One-Hit Wonders

Holland & Hart: Cannabis Taxation: Where Does the Money Go?

Published

2 years ago

April 4, 2023

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Cannabis tax revenue remains a central argument for legalization. In the decade since adult-use markets first launched, local, and state governments have allocated billions of dollars in collected cannabis taxes to fund educational infrastructure, substance abuse prevention and treatment programs, public safety and many other initiatives designed to improve the lives of those living in states with legal cannabis markets.

There is an irony here. It is almost as if the drug war has turned in on itself, with money from the once demonized cannabis plant being used on treatment and support of individuals addicted to pharmaceutical opioids, alcohol, and other “legal” drugs.

It’s also important to scrutinize how cannabis taxes are structured and acknowledge the harms of overregulation and overtaxation, something we have seen at Holland & Hart time and again helping licensed operators navigate complex cannabis regulations for tax collecting, license transfers, reporting, and other compliance matters. One thing is clear: while the goals are noble, cannabis taxation has its flaws and unforeseen consequences.

Types of Taxes on Cannabis

Tax structures governing cannabis sales vary across legal markets. Some states levy multiple taxes (such as an excise tax on wholesale transfers), and local governments commonly impose their own separate taxes. Of course, all of these cannabis taxes get passed to the consumer, who may also pay general state and local sales taxes on their purchases.

The complexity doesn’t end there. States tax various cannabis products in different ways, including: a percentage-of-price tax, a weight-based tax, and a potency-based tax. For example, Washington levies a 37% sales tax on cannabis purchases, while Illinois does not have any sales tax but does levy a 7% excise tax of value at the wholesale level, a 10% tax on cannabis flower or products with less than 35% THC, a 20% tax on products infused with cannabis, such as edible products, and a 25% tax on any product with a THC concentration higher than 35%.

Cannabis Tax Revenue Funding

All of those percentages of sale add up quite quickly and are allocated in different ways. Some of the cannabis tax revenue goes to education-related initiatives like school construction, school food programs, before- and after-school enrichment programs, and public libraries. Other funding is directed toward public health and community programs like alcohol and drug treatment, job training, conviction expungement, and services for veterans. Investment in traditionally underserved or underdeveloped communities is also common in some states.

It’s important to note that tax structures are subject to change due to sunsetting legislation, ballot initiatives, and other bureaucratic maneuvers. Here is where the money currently goes in some of the states with the highest returns from cannabis taxation.

Colorado

Colorado voters legalized adult use of cannabis in 2012 and state-licensed dispensaries started sales in 2014. Colorado levies a standard state sales tax (2.9%), a retail marijuana sales tax (15%), and a retail marijuana excise tax (15%) on wholesale sales/transfers of retail marijuana. In 2021, Colorado recorded $423,486,053 in cannabis tax revenue.

The state allocates 10% of the collected marijuana retail tax to local governments, apportioned according to the percentage of sales occurring within city and county boundaries. The remaining 90% is allocated as follows:

15.56% of the revenue goes to the General Fund
- Education
- Health care
- Human services
- Corrections
12.59% goes to the Public School Fund
71.85% goes to the Marijuana Tax Cash Fund
- Health care
- Health education
- Substance abuse prevention and treatment programs
- Law enforcement
- Education
  - The School Health Professional Grant program to address behavioral health issues in schools.
  - A grant program to help schools and districts set up initiatives to reduce the frequency of bullying incidents.
  - Grants to fund drop-out prevention programs.
  - Early Literacy Competitive Grants to ensure reading is embedded into K-3 curriculum.
  - A grant to expand concurrent enrollment programs.
  - Grants to fund physical education courses and social-emotional health programs for K-5 students.

Revenue from the excise tax of wholesale sales goes to the Building Excellent Schools Today (BEST) fund. The first $40 million collected annually is earmarked for capital construction projects “to repair or replace Colorado’s most needy public school facilities.” The cannabis money is commingled with State Land Board proceeds, Colorado Lottery spillover funds, and interest accrued in the Public School Capital Construction Assistance Fund. Matching funds are required by statute and calculated based on a series of factors, from the particular district’s bond election efforts over the past 10 years to the district’s assessed value per pupil. School projects completed thanks to the BEST fund include HVAC and electrical upgrades, fire and safety improvements, roof replacements, adding ADA-compliant restrooms and abating hazardous materials.

