Kevin Thorn writes…..Do you own a cannabis business in Massachusetts? A well-versed Boston tax attorney explains what you need to know about the tax laws related to cannabis.
1. Massachusetts Imposes Sales and Excise Taxes on Cannabis Products
At the state level in Massachusetts, there are two taxes that apply to the sale of cannabis products. These are: (i) the state sales tax of 6.25 percent; and, (ii) an additional state “excise” tax of 10.75 percent. Cannabis businesses must collect both of these taxes at the time of sale, and they must timely remit these taxes to the Massachusetts Department of Revenue (DOR).
2. Local Sales Taxes Can Be Up to Three Percent
Depending on where exactly your cannabis business is located, you may have to collect and remit a local sales tax as well. Local sales tax rates vary by jurisdiction, and can be as high as three percent of the retail price of goods sold.
3. You Do Have to Pay Federal Income Tax on Cannabis Sales
Even though marijuana is still illegal at the federal level, cannabis businesses in Massachusetts must report their income to the Internal Revenue Service (IRS)—and this presents a number of potential challenges. For example, since federal law prohibits the sale of cannabis products, it is illegal to deduct business expenses related to cannabis sales even though you have to report (and pay tax) on the income from these sales. However, some of your business expenses may still be deductible on your company’s federal return, and you can deduct all eligible businesses expenses on your Massachusetts income tax returns.
4. You Need to Collect and Remit Employment Taxes, Too
Occasionally, new business owners will overlook their state and federal employment (or payroll) tax obligations. When you pay your employees, you are required to deduct Massachusetts income tax withholdings as well as the federal FICA withholding for Medicare and Social Security. As a Massachusetts business owner, you must also be sure to accurately classify your workers and not pay employees as independent contractors.
5. You Should Be Prepared to Demonstrate Tax Compliance
While all business owners need to be prepared for the possibility of a federal or state tax audit, those in Massachusetts’ blossoming cannabis industry may be at particularly high risk of being audited. Being prepared for an audit means accurately filing your taxes on time first and foremost, but also having thorough documentation on hand to substantiate your local, state and federal tax filings. The best way to mitigate your risk of liability in the event of an audit is to work with an experienced Boston tax attorney.