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Everyone hates paying taxes. Uncle Sam always gets his cut unless you’re a wealthy billionaire who can afford to hide your money in the Caymans. Perhaps nothing is more overlooked yet so critical to the success of a cannabis businesses than taxes. Because of cannabis being federally illegal, taxes get rather complicated, and it can be difficult to understand exactly who gets what. Thankfully, this blog post should fill in some of the blanks and help you as you move forward in the cannabis industry.

As we all know, cannabis is a Schedule I substance in the eyes of the U.S. government. In other words, you are buying and selling a federally illegal product. Congratulations! So how does this affect your taxes? First, it means that you can’t deduct your business and operating expenses like most other companies can. Dispensaries lose the most when it comes to taxes, as they can only deduct the costs of buying cannabis products. This compares to cannabis cultivators and manufacturers, who are taxed less because more of their business and operating costs fall under the category of cost of goods sold.

But wait! Although cannabis is federally illegal, it is legal in Massachusetts. This must mean that you get a break on your state taxes because your federal taxes are so heavy! Nope, think again. Everyone wants a piece of that cannabis pie (even if they don’t inhale). In Massachusetts, dispensaries are once again handed the short end of the stick, with there being a sales tax of 3% that a local government can choose to apply. In addition, the state government levels a 10.75% excise tax on cannabis retail sales based upon retail price. Cannabis products are then subject to a 6.25% sales tax, and towns can choose to impose a so-called “community impact fee” on any cannabis business within their borders. This fee cannot exceed 3% of annual gross sales and lasts for five years.

What does all this mean? It means that there is an actual tax rate of 70% on dispensaries and retail cannabis products! To put this into perspective, that means that you are making $15 of profit on a $50 eighth. That is an absurdly low profit margin! How can you reduce your tax burden? First, try to combine your dispensary license with a cultivation or manufacturing license, allowing you to deduct the costs of goods sold and saving you money. Second, create a limited liability company (LLC) or corporation for your cannabis business. These are legal business entities that shelter you from your businesses’ debts and liabilities. An LLC divides your personal taxes from your business and allows you to choose whether to be taxed as a corporation or not. A corporation is taxed as a separate entity.

It should be said that speaking to or hiring a tax lawyer and accountant familiar with the cannabis industry is suggested versus simply taking this post at face value. However, this has hopefully helped you better understand cannabis taxes in Massachusetts and should provide a foundation upon which to build as you go forward. Best of luck!

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