Sales Tax on CBD Oil
The sale of hemp has grown dramatically over the last 12 months, and the popular CBD, which is a natural compound extracted from hemp. You will find over 3,000 listings on Amazon.com alone for CBD oil.
The CBD products (most popular is oils) are recognized for potential health benefits.
This sudden rise of these products has led to several state and local tax issues in a very short period.
Each state must determine if CBD is subject to sales tax. It is not like cut-and-dry products that are subject to sales tax in the 45 states and D.C. This is closer to supplements that are taxable in some states, but not others, based upon ingredients.
If a state determines your CBD product is subject to sales tax, you will need to measure your gross revenue and transactions in most states. Since the 2018 U.S. Supreme Court Case, Wayfair vs. South Dakota, states now have thresholds that, when passed, create sales tax nexus.
Track Your CBD Oil Sales by State and Transaction to Determine if You have Created Economic Nexus (if Taxable by the State).
The most common is $100K in sales or 200 transactions. You must pass $500K in sales in states like California before you create sales tax nexus. Once you have sales tax nexus, you are responsible for collecting and remitting sales tax from your customers in that state.
If you sell on a Marketplace facilitator like Amazon, they collect and remit sales tax for their third-party sellers in 34 states.
CBD oil is made from the leaves, flowers, and stalks of the hemp plant—the only parts of the plant where cannabidiol is found.
Hemp, which is different from its higher THC cousin, marijuana, has been legal in many states for years but not entirely legal at the federal level. That changed when Congress passed the 2018 Farm Bill, which allowed the hemp market to skyrocket.
The hemp industry, which was $1.1-billion in 2018, is expected to more than double to 2.6-billion by 2022. The CBD market alone may reach over $20-billion by 2022.
As you can imagine, the states are salivating for an opportunity to earn additional revenue from this explosive growth.
The states have several areas where these hemp manufactures could generate additional tax revenue. They include:
- Licensing and regulations
- Sales tax
- Or excise tax instead of sales tax
- Of course, state income taxes on profits in states that have a state income tax.
The states are quickly attempting to decide how to maximize their state revenues from the sales of hemp and CBD oils.
If the states determine that CDB oil is not subject to sales tax, that would be a massive win for the sellers and lessen their sales tax burden. In the end, it is more likely the states that charge sales tax (45 plus D.C.) will want to put CBD oil in a box that is subject to sales tax. Why turn away the revenue?
One may argue that CBD oil should fall under an agriculture exemption, and therefore not subject to sales tax, like food and food ingredients.
Vermont is one of the first states to release clear guidelines for the taxation of hemp and hemp-related products (which includes CBD oils).
In Vermont, hemp is considered tangible personal property, which means it is subject to sales and use tax. UNLESS an exemption applies.
Hemp plants sold as an agricultural supply qualify for the agricultural exemption from sales tax and are NOT taxable in Vermont.
Is CBD oil (derived from the hemp plant