Tax Decoded | Summer 2019
Weighing the Taxes on Legal Weed
Illinois legislators have rolled out the foundation for a legal recreational cannabis industry — with no shortage of taxes to go along with it.
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
Deciphering Today's State & Federal Tax Law
In Illinois’ ongoing effort to cultivate new revenue sources, the state has joined a growing
number of others across the nation in legalizing recreational cannabis use in hope of
sparking a new industry and the economic benefits that could follow. With Illinois’ medicinal
cannabis program being deemed a success, and Gov. J.B. Pritzker’s budget counting on
significant cannabis revenues, the Illinois General Assembly passed the Cannabis
Regulation and Tax Act, HB 1438, which legalizes sales and possession of adult-use
The new legislation establishes a tiered tax structure that imposes a variety of taxes at both
the wholesale and retail levels that will be administered and collected by the Illinois
Department of Revenue (IDOR).
CULTIVATORS AND CRAFT GROWERS
The first tax is imposed on licensed cannabis cultivators and craft growers. Beginning
Sept. 1, 2019, a tax of 7 percent is imposed on their gross receipts of cannabis sales. The
statute provides that a cultivator must be licensed by the state to be eligible to register
with the IDOR. What’s notable here is that the legislation allows the IDOR to set the selling
price if it determines, for some reason, that a cultivator’s or craft grower’s transaction is not
an arm’s length sale.
Cultivators may recover the tax by stating it as a separate charge on the bill to their
customers. This right of reimbursement is a recognition that the tax is not a tax that is the
responsibility of the purchaser. In that respect the tax is like locally imposed retailers’
occupation taxes — the tax is on the seller with a right of reimbursement from the purchaser.
What this means as a practical matter is that a purchaser with enough bargaining power
could actually decline to reimburse cultivators.
Cultivators are required to file tax returns monthly with the return and payments both due
on the 20th of the month following the month in which the sales were made. All returns
and payments are required to be filed electronically. However, the legislation allows for
cultivators to petition the IDOR for an exemption to the electronic payment requirement
based on hardship in recognition that entities in the cannabis business have a difficult time
establishing traditional banking relationships. Because cannabis remains a Schedule I drug
under the federal Controlled Substances Act of 1970 — deeming the use, sale, and
possession of cannabis illegal — federally insured banks must follow federal laws governing
banking that involves illegal activities. Meaning most banks currently cannot serve, or
choose not to serve, the legal cannabis industry.
Cultivators are also subject to specific requirements for invoices. The invoices must be
maintained in Illinois and must always be subject to IDOR inspection.
The next tier in the tax process applies to companies that infuse
cannabis into other products, like edibles. “Infusers,” as they are
known in the legislation, may be required by the IDOR to file
information returns with the department. The requirement of
information returns by infusers appears to be a mechanism by
which the State of Illinois can ensure that all cannabis raised
and sold by cultivators and craft growers is not diverted to
the black market.
The next tax imposed is the Cannabis Purchaser Excise Tax. This
tax is imposed and collected by cannabis retailers on sales to end
users. The tax rate varies by the type of product, and in the case of
smokable cannabis, by the amount of THC.
All cannabis-infused products are taxed at 20 percent of the
purchase price. Other cannabis with a THC level of 35 percent or
less is taxed at 10 percent of the purchase price. Cannabis with a
THC level of greater than 35 percent is taxed at 25 percent of the
The Cannabis Purchaser Excise Tax must be stated separately on
customers’ bills. It is also worth noting that the Cannabis Purchaser
Excise Tax is not a portion of the tax base used for calculation of
the Retailers’ Occupation Tax, aka sales tax, on cannabis purchases.
Sales of cannabis to end users are still subject to all general
state and local retailers’ occupation taxes. The state tax rate is
currently 6.25 percent of the selling price and local tax rates
obviously vary by location.
The Cannabis Purchaser Excise Tax is also required to be
electronically reported to the IDOR under requirements that mirror
those for cultivators.
Another point to be mindful of is that the legislation contains a
specific prohibition of bundling cannabis sales with non-cannabis
products. In other words, cannabis retailers cannot bundle sales of
cannabis with smoking paraphernalia.
HB 1438 also imposes two new local retailers’ occupation taxes on
cannabis sales to end users. The first is the Cannabis County
Retailers’ Occupation Tax. The tax can be imposed in .25 percent
increments, and the maximum tax rate that may be imposed by a
county depends on the seller’s location. Sales in an unincorporated
area of a county may be taxed at a maximum rate of 3.75 percent.
Sales made in a municipality located in a home rule county, namely
Cook County, may be taxed at a maximum rate of 3 percent. Sales
made in a municipality in a non-home rule county (every county
other than Cook) may be taxed at a maximum rate of .75 percent.
These county taxes are also collected and enforced by the IDOR.
The legislation also authorizes the imposition of the Municipal
Cannabis Retailers’ Occupation Tax. These taxes can be imposed
in .25 percent increments up to 3 percent of gross receipts.
In effort to satiate Illinois’ craving for legal cannabis revenues and
the broader social and economic benefits of a newly legal industry,
the Illinois General Assembly has attempted to develop a
recreational cannabis taxing scheme that will maximize state and
local revenues. At the same time, the state is attempting to avoid
setting tax rates that are so high that, when combined with the cost
of cannabis, consumers continue to find black-market cannabis
more attractive from a price standpoint. We will have to wait and
see whether the drafters of the taxes got it right.
Keith Staats, JD, is the executive director of the Illinois Chamber
of Commerce Tax Institute. He has been an ICPAS member since 2001.