Marijuana Tax: How It Works and Where the Money Goes

Marijuana tax in the United States comes in layers: a state cannabis excise tax, often a general sales tax on top, sometimes a local surcharge, and, at the front of the supply chain, a cultivation tax that quietly raises the shelf price. In some states the combined bite on a retail purchase runs past 45%. Cannabis businesses face a separate federal problem entirely, where a provision called Section 280E has pushed effective tax rates as high as 80%, though a partial rescheduling in April 2026 has begun to change that for some operators.

State Excise Taxes

Every state with a legal recreational market charges a cannabis-specific excise tax. Rates run from 6% in Missouri to 37% in Washington.¹ Arizona charges 16%, Colorado and California each charge 15%, Oregon charges 17%, and Montana charges 20%.

A few states tie the rate to what you’re buying. Illinois charges 10% on cannabis flower with THC at or below 35%, 20% on cannabis-infused products like edibles, and 25% on any product with THC above 35%.² Under that kind of tiered structure your tax bill depends not just on where you shop but on what’s in the package.

Excise tax is usually applied before any general sales tax, which can compound slightly when the sales tax is calculated on the excise-inclusive price. Revenue is typically earmarked for specific programs rather than dropped into the general fund.

General Sales Tax on Top

About 17 states apply their regular sales tax to cannabis in addition to the excise tax.¹ General sales tax rates around the country usually sit in the 4% to 7% range, and in these states that amount is added at the register as its own line item.

Not every state does this. Washington applies its 37% excise tax but exempts recreational cannabis from the general state sales tax, treating the excise rate as sufficient on its own. Identical products can carry very different tax loads depending on which side of a state line you’re standing on.

Local Surcharges

Cities and counties commonly add their own cannabis surcharges. These local taxes are typically capped by the state and generally set between 2% and 5%.¹ Colorado allows counties and municipalities to impose additional wholesale excise taxes up to 5%; Illinois caps local add-ons at 3.75%.²

The practical effect is that the same product can cost noticeably more or less between neighboring towns. Stack state excise, general sales tax, and local surcharges together and the total gets heavy fast. In Washington the combined tax on a retail cannabis purchase can exceed 47% once local rates are included. Even in lower-tax states, the combination routinely lands somewhere between 20% and 30%.

Cultivation Taxes You Don’t See on the Receipt

Some states tax cannabis at the earliest point in the supply chain, when it’s harvested or transferred from a grower. These are usually weight-based rather than price-based, which keeps revenue steadier when market prices swing. Alaska charges $50 per ounce for mature flower, $25 per ounce for immature flower, $15 per ounce for trim, and $1 per clone. New Jersey charges $2.50 per ounce.²

Cultivators pay this directly, but the cost is baked into the wholesale price and lands in the retail sticker eventually. California suspended its cultivation tax of $9.25 per ounce on flower in July 2022 after operators argued the levy was making legal prices uncompetitive with the illicit market.

Medical Cannabis Pays Less

Medical marijuana cardholders generally pay lower taxes than recreational buyers. Many states either exempt medical cannabis from the excise tax entirely or apply a significantly reduced rate.¹ The tradeoff is that medical programs typically require a doctor’s recommendation, an application fee, and periodic renewal. Those upfront costs offset some of the savings for light users. For regular purchasers in states where recreational rates land above 25%, a medical card can save hundreds of dollars a year.

Where the Tax Money Goes

Most states earmark at least part of their cannabis tax revenue. Education is the most common destination: Colorado directs tens of millions toward school capital construction and early literacy grants, Oregon sends 40% of its cannabis tax revenue to the state’s Common School Fund, and Michigan puts 35% of revenue remaining after administrative costs into the state school aid fund. Other allocations include substance use prevention (Washington funds programs for teenagers and public education campaigns), public health, social equity programs targeted at communities harmed by prohibition, infrastructure, and law enforcement.

The Federal Business Tax: Section 280E

The most punishing tax in the cannabis industry isn’t a state levy. Section 280E of the Internal Revenue Code bars any business that traffics in a Schedule I or Schedule II controlled substance from claiming standard business expense deductions on its federal taxes.³ For a dispensary, that means rent, wages, utilities, marketing, and nearly every other overhead cost cannot be subtracted from gross income when calculating federal tax.

The one carve-out is cost of goods sold. Because COGS is used to calculate gross income rather than deducted from it, cannabis businesses can still account for the direct cost of acquiring or producing inventory. Everything else on the expense ledger is disallowed. The Senate Finance Committee has estimated the effective federal rate can reach 80%.⁴ A restaurant or retail store with the same revenue and expenses would owe a fraction.

Section 280E is a business-side rule; it doesn’t add anything to the retail price beyond what dispensaries build in to stay solvent. Consumers don’t file anything or pay anything extra because of it.

What the 2026 Rescheduling Changed

On April 23, 2026, the Department of Justice and the DEA issued an order moving FDA-approved marijuana products and marijuana products regulated under a state medical marijuana license from Schedule I to Schedule III of the Controlled Substances Act.⁵ Because Section 280E only applies to Schedule I and II substances, the rescheduling removes the 280E barrier for qualifying medical cannabis businesses.³

The change is partial. Unlicensed marijuana crops, bulk marijuana, and marijuana not yet incorporated into an FDA-approved product remain on Schedule I.⁶ A state-licensed medical dispensary may now be able to deduct rent and payroll like any other business, while a recreational-only operation dealing in the same plant remains under 280E.

The Treasury and IRS have said they expect to issue guidance on how 280E applies going forward, including a transition rule that would treat the rescheduling as effective for a business’s full taxable year that includes the date of the final order.⁶ The DOJ has also initiated an expedited hearing process for the complete rescheduling of marijuana, with proceedings set to begin on June 29, 2026.⁵ If full rescheduling goes through, 280E would stop applying to the entire legal cannabis industry, and some of the pressure that has kept retail prices high may ease.

1
Tax Policy Center. How Do State and Local Cannabis (Marijuana) Taxes Work?
2
Tax Foundation. Recreational Marijuana Taxes by State, 2026
3
Office of the Law Revision Counsel. 26 USC 280E – Expenditures in Connection With the Illegal Sale of Drugs
4
U.S. Senate Committee on Finance. Marijuana Revenue and Regulation Act Summary
5
U.S. Department of Justice. Justice Department Places FDA-Approved Marijuana Products and Products Containing Marijuana in Schedule III
6
U.S. Department of the Treasury. Treasury, IRS Announce Process for Tax Guidance Following DOJ Final Order on Medical Marijuana Rescheduling