December 19, 2019
UPDATE: The Cook County Board passed ordinance 20-0658, imposing a 3% cannabis retailers’ occupation tax on recreational cannabis sales within the county. The new tax will go into effect July 1, 2020 and is in addition to state and local sales taxes and other cannabis taxes, as described below. The county projects it will receive $850,000 in revenue from the tax during the last six months of 2020, but the FY2020 Cook County budget does not rely on any revenue from the new tax.
Earlier this year Illinois became the first state to legalize retail sales of recreational adult use cannabis via state statute rather than by referendum. In addition to implementing a regulatory regime and expungement process, the legislation also puts into place excise and sales taxes on recreational cannabis. This blog explains the tax rates at the state and local levels and provides a comparison to other states that have legalized recreational cannabis. It is important to note that none of these taxes apply to medical cannabis sales.
Like alcohol and tobacco, recreational cannabis sales will be subject to both excise and sales taxes. Unlike alcohol and tobacco, the excise tax will be a percentage of the purchase price, rather than a per unit or weight basis. An excise tax is a tax on a specific good at purchase and is often included in the sale price of the item. This is in comparison to a general tax like the sales tax, which applies to myriad goods and services. In other states that have legalized recreational cannabis, some use only sales or excise taxes while others use a combination of both, like Illinois. Cannabis cultivators in Illinois are also subject to a 7% privilege tax on their sales, such as to a dispensing organization, processor or infuser.
The State of Illinois will impose excise, general sales and privilege taxes on recreational cannabis. County and municipal governments’ general sales taxes will also apply to recreational cannabis. County and municipal governments may additionally choose to impose a special sales tax (Cannabis Retailers’ Occupation Tax) on recreational cannabis, which would be administered by the state, collected by the Illinois Department of Revenue (IDOR) and then the revenue allocated back to the local government minus an administrative fee. Municipal governments may decide whether to allow recreational cannabis sales within their borders, though they may not prohibit personal consumption. The following table shows the rates at which the taxes can be applied. THC is Tetrahydrocannabinol, the main psychoactive compound in cannabis.
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Tax Rates on Recreational Cannabis in Illinois* |
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Cultivation Privilege Tax |
Cannabis Excise Tax |
General Sales Tax** |
Cannabis Sales Tax (Cannabis Retailers’ Occupation Tax)*** |
|
State |
7% of the gross receipts from the sale of cannabis by a cultivator or a craft grower, such as to a dispensing organization, processor or infuser |
- 10% — cannabis with a THC level at or below 35% - 20% — all cannabis infused products - 25% — cannabis with a THC level above 35% |
State general sales tax of 6.25% applies to cannabis sales |
N/A |
|
Municipal |
N/A |
N/A |
Municipal general sales taxes at varying rates apply to cannabis sales |
No more than 3% of gross receipts in 0.25% increments |
|
Non-Home Rule County |
N/A |
N/A |
Non-home rule county general sales taxes at varying rates apply to cannabis sales |
- No more than 3.75% of gross receipts for sales made in unincorporated areas in 0.25% increments - No more than 3% of gross receipts of sales made in a municipality in 0.25% increments**** |
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Home Rule County (Cook County) |
N/A |
N/A |
Home rule county general sales tax of 1.75% applies to cannabis sales |
- No more than 3.75% of gross receipts for sales made in unincorporated areas in 0.25% increments - No more than 3% of gross receipts for sales made in a municipality in 0.25% increments |
**All state and local general sales taxes apply to cannabis purchases, including RTA sales taxes in Cook and the collar counties and Metro East Transit District and Metro East Park and Recreation District sales taxes in St. Clair County.
***Cannabis Retailers’ Occupation Tax is an additional local sales tax on all persons engaged in the business of selling adult use cannabis at retail in a municipality or county.
****Public Act 101-0363 changed the non-Home Rule County cannabis sales tax rate to no more than 3.0% in 0.25% increments from the 0.75% in 0.25% increments included in the original bill. The non-Home Rule County cannabis sales tax rate rules now match Cook County.