In Denver, the City Council recently announced approval to use approximately $15 million of Denver’s cannabis sales tax for the city’s first investment program focused on minority and women-owned businesses. Establishing quality job opportunities, a pipeline of entrepreneurs and small business startups, and generational wealth for Denver-based business owners who have historically lacked investment opportunities, are the goals of the Malone Fund.

Washington State

Washington launched adult-use sales in 2014, a few months behind Colorado. With its 37% cannabis retail tax coupled with a 6.5% standard retail sales tax, the state pulled in $559.5 million in 2021. Some of the funds directed to public health and research include:

The state health authority for an annual healthy youth survey
- Measure drug use and other behaviors that contribute to morbidity, mortality, and social problems
The University of Washington for marijuana-related educational programs
The state’s health professions account
- Provides an accounting and resource allocation vehicle for licensing activity of health professions
Various state departments for research related to pesticides, licensing, accreditation, and testing

California

The largest legal market in the nation adopted laws for legal adult use in 2016 and collected staggering $1.3 billion in revenue in 2021. The initial taxation arrangement for cultivators was $10.08 per ounce for flower, $3.00 per ounce for leaves, and $1.41 per ounce for fresh plant. But, on July 1, 2022, through AB 195 California announced it would remove cultivation taxes and instead impose a 15% excise tax on retail purchases of cannabis or cannabis products beginning in January 1, 2023. Beginning in the 2025–26 fiscal year and every two years thereafter, California will determine whether the cannabis excise tax rate should be adjusted to ensure revenue generated is in line with what would have been collected through the cultivation tax to a maximum of 19% of the gross receipts of retail sales.

This is how the California distributes its cannabis taxes:

All regulatory and research costs must be covered first
60% goes to anti-drug programs
- Youth Education Prevention, Early Intervention and Treatment Account (YEPEITA)
  - Prevention and early intervention services including outreach, risk survey and education to youth, families, schools, primary care health providers, behavioral health and SUD service providers, community and faith-based organizations, foster care providers, juvenile and family courts, to recognize the reduce risks related to substance use, and the early signs of problematic use.
  - Grants to schools to develop and support Student Assistance Programs, designed to prevent and reduce substance use, and improve school retention and performance. Schools with higher than average drop-out rates will be prioritized for grants.
- 20% goes to environmental programs
  - Combat illegal grows and wildland restoration
  - Road improvement
  - Local park investment
- 20% goes to public safety
  - Science and policy research
  - Law enforcement
  - Fire protection
  - Local programming to address public health and safety associated with the implementation of Proposition 64.

Elsewhere, Missouri voters in 2018 adopted Constitutional Amendment 2, known now as Article XIV, which includes a provision requiring that fees and taxes generated by the medical marijuana program, less operational expenses, be transferred to the Missouri Veterans Commission for health and care services for military veterans. Since dispensary sales began in October 2020, more than $335 million in sales have occurred—with almost $9 million going to veterans as of the end of 2021—thanks to a sales tax rate of 4% on medical marijuana.

In Oregon, police and mental health treatment centers receive funding, but the biggest recipients are the state’s schools, which receive 40% of the state’s cannabis tax revenue.

At the national level, cannabis remains illegal, but among various bills in Congress, the MORE Act (Marijuana Opportunity Reinvestment and Expungement) has passed the House and if (ever) approved by the Senate, would establish a sales tax at 5% which would increase to 8% over three years. The tax would be imposed on the retail sales of cannabis and proceeds from the tax would go to a newly established Opportunity Trust Fund. A new governmental organization, the Cannabis Justice Office, would be tasked with overseeing the social equity provisions of the MORE Act.

50% of the money would support a Community Reinvestment Grant Program, 10% would support substance misuse treatment programs, and 40% would go to the federal Small Business Administration to support implementation of a newly created equitable licensing grant program. The Community Reinvestment Grant Program would provide eligible entities with funds to administer services and programs for individuals adversely impacted by the War on Drugs.

