How Is Weed Taxed? Excise, Sales Tax, and Section 280E

Buying weed legally means paying a stack of taxes that typically totals 20% to 40% of the sticker price. States charge a dedicated cannabis excise tax that ranges from 6% in Missouri to 37% in Washington, most states add their regular sales tax on top, and cities or counties often layer on their own cannabis levy.¹ Behind the scenes, cannabis businesses face a separate federal tax problem under Section 280E that pushes their costs, and therefore your prices, higher than they would otherwise be. A 2026 federal rescheduling of medical marijuana is starting to change that picture.

The State Cannabis Excise Tax

Every state with a legal market charges some form of excise tax on cannabis. The most common design ties the tax to the retail price. Rates vary widely, but most states land between 10% and 20%.¹ Depending on the state, the excise tax is either built into the shelf price or added at the register.

A few states tax by THC potency instead of price. Connecticut charges a per-milligram rate that differs by product type, with flower taxed at a fraction of a cent per milligram and edibles at a higher rate. Illinois uses a tiered structure: products above 35% THC are taxed at 25% of the sale price, while lower-potency products are taxed at 10%.²

Weight-Based Wholesale Taxes

Some states skip retail pricing entirely and tax cannabis by weight earlier in the supply chain. Alaska charges cultivators $50 per ounce of mature flower, $25 per ounce of immature flower, and $15 per ounce of trim.² These costs hit at the first wholesale transaction and get baked into what you pay at the counter. The trend is moving away from this model. California eliminated its per-ounce cultivation tax in 2022 and shifted entirely to percentage-based levies.

Sales Tax and Local Add-Ons

The excise tax is only the first layer. In most states, cannabis is also subject to the general sales tax that applies to any retail purchase. Combined state and local sales tax rates run from zero in a handful of states to over 10% in the highest-tax jurisdictions.³ If your state charges 7% sales tax on electronics, it charges the same on cannabis.

Cities and counties in many states can also impose their own cannabis-specific taxes. State laws typically cap these local levies between 2% and 5% of gross receipts.¹

Stacked together, the excise, sales, and local taxes in a high-tax state can add 30% to 40% on top of the base product price. Your receipt will usually break these out as separate line items.

Medical Cardholders Pay Less

Patients with a state-issued medical marijuana card generally pay substantially less than recreational buyers. Many states exempt medical cannabis entirely from their excise tax, and a significant number also waive the general sales tax on medical purchases. States with full medical exemptions include California, Connecticut, Maryland, Massachusetts, Minnesota, New Jersey, and New York, among others. You typically need to present a valid patient registry card at the dispensary, which keeps records to document the exemption.

State-level relief does not extend to your federal return. IRS Publication 502 states that you cannot include amounts paid for controlled substances that are not legal under federal law, even when state law permits them, so medical patients have not been able to deduct cannabis purchases the way they would other prescription medications.⁴ The 2026 rescheduling described below could shift this, with caveats.

Why Businesses Pay So Much: Section 280E

Cannabis is still a federally controlled substance, and one provision of the tax code creates enormous problems for every licensed operator. Section 280E prohibits any deduction or credit for expenses connected to trafficking in Schedule I or Schedule II controlled substances.⁵ Rent, wages, marketing, utilities, and other ordinary overhead cannot be written off.

There is one narrow exception. Courts and the IRS agree that subtracting the cost of goods sold is an accounting step that happens before you calculate gross income, so it is not blocked by 280E.⁶ A grower can subtract cultivation costs. A retailer can subtract the wholesale price it paid. Everything else is nondeductible.

The effect is that cannabis companies are taxed on gross profit rather than net profit. For a retail dispensary with thin margins, the effective federal income tax rate can climb above 70%, and a business can owe the IRS money even when its books show a loss. That squeeze is a major reason legal cannabis prices stay high, which in turn is why the legal market still struggles to undercut illicit sellers in some areas.

What Federal Rescheduling Changes in 2026

In 2026, the Department of Justice issued an order placing FDA-approved marijuana products and marijuana products sold through state-licensed medical programs into Schedule III of the Controlled Substances Act.⁷ A separate administrative hearing on broader rescheduling that would cover recreational cannabis is set to begin on June 29, 2026.

Section 280E only applies to Schedule I and II substances. Medical cannabis businesses that now fall under Schedule III could begin claiming standard business deductions. The Treasury Department and IRS announced a transition rule providing that rescheduling will generally apply for a business’s full taxable year that includes the effective date of the final order, meaning eligible medical operations may be able to deduct ordinary business expenses for their entire 2026 tax year.⁸

Recreational operators remain in Schedule I territory for now and continue to face the full weight of Section 280E. A December 2025 executive order directed the Attorney General to complete the broader rescheduling process as quickly as possible, but the outcome of that hearing is not guaranteed.⁹

For patients, Schedule III status could eventually make medical cannabis a deductible medical expense on federal returns. One practical limitation remains: the tax code requires a physician’s prescription rather than a recommendation, and most state medical programs use the recommendation model.⁴

Reporting Cannabis Income

Federal law requires you to report cannabis income whether or not your state has legalized it. IRS Publication 525 states that income from illegal activities, including drug sales, must be included on Schedule 1 (Form 1040) or on Schedule C for self-employment income.¹⁰ The Fifth Amendment allows you to report the income without identifying its precise source, but you still have to include the amount. Leaving cannabis income off your return turns a regulatory issue into a tax evasion problem.

1
Tax Policy Center. How Do State and Local Cannabis (Marijuana) Taxes Work
2
Tax Foundation. Recreational Marijuana Taxes by State
3
Tax Foundation. State and Local Sales Tax Rates, 2026
4
Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
5
Office of the Law Revision Counsel. 26 USC 280E – Expenditures in Connection with the Illegal Sale of Drugs
6
Congressional Research Service. The Application of Internal Revenue Code Section 280E to Cannabis Businesses
7
U.S. Department of Justice. Justice Department Places FDA-Approved Marijuana Products and Products Containing Marijuana Regulated by State Medical Marijuana Licenses in Schedule III
8
U.S. Department of the Treasury. Treasury, IRS Announce Process for Tax Guidance Following DOJ Final Order on Medical Marijuana Rescheduling
9
The White House. Increasing Medical Marijuana and Cannabidiol Research
10
Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income