Source: Illinois Department of Revenue, Informational Bulletin FY 2020-12, November 2019, “Reporting and paying tax on cannabis sales,” and Civic Federation calculations.
Revenue Forecasts
IDOR has projected that the cannabis industry will generate over $57 million in tax revenue and licensing fees for the State in fiscal year 2020, not including sales taxes. The projection includes estimates from the Department of Revenue, Department of Agriculture and Department of Financial and Professional Regulation. The breakdown of the projection is as follows:
- Excise and cultivation privilege tax revenue was projected in a range of $10-$58 million, with the revenue estimate taking the midpoint of $34 million;
- Application and licensing fees for growers estimated by the Department of Agriculture at $12.7 million; and
- Application and licensing fees for dispensaries estimated by the Department of Financial and Professional Regulation at $10.78 million.
IDOR projects larger amounts of tax revenue in future years once the market becomes established of $140.5 million in FY2021 and $253.5 million in FY2022, excluding application and licensing fees.
The City of Chicago in its FY2020 budget projected that under its 3% cannabis sales tax and municipal general sales tax, cannabis sales would generate $3.5 million. While collection of the general sales tax will begin immediately on January 1, 2020, collection of the municipal cannabis sales tax was previously not set to begin until September of 2020 due to a drafting error in the legislation. A trailer bill signed into law on December 4, 2019 moved up the start date for the municipal and county cannabis sales taxes to July 1, 2020 if ordinances are filed with IDOR by April 1, 2020. Cook County has not yet passed an ordinance allowing for taxation of recreational cannabis and has projected it will not receive any cannabis revenues for FY2020.
Cannabis revenues are difficult to project because of a lack of data on use, demand, price and how long it will take a market to get up and running. While Illinois is following other states and can draw upon their experiences, each state has ended up being different in terms of how legalization has progressed. In the meantime, it will be best for the State of Illinois and local governments to budget conservatively for cannabis revenues and prepare for much volatility.
How do Other States Tax Recreational Cannabis?
How do Illinois’ rates compare with other states? In a report released in August of this year, the Pew Charitable Trusts compared the taxation regimes implemented in states that had legalized recreational cannabis by February 2019 and emphasized that revenues from cannabis taxes have been very volatile and difficult to project. For example, the report noted that in Nevada’s first six months of collecting cannabis taxes, revenue came in 40 percent higher than projected, but in California revenue was 45 percent below projections in the first six months of collections. The following table is based on a table from that report, updated to include additional information available since the report was published, including from Illinois.
Some states, such as Illinois, also allow local governments to add additional tax on recreational cannabis, but that information is not included in the following chart.
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Tax Rates on Legalized Recreational Cannabis by State |
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State |
Cultivator Excise Tax |
Retail Excise Tax |
General Sales Tax |
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Alaska* |
- $50 per ounce, mature bud and flower - $25 per ounce, immature or abnormal bud - $15 per ounce, remainder of plant - $1 per clone |
N/A |
N/A |
|
California† |
- $9.65 per ounce on flowers - $2.87 per ounce on leaves - $1.35 per ounce on fresh cannabis plant |
15% |
7.25% |
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Colorado‡ |
15% |
15% |
N/A |
|
Maine§ |
- $335 per pound of flower or mature plant - $94 per pound of trim - $1.50 per immature plant or seedling - $0.30 per seed |
N/A |
10% |
|
Massachusettsǁ |
N/A |
10.75% |
6.25% |
|
Michigan# |
N/A |
10% |
6% |
|
Nevada** |
15% |
10% |
6.85% |
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Oregon†† |
N/A |
17% |
N/A |
|
Washington‡‡ |
N/A |
37% |
6.5% |
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Illinois§§ |
7% |
- 10% — cannabis with a THC level at or below 35% - 20% — all cannabis infused products - 25% — cannabis with a THC level above 35% |
6.25% |