Sales Taxes On Cannabis: No Rest For Small Producers
September 17, 2018 Andrew AdolphCannabis,News
Have you ever wondered why there is a stamp required on all legal cannabis packaging? It’s because a combination of sales taxes on cannabis at a rate of about 24%, depending on which province it is sold.
High Sales Taxes On Cannabis Pose A Risk To Legal Markets
All designers of taxation systems know about the same phenomena: the higher the tax rate, the more cheating there will be, or the market will go underground entirely (depending on the underlying commodity or service).
In 1991 when the GST was new, multiple studies found that the underground economy will emerge when sales tax on anything exceeds approximately 15%. This is because people will only pay so much for something and are always prepared to find cheaper alternatives. So at some point, high sales taxes on cannabis will cause the black market to flourish.
With up to three levels of excise duty, plus GST and PST, the amount of tax is equal to about 32% in BC. In Ontario, that rate is 36.4%. In Alberta, 38.2% is tax, and in Nunavut, 39.9%. I can only speculate that Alberta set its tax rate so high because it doesn’t levy a retail sales tax.
Needless to say, all these rates are far more than 15%. So as long as the science hasn’t changed, there must be a lot of underground economy going on!
The Confusing Cannabis Duty Rate System
The different excise duty rates reflect that the provinces couldn’t accept the same amount to charge. However, they did agree that the excise duty shouldn’t be calculated based on the province of production. That said, the trio of excise duty rates on cannabis depends on which province the licensed retailer or consumer is based in.
Sales Taxes On Cannabis Impact Small Producers Most
Unfortunately for producers, the opportunities brought by legalization don’t make for viable business plans. It would seem the legal cannabis industry is only possible with the largest operations that can survive on razor-thin margins.
Of the tax included, consumers cover about one-third of it as GST, HST or PST that they pay when they purchase. However, producers must cover, fund, and pay for the other two-thirds upfront for producers to receive payment.
This means that most producers must pay a tax based on the top revenue line of at least 20% of the sale. Even if the producer is losing money and in the red, they still must remit a whopping 20% of sales to the government (who, for some reason, thinks this is viable).
One exception is Manitoba, which only has a 2.5% excise charge. However, they charge a 6% “social responsibility levy.” While still a tax (with a ridiculous name), it gets passed to retail consumers. Consequently, a producer selling to Manitobans doesn’t have to bear as much tax load.
Undue Compliance Burdens
The other problem facing small cannabis producers is the massive paperwork requirement. The government will reward people new to legally paying tax on their cannabis sales with a 10-page reporting package. To make things worse, producers must file this form every month for the sake of compliance.
Sales Taxes On Cannabis: Bottom Line
In a business where 20% off the top goes to the government, cannabis cultivators and craft cannabis producers must overcome substantial barriers to entry and survival. But, hopefully, these local enterprises will catch the break they deserve as things progress.
Do you have a sales tax question? Or do you work in the cannabis industry and are looking for some help? Please schedule a free appointment to discuss your issues! Just call 604-240-6173 or email firstname.lastname@example.org.
Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.