Avalara > Blog > Sales and Use Tax > Adult-use sales tax? Wacky Tax Wednesday

Adult-use sales tax? Wacky Tax Wednesday

Various types of sales taxes generate revenue for all sorts of specific purposes. For example, education sales tax funds schools; transportation sales tax raises money for public transportation; and special district sales tax brings in revenue for special districts. There are municipal street maintenance and repair sales taxes, hotel taxes, meals taxes, and so on. The name typically reveals the purpose of the tax, which is why talk of an adult-use sales tax in New Jersey caught my eye.

A sales tax to raise revenue for adult use? Do tell.

The proposed adult-use tax is, in fact, linked to a product that would only be sold to adults: marijuana. Several bills now under consideration in the New Jersey Legislature would allow adults to purchase — and pay taxes on — marijuana for recreational purposes.

Spread the wealth

Under Senate Bill 830 (which carries over the previous S3195), cannabis and cannabis products would be taxed at a rate of 7% initially. That rate would increase annually to 10% in year two, 15% in year three, 20% in year four, and 25% year five and beyond.

Assembly Bill 3581 proposes a different tax strategy: 7% in the first two years; 10% in year three and four; and 15% in year five and beyond. The bill also permits the home growing of marijuana — up to six plants in a house or rental unit — although it grants local governments the right to prohibit it. A3581 would also require a minimum of 15% of the licenses for new marijuana retailers be issued to minority-, women-, or veteran-owned businesses.

The Division of Taxation would be responsible for regularly reviewing the tax and recommending adjustments to the Legislature. It would also establish procedures for the collection of all taxes levied. The bulk of the revenue generated by the tax would fund the Division of Marijuana Enforcement, an agency created to enforce and regulate the recreational marijuana market.

Local governments of localities with a recreational marijuana establishment would receive a portion of the revenue. Under S830, the allotment would be 1% the first year, 2% the second year, and 3% the third year and beyond. Under A3581: 1% the first and second year, 2% the third and fourth year, and 3% year five and beyond.

Money, money, money

According to the bills, the controlled manufacture, distribution, and retail sale of marijuana would “generate hundreds of millions of dollars” for the state — revenue that would “bolster effective, evidence-based drug treatment and education” and be reinvested in communities. It could also cut down costs of marijuana possession enforcement, roughly $127 million annually.

However, if legalized, the marijuana market may experience some growing pains. California’s retail sale of recreational marijuana has only been legal since January 1, 2018, and already the state is struggling to find the marijuana tax sweet spot.

Many legal marijuana sellers in California are saying they “can’t compete with the black market because of the high state and local taxes.” According to industry leaders, “high taxes, complicated regulations and a thriving black market are having deleterious effects” on the nascent industry. Consequently, a bill seeking to lower the state excise tax on marijuana and suspend the tax on cannabis cultivation is now under consideration.

New Jersey’s proposed adult-use sales tax is quite a bit lower than similar taxes in California, which can be as high as 45% in some parts of the state. Still, some predict The Garden State could generate as much as $1 billion a year from legalizing and taxing pot — the equivalent of more than a half-cent boost in the sales tax. That seems optimistic. In Colorado, the first state to legalize pot, marijuana taxes, licenses, and fees brought in $247,368,473 in 2017.

Tax revenue can be a powerful motivator. It will be interesting to see whether it’s enough of one for New Jersey lawmakers to legalize marijuana for adult use. If it is, you can learn about it on the Avalara blog.

Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.