While the industry has worked with governments to establish reasonable taxation regimes, excessive taxes will drive consumers to the black market. Using cannabis taxes as a resource to fill budget gaps created by tax favoritism of other industries is not a solid approach to responsible fiscal policy. In order for the legalization of cannabis to be a long-term success, the industry, legislatures, regulators, and even prohibitionists need to work together to make sure the safer legal cannabis market is not overtaxed to the point that it can no longer survive.

Source: JD Supra

https://www.jdsupra.com/legalnews/cannabis-taxation-where-does-the-money-6588066/

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One-Hit Wonders

Kentucky Bills Would Tax and Strictly Regulate Hemp-Infused THC Beverages Like Alcohol

Published

2 weeks ago

March 19, 2025

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In the years since the 2018 Farm Bill became federal law, a burgeoning industry of hemp-infused THC beverages has proliferated throughout the country, including in Kentucky. The 2018 Farm Bill legalized the domestic production of hemp and protected hemp and hemp products in interstate commerce. Likewise, Kentucky law has—for years—broadly allowed retail sales of hemp products, including food and beverages with hemp-derived THC.

Some states, however, perceive the 2018 Farm Bill to have created a legal loophole that allows hemp products with intoxicating amounts of THC to be sold, despite the 2018 Farm Bill’s restriction that hemp may not contain more than 0.3% delta-9 THC on a dry weight basis. To close the loophole, states have enacted laws or implemented regulations banning certain hemp products with intoxicating amounts of THC or restricting such products to adult-use channels like licensed alcohol stores or cannabis dispensaries.

Kentucky appeared poised to do the same when state Senator Julie Raque Adams introduced Senate Bill (SB) 202, which would have placed a one-year moratorium on the sale of hemp-infused THC beverages while the state developed a regulatory regime. Hemp beverage manufacturers and other hemp industry stakeholders loudly and quickly voiced opposition, arguing for narrower means than banning all sales. The next day, Senator Adams filed a floor amendment that removed the moratorium and instead imposed the three-tiered regulatory system that exists for alcohol.

The three-tiered regulatory system that will apply if the bill becomes law has robust requirements, including licensing, shipping, and signature-on-delivery requirements. Additionally, hemp beverages will be limited to five milligrams of intoxicating cannabinoids per serving and may only be sold or consumed by persons 21 years of age or older. Beverages that exceed the cannabinoid limit could be legally sold until May 1, 2025.

The Senate approved the floor amendment. The House passed a committee substitute retaining the Senate floor amendment’s provisions but that extends the sell-through provision until June 1, 2025, and makes the five-milligram per serving limit applicable per every 12-ounce serving. The House committee substitute allows hemp beverages to be sold at fairs, festivals, and similar events. The Senate concurred with the House’s version, and Governor Beshear received the bill to sign into law or veto.

Although SB 202 eschews a ban against hemp-infused THC beverages, it creates strict regulations that differ significantly from the current regulatory regime for hemp beverages, while also directing state agencies to develop further regulations. Ongoing compliance by manufacturers, distributors, and retailers will be critical.

In addition to SB 202, the House and Senate passed House Bill (HB) 775, which sets tax rates for hemp-infused THC beverages. The taxes must be paid and reported by both manufacturers and distributors. Among other provisions, the bill requires manufacturers to obtain a food manufacturer permit from the Department for Public Health and to register with the Department of Revenue, and requires sellers to obtain a retail package, distributor, or direct shipper license. HB 775 is headed to Governor Beshear’s desk.

As a nationally preeminent and leading firm for hemp legal and regulatory services, Frost Brown Todd is well positioned to assist hemp manufacturers, distributors, and retailers in navigating applicable federal and state laws. For more information about SB 202 or HB 775, or their implications for hemp beverages sold in Kentucky, please contact the author or any other attorney with Frost Brown Todd’s Consumable Goods Team.

You can also visit our Hemp Legally Speaking Blog for more insight into the legal and operational issues unique to the industrial hemp, CBD, and hemp-derived THC marketplaces.

