Colorado is one of a small handful of states where sales of recreational marijuana are legal. But legitimacy comes with a price — high taxes. Retail sales of weed are subject to the 2.9% general state sales tax, an additional 10% state sales tax, and applicable local sales taxes; a 15% excise tax on wholesale sales also impacts the final sales price, as does the local excise tax, if there is one. Beginning July 1, 2017, the sales tax rate on recreational marijuana will be even higher.

Senate Bill 17-267, signed into law last week by Gov. John Hickenlooper, increases the additional state sales tax from 10 to 15%. This diverges from the previous plan, under which the 10% rate was to drop to 8% on July 1. However, the measure also exempts retail sales of marijuana from the 2.9% general state sales tax so consumers will see rates rise by only 2.1% on July 1. Voters in 2013 granted the state legislature the power to decrease or increase the excise and sales tax rates on retail marijuana, “so long as the rate of either tax does not exceed 15 percent” (Proposition AA).

SB 17-267, or “Sustainability of Rural Colorado,” stipulates that the state will receive 90% of the special sales tax revenue, while local governments will receive the remainder. For FY 2017–18, $30 million of the state retail marijuana sales tax revenue will fund the State Public School Fund (SPSF) and be allocated to rural school districts: 55% to large districts, and 45% to small ones. In subsequent years, 12.59% of the special sales tax revenue will go to the SPSF; the remainder will go to the General Fund. Additional details are available in the bill’s fiscal note.

In Colorado, revenue from the 2.9% state sales tax is subject to the TABOR Amendment, which limits the amount of revenue the state can retain and spend. Under TABOR, “the state is required to set aside the excess and issue refunds to taxpayers in the following fiscal year.” The special tax on retail sales of marijuana is not subject to TABOR because it is a voter-approved revenue change. Additional information is available in SB 17-267.

The retail marijuana industry is young and still undergoing growing changes in the states where it is legal. Yet changes in sales tax rates and rules can occur for any product in any state at any time, complicating tax compliance for businesses.

To learn more about sales and use tax in Colorado, see Colorado Sales Tax Rates.

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