How Passage of Proposal 1 Would Impact Taxes on Recreational Cannabis

Michigan voters will have a number of decisions to make when they walk into the voting booth on Nov. 6. One of those decisions will be on Proposal 1 – which authorizes and legalizes possession, use and cultivation of cannabis by those 21 or older and for the commercial sales of cannabis through licensed retailers.

The proposed language put forth, known as the Michigan Regulation and Taxation of Marihuana Act, includes a number of changes to the treatment of cannabis in Michigan. While this is likely not the final language that would be adopted by the state, the proposed legislation allows for a number of differences from those created with the passage of the Medical Marihuana Facilities License Act (“MMFLA”) – which allowed the selling of medical cannabis throughout the state.

Excise Tax

The language in Proposal 1 states that the excise tax on recreational sales will be 10 percent. This excise tax is paid for by the provisioning center and cannot be passed on to the customer. However, a business is allowed to take this tax into account when setting its prices. The tax collected by the state is paid quarterly by the business. The payments will be apportioned by the state to the municipality and county in which the business is located, to the school aid fund, and finally to the transportation fund for road and bridge repairs.

Sales Tax

The recreational sales will also be subject to the six percent sales tax. In addition, the excise tax is also subject to sales tax. This means that if there is a recreational sale for $100, the retail establishment is responsible for $10 in excise tax and the customer pays the six percent sales tax on the $110 liability – meaning the customer pays $6.60 in tax on the $100 purchase. The reason for this is that the General Sales Tax Act of Michigan makes the sales tax apply to any other tax that a retail establishment incurs, with the exception of sales and use tax.

Business Expenses

A potentially overlooked aspect of Proposal 1 is the importance of Section 12:

In computing net income for marihuana establishments, deductions from state taxes are allowed for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying out a trade or business. (emphasis added)

While this may not make a significant difference to the bottom line of a business due to the much lower state tax rate, there will still be some effective savings if a business can take into account its expenses beyond the cost of goods sold. Federally, we are still dealing with the limitations of IRC 280E as it relates to deductions for business expenses.

So, if this language is in the final bill passed as a result of Proposal 1 winning on Nov. 6, then those ordinary and necessary business expenses will be captured at the state level but not on the federal returns.

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