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One-Hit Wonders

State Cannabis Banking Laws: Where Equity & Lending Access Stand Today – Eric Foster

Published

3 weeks ago

March 13, 2025

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By Eric Foster |

Cannas Capital Holdings

The Patchwork of State Cannabis Banking Laws

As federal cannabis banking reform remains stalled, states have begun taking independent action to address the capital access crisis for cannabis businesses. While some states like Illinois, Maryland, New York, and Virginia have created state-backed cannabis lending programs, others have taken different approaches, ranging from self-administered programs with no external banking involvement to state protections for financial institutions but no direct state capital support. This mishmash of approaches leaves both Social Equity Cannabis businesses vulnerable to predatory lenders and financial instability and Corporate Cannabis businesses without debt-financed lending options.

This article breaks down state cannabis banking laws, highlighting:

Which states provide structured lending and financing support.
How different states approach social equity financing.
Key differences in state banking statutes and what needs improvement.

1. How States Approach Cannabis Banking & Lending

Since federal banks and credit unions remain hesitant to lend, state governments have adopted various models to facilitate financial access for cannabis licensees.

Four Common Models of State Cannabis Banking & Lending

✅ Model 1: State-Backed Cannabis Lending Programs (Best Practice) These states use cannabis tax revenue to fund capital access programs, creating low-interest or zero-interest loan funds and encouraging banks to participate through loan guarantees and risk-sharing mechanisms.

Examples: Illinois, Maryland, New York, Virginia
Best for: Social equity and minority-owned cannabis businesses needing fair access to financing.

✅ Model 2: State Self-Administered Loan & Grant Programs Without External Bank Partnerships Some states allocate funding for social equity applicants but do not involve external banks, credit unions, or CDFIs in the process. These programs:

Provide a limited total amount of funding per year, which must be replenished through annual appropriations.
Cap the maximum funding available per business.
Do not address the need for long-term lending partnerships that could expand financing options.
Examples: Connecticut, Michigan, Massachusetts, Colorado, New Jersey, New York
Best for: Short-term relief but not a scalable lending solution for long-term business growth.

✅ Model 3: State Legal Protections for Banks Without Direct State Capital Support These states allow banks, credit unions, and CDFIs to serve cannabis businesses without fear of state-level penalties, but they do not provide direct state financial backing for loans or banking relationships. As a result:

Banks must still manage all compliance risks independently, limiting participation.
No state-backed loan guarantees, lending facilities, or grant programs exist to make cannabis lending more attractive.
Only the most risk-tolerant financial institutions choose to engage with cannabis businesses.
Examples: California, Pennsylvania, Arkansas, Rhode Island, Texas, Oklahoma, West Virginia, Ohio, Missouri, South Dakota
Best for: Encouraging some legal banking relationships but fails to ensure broad financial access for cannabis businesses.

✅ Model 4: No State-Level Banking Protections for Cannabis Businesses Some states have legalized cannabis but have not enacted statutory protections for banks or credit unions working with marijuana-related businesses. As a result:

Financial institutions in these states face higher risks when serving cannabis businesses.
No clear legal framework exists to shield banks from potential enforcement actions.
Cannabis businesses in these states remain almost entirely cash-based, increasing security risks and limiting growth.
Example: Louisiana
Worst for: Any cannabis business seeking financial services.

2. State-by-State Breakdown of Cannabis Banking & Lending Programs

Illinois: The Gold Standard for State Cannabis Lending

Best for: Social Equity & Minority-Owned Cannabis Businesses Banking Model: State-Backed Lending & Capital Access Program

The Community Invest – Cannabis Banking Services Program provides state-backed capital to banks and credit unions, enabling them to offer low-cost banking services to cannabis businesses.
The Cannabis Social Equity Loan Program offers low- or no-interest loans to social equity applicants, helping minority businesses establish themselves in the market.

The Illinois Finance Authority administers state-funded loans and subsidizes loans through qualified Banks, Credit Unions and CDFI’s, prioritizing businesses in disproportionately impacted areas.

Maryland: A Strong Model with Loan Loss Reserve Protection

Best for: Small & Medium-Scale Cannabis Businesses Banking Model: State Loan Loss Reserve & Lending Program

Maryland’s Capital Access Program (Subtitle 14, Chapter 26 of 2022) provides loan loss reserve accounts for banks that lend to social equity cannabis businesses.
The state allows dispensaries to apply for loans up to $500,000 and growers/processors up to $1 million, reducing financial barriers.
Maryland’s cannabis tax revenue partially funds these lending programs, ensuring sustainability.

New York: Social Equity-Focused Cannabis Lending

Best for: Justice-Impacted & Minority Entrepreneurs Banking Model: State-Facilitated Loan Fund & Private Investment Pool

New York’s Social Equity Cannabis Fund is structured to provide financial backing to social equity licensees.
The state works with private financial institutions and impact investors to co-fund cannabis business loans.
Loan repayment structures are designed to minimize early financial strain, helping startups succeed.

Virginia: A Developing State Banking Model

Best for: New Market Entrants & Small-Scale Cannabis Businesses Banking Model: State-Led Lending Initiative

Virginia’s State Cannabis Lending Initiative is has not started due to obstruction from Governor Youngkin rejecting the second State legalization bill in 2024 and 2025 but is modeled after Illinois & Maryland.
The state intends to offer cannabis business loans backed by state funds both directly and through Community Development Financial Institutions and Banks, supporting social equity businesses.

3. Where Other States Are Falling Short

Model 2 States: Self-Administered, Limited Loan & Grant Programs

Connecticut, Michigan, Massachusetts, Colorado and New Jersey provide funding for cannabis businesses but do not involve financial institutions, creating short-term solutions but no long-term lending structures.

Colorado self administers their lending program through the Office of Economic Development & International Trade

Model 3 States: State Protections Without Capital Support

California, Pennsylvania, Arkansas, Rhode Island, Texas, Oklahoma, West Virginia, Ohio, Missouri, South Dakota have legal protections for banks working with cannabis businesses but no direct lending or grant programs.

Model 4 States: No Legal Banking Protections

Louisiana has no banking protections for financial institutions, making cannabis businesses in the state almost entirely cash based.

4. The Path Forward: Expanding State-Level Lending Programs

As more states legalize cannabis, the best way to ensure equitable access to capital is to create structured lending programs that involve banks, credit unions, and CDFIs. States that only provide self-administered grants or legal protections for banks are not doing enough to ensure sustainable cannabis financing.

By following the models set by Illinois and Maryland, states can:

✅ Create state-backed cannabis lending facilities using cannabis tax revenues.

✅ Offer loan guarantees to banks and credit unions to reduce lending risks.

The Illinois Cannabis Capital Investment eco-system

✅ Adopt compliance & underwriting frameworks like the Bank Black Initiative & Cannabis Compliance Banking Solution to support financial institutions.

How Bank Black & Cannabis Compliance Banking Can Help

Cannas Capital’s Bank Black Initiative and Cannabis Compliance Banking & Capital Solution offer: ✅ AI-driven underwriting to de-risk cannabis loans. ✅ Regulatory compliance monitoring for banks & state agencies. ✅ Social equity-focused lending frameworks to ensure minority-owned businesses have fair access to capital.

Final Thoughts: Why State-Led Action is Necessary

The federal government isn’t moving on cannabis banking reform anytime soon. That means states must take the lead in creating sustainable, scalable lending programs for cannabis businesses. Expanding access to capital is not just about financing cannabis businesses—it’s about ensuring that social equity applicants and minority-owned companies have the same opportunities to succeed as well-capitalized corporate players.

With models like Illinois, Maryland, and New York, we already see effective solutions that prioritize social equity financing. The next step is expanding these programs to more states—and integrating compliance-driven solutions like the Bank Black Initiative to make them even stronger.

Citations & Key References

Source

Key Information Referenced

Link or Document

Illinois Finance Authority Act (20 ILCS 3501/801-5)

Illinois state-backed cannabis banking program

Illinois Finance Authority Act

Maryland Chapter 26 of 2022 & Chapter 254/255 of 2023

Maryland’s cannabis loan loss reserve and capital access program

Chapter 254/255 of 2023

New York Social Equity Cannabis Fund

State-backed cannabis investment fund