods sold, which can leave a much larger bill. Underpayment triggers a penalty based on the shortfall, the length of the underpayment, and the IRS’s quarterly interest rate, which stood at 7% for the first quarter and 6% for the second quarter of 2026.¹¹

Records and Audit Exposure

Cannabis operators face heightened IRS scrutiny. High cash volume, the 280E deduction ban, and the complexity of cost-of-goods-sold allocations make the industry a frequent audit target. Sloppy records are the fastest way to lose: if you cannot document which costs belong to production versus general operations, the IRS will reclassify expenses in its favor.

The IRS recommends keeping tax records for at least three years from the date a return is filed. If you underreport income by more than 25% of your gross income, the IRS can audit up to six years back. Employment tax records should be kept for at least four years after the tax is due or paid, whichever is later.¹² State tax authorities often have their own windows of four to five years, and keeping records for the longest applicable period is safest.

At a minimum, hold on to detailed point-of-sale data, transportation manifests tracking inventory from cultivation to retail, laboratory test results (especially where potency-based taxes apply), payroll records with time allocations showing which employees worked in production versus other roles, and utility bills broken out by facility area. The businesses that come through audits intact are the ones that can hand an examiner a clean paper trail for every dollar of cost of goods sold.

Filing and Paying When Banking Is Limited

Most state and local tax agencies provide online portals for filing returns and authorizing electronic payments. Forms vary by jurisdiction: some states use cannabis-specific returns, while others put cannabis on general sales and use tax forms with added schedules. Returns typically require sales broken down by product type such as flower, concentrates, and edibles, along with the state license number and federal employer identification number.

The practical obstacle is banking access. Most major banks remain reluctant to serve cannabis businesses even after the partial rescheduling. Federal legislation that would explicitly protect banks from regulatory penalties for serving cannabis clients has been proposed repeatedly but had not been enacted as of mid-2026. Without a bank account, electronic payments and standard ACH transfers are not options. Many operators rely on credit unions or smaller community banks willing to take on the compliance burden, though sudden account closures remain common.

Businesses that cannot access banking typically pay in cash. Some government offices operate designated cash-handling facilities where businesses can submit large payments in person, and appointments are often required. Armored car services are a routine expense for operators moving tens of thousands of dollars in currency to a tax office. Whether paying electronically or in cash, save confirmation numbers, payment vouchers, and receipts as permanent proof of compliance for each filing period.

1
Library of Congress. The Application of Internal Revenue Code Section 280E to Marijuana Businesses: Selected Legal Issues
2
Office of the Law Revision Counsel. 26 USC 280E – Expenditures in Connection With the Illegal Sale of Drugs
3
Federal Register. Schedules of Controlled Substances: Rescheduling of FDA-Approved Products and State-Licensed Medical Marijuana
4
Office of the Law Revision Counsel. 26 USC 471 – General Rule for Inventories
5
Tax Policy Center. How Do State and Local Cannabis (Marijuana) Taxes Work?
6
Office of the Law Revision Counsel. 26 USC 6050I – Returns Relating to Cash Received in Trade or Business
7
Internal Revenue Service. Instructions for Form 8300
8
Internal Revenue Service. 4.26.10 Form 8300 History and Law
9
Internal Revenue Service. Underpayment of Estimated Tax by Corporations Penalty
10
Taxpayer Advocate Service. Making Estimated Payments
11
Internal Revenue Service. Quarterly Interest Rates
12
Internal Revenue Service. How Long Should I Keep Records?