Maryland Cannabis Tax: What You Need to Know

Following the legalization of adult-use cannabis, Maryland established a new tax framework to govern the sale of these products. This structure was created through legislation that outlined the tax rate, business responsibilities, and the public allocation of revenue. The system integrates the new cannabis market into the state’s existing tax collection and administration infrastructure, managed by the Comptroller of Maryland.

The Adult-Use Cannabis Sales and Use Tax

The sale of adult-use cannabis in Maryland is subject to a 12% sales and use tax on the purchase price. This tax is applied at the retail level, meaning the consumer pays the tax at the point of sale on any product containing cannabis. The tax specifically targets products like flower, edibles, and concentrates with a delta-9-tetrahydrocannabinol (THC) concentration greater than 0.3% on a dry weight basis. This distinguishes them from hemp products that are generally subject to the standard 6% state sales tax.

This 12% rate is exclusive to adult-use cannabis products. Other items sold at a dispensary, such as clothing or food products that do not contain cannabis, are taxed at the regular 6% sales tax rate. A notable exemption from the 12% cannabis tax is the sale of medical cannabis. Patients or caregivers who present a valid medical identification card issued by the Maryland Cannabis Administration do not pay the sales and use tax on their purchases, up to the amount certified by their provider. Any amount purchased beyond the certified medical quantity is subject to the 12% tax.

Tax Compliance for Cannabis Businesses

For a cannabis business to operate and remain in compliance, it must first navigate a series of licensing and registration requirements. Before making any sales, a business must register with the Maryland State Department of Assessments and Taxation (SDAT). It must also obtain a Sales and Use Tax License from the Comptroller of Maryland for each retail location and a Trader’s License from the Clerk of the Circuit Court in the county where the business operates.

Once licensed, businesses are responsible for tracking all transactions. This includes maintaining detailed records of all retail sales, the amount of tax collected on adult-use products, and documentation for all tax-exempt medical cannabis sales. These sales records must be preserved for a period of four years to ensure they are available for any potential review or audit by the Comptroller’s office.

The procedural aspects of compliance involve regular filing and remittance of the collected taxes. Most cannabis businesses are assigned a monthly filing frequency and must file their tax returns by the 20th day of the month following the collection period. For example, taxes collected in July are due by August 20th. Filing is done online through the Comptroller’s bFile portal using Form 202. Businesses that file and pay on time are eligible for a small credit against the tax due, with a maximum credit of $500 per return.

Allocation of Tax Revenue

After the 12% adult-use cannabis tax is collected, the revenue is distributed according to a formula established by state law. A portion, 35%, is directed to the Community Reinvestment and Repair Fund (CRRF). This fund is designed to support community-based initiatives in areas that were disproportionately affected by the enforcement of cannabis prohibition. The Office of Social Equity oversees the distribution of these funds to local jurisdictions.

The law also allocates smaller portions of the revenue to other specific funds. The Cannabis Public Health Fund and the Cannabis Business Assistance Fund each receive 5% of the tax proceeds. The public health fund is tasked with addressing health-related issues associated with cannabis legalization, while the business assistance fund provides support to small, minority-owned, and women-owned businesses. Another 5% of the revenue is distributed to counties, and the remaining revenue is deposited into the state’s General Fund.

Federal Income Tax Rules for Cannabis Businesses

Despite being legal at the state level in Maryland, cannabis remains a Schedule I controlled substance under federal law. This classification has significant federal income tax consequences for cannabis businesses due to Internal Revenue Code Section 280E. This section of the federal tax code prevents state-licensed cannabis businesses from deducting ordinary and necessary business expenses from their gross income.

The impact of Section 280E is substantial, as it prevents deductions for costs like employee salaries, rent, utilities, and marketing. The only deduction a cannabis business is permitted to take at the federal level is for its Cost of Goods Sold (COGS), which includes the direct costs of acquiring or producing the cannabis products themselves. This limitation means that cannabis businesses are taxed on a much larger portion of their income than businesses in any other industry, leading to an effective federal tax rate that can be 70% or higher.

This federal tax treatment creates a difficult financial environment for cannabis entrepreneurs. While they must comply with Maryland’s 12% sales tax on their products, they face a separate and more punitive reality when filing their federal income taxes. The inability to deduct standard operating expenses puts immense pressure on cash flow and profitability, making it a major challenge for businesses to grow and reinvest in their operations.