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Troutman Pepper: Colorado’s Excise Taxes on Recreational Marijuana: A Revenue Boon for the State That Disadvantages Vertically Integrated Cannabis Operations
Since its first recreational marijuana dispensary opened in 2014, Colorado has been at the forefront of the burgeoning adult-use cannabis industry, setting a precedent for other states considering the legalization of recreational marijuana, and reaping significant tax benefits for the state in the process.
Indeed, the state of Colorado imposes a 15% excise tax on retail marijuana, in addition to a 15% sales tax. City, county, and special districts sales taxes may also apply to retail marijuana sales. According to the Colorado Department of Revenue, in 2022 the state collected more than $313 million in combined revenue from the excise and sales taxes on recreational marijuana, and collected nearly $71 million in retail marijuana excise taxes alone. According to an August 2023 memorandum by the Colorado Legislative Counsel staff, the state tax revenue derived from marijuana exceeds the tax revenues from alcohol or tobacco products.
This article concerns Colorado’s recreational marijuana excise tax, which is levied on the first sale or transfer of marijuana from a recreational marijuana cultivation facility to a recreational marijuana store or a facility that manufactures recreational marijuana products. The tax must be paid by any recreational marijuana cultivation facility licensed by the State of Colorado to cultivate, prepare, package, and sell marijuana to recreational marijuana stores or facilities that manufacture recreational marijuana products. This tax is paid by the cultivator but is often passed on to the consumer in the form of higher prices. And, as explained further below, the state’s manner of calculating the tax for cultivation facilities that are “affiliated” with the recreational marijuana store or recreational manufacturing facility to which the sales or transfers are made has affected cannabis entrepreneurs crying foul.
Funding Education
Revenue generated from the recreational marijuana excise tax benefits public education. Under Amendment 64 to the Colorado Constitution, which legalized the recreational use and retail sale of marijuana in Colorado for adults over age 21, the first $40 million collected each year is earmarked for the Building Excellent Schools Today (BEST) fund, which provides grants for school construction projects across the state. Any revenue collected beyond that amount goes to the Public School Fund.
Statutory and Regulatory Requirements
Under Colo. Rev. Stat. § 39-28.8-302, the 15% marijuana excise tax rate must be applied to “the average market rate of the unprocessed retail marijuana if the transaction is between affiliated retail marijuana business licensees,” or to “the contract price … if the transaction is between unaffiliated retail marijuana business licensees.” The statutory definition section applicable to the recreational marijuana excise tax law, Colo. Rev. Stat. § 39-28.8-101, defines affiliated marijuana businesses as those “that are owned or controlled by the same or related interests, where ‘related interests’ includes individuals who are related by blood or marriage or entities that are directly or indirectly controlled by an entity or individual or related individuals.” The “contract price” is “the invoice price charged by a retail marijuana cultivation facility to each licensed purchaser for each sale or transfer of unprocessed retail marijuana.” And the “average market rate,” meanwhile, is “the average price, as determined by the [Colorado Department of Revenue (CDOR)] on a quarterly basis, of all unprocessed retail marijuana that is sold or transferred from retail marijuana cultivation facilities in the state, to retail marijuana product manufacturing facilities or retail marijuana stores, less taxes paid on the sales or transfers.” Colorado’s Retail Marijuana Tax regulation, 1 Colo. Code Regs. § 201-18 et seq., applies statutory average market rate definition and excise tax calculation method to: