Now that the deadline for submitting Illinois cannabis license applications has passed, it is time to look forward to another aspect of the Compassionate Use of Medical Cannabis Pilot Program Act — taxes.
The Act has generated two new state taxes, the Medical Cannabis Cultivation Privilege Tax (“Cultivation Tax”) and the related Compassionate Use of Medical Cannabis Pilot Program Act Surcharge (“Surcharge”). The Illinois Department of Revenue recently issued regulations on both the Cultivation Tax and the Surcharge.
The Cultivation Tax is imposed on the privilege of cultivating cannabis for medical use. The tax is 7% of the sales price per ounce. The tax is paid by the cultivation center and is not the responsibility of a dispensing organization, qualifying patient, or designated caregiver. However, the new regulations clarify that the cultivation center may seek reimbursement of the tax; the charge may not be identified on the invoice as a tax.
Persons subject to the Cultivation Tax must apply for a certificate of registration from the Department of Revenue. Those already registered with the Department of Revenue under the Retailers Occupation Tax are not required to register separately for purposes of the Cultivation Tax.
The Cultivation Tax is not imposed on free samples of medical cannabis given to a dispensing organization by a cultivation center. Nonetheless, the cultivation center will incur use tax liability on the cost price of the samples given. Furthermore, under the regulations, a cultivation center may not directly or indirectly discriminate in price between different dispensing organizations that are purchasing a like grade, strain, brand, and quality of cannabis or cannabis-infused products. Pricing based on differences in the cost of manufacturing, quantities sold, such as volume discounts or delivery method, are not prevented under the Department of Revenue regulations. Finally, the new regulations impose detailed record keeping requirements on all marijuana businesses.
The Surcharge statutes and regulations are somewhat complex. In general, the Surcharge is imposed on: 1) all taxpayers; 2) deriving income from sales and exchanges; 3) of certain tangible, real and intangible property of an “Organization Registrant.” In general, an Organization Registrant is a legal entity registered in Illinois either as a cultivation center or as a medical cannabis dispensary. An important point is that liability for the Surcharge is not limited to cultivation centers and dispensaries. The income of certain investors may be subject to the tax. Specifically, partners and S Corporation shareholders may be subject to the tax even if such partners and shareholders are not themselves a cultivation center or dispensary.
Finally, the taxes with which we are most familiar (e.g. income tax) are often rate based. The Surcharge is a bit different in that the Surcharge is equal to the amount of the taxpayer’s federal income tax liability for the taxable year attributable to transactions subject to the surcharge. Accordingly, a taxpayer must have a clear understanding of his or her federal income tax liability and treatment of asset sales and exchanges before The Surcharge can be analyzed. Finally, the regulations outline several exceptions to The Surcharge, including bankruptcy and certain transfers of registration, acquisitions, and restructurings.
In addition to these two new taxes, cultivators, and dispensaries must still consider other Illinois state taxes such as: Income Tax, Retailer Occupation Tax, Use Tax, Employee Withholding and other local taxes. And, of course, all Illinois marijuana businesses must grapple with 280E under the federal tax code.