Marijuana Sales in Colorado: Where Do the Taxes Go?

April 29, 2014

Like it or not, sales of recreational marijuana by retail shops became legal in Colorado effective January 1, 2014. You may have seen the headlines recently about the higher-than-expected tax revenue that the recreational shops have generated thus far. In January alone, the State collected $2 million in taxes from the recreational sales.

One of the big campaign points related to the taxes in November 2013 were that the funds were going to be used for public schools in Colorado. I started to get curious about exactly where all the taxes are going and what the law says about how the revenue has to be spent. Let’s break it down:

1) Standard state sales tax: The state sales tax rate in Colorado is 2.9%. All sales of recreational marijuana have this 2.9% rate included. It’s the same rate that you would pay for any other item you purchase within the state.

2) State excise tax and special state sales tax: Through Proposition AA, which was on the November 2013 ballot in Colorado, the Colorado voters approved a special excise tax on the sale of recreational marijuana. The ballot measure was supported by 65% of the voters. It has two different taxes:

  • The first part imposes a 15% excise tax when unprocessed retail marijuana is first sold or transferred by a retail cultivation facility. This is a tax on wholesale transfers of recreational marijuana and will be paid by the shops when they are purchasing wholesale products for re-sale in their shops. In other words, the consumer does not directly pay this tax. The first $40 million of revenues generated by this 15% tax is required to be used for public school construction.
  • The second part imposes a 10% sales tax on the sale of retail marijuana (in addition to the standard 2.9% sales tax mentioned above). This is the tax that the customers in the retail shop pay. The revenue generated by this tax is required to be used to regulate the stores and put together public health campaigns about marijuana. You may have already seen some of the ads generated on that front, warning of the dangers related to driving while impaired.

3) Local sales tax: Cities and municipalities have their own local sales tax rates, which will also be applied to sales within those jurisdictions. In addition, many of the cities are imposing their own excise taxes on the sales.

In February 2014, Governor Hickenlooper submitted his request to the Legislature for allocation of the taxes that are collected from Proposition AA. Highest on the list was youth marijuana use prevention, for which the Governor requested use of $45.5 million through the end of 2015. Other items on the request included substance abuse treatment ($40.4 million), public health ($12.4 million), regulatory oversight ($1.8 million), law enforcement ($3.2 million) and statewide coordination ($0.2 million). These expenditures would be for tax revenue above the first $40 million, which must go to public schools (specifically, the Building Excellent Schools Today program).

Another issue that came up in late March relates to TABOR (The Taxpayer Bill of Rights). TABOR puts limits on government revenue growth, and says that the government cannot spend more without voter approval. If TABOR is triggered, it could cause a one-year refund on new sources of revenue, including the marijuana taxes. Alternatively, the voters could be asked to approve the retention of the funds by the State. At this point it is too early to tell what will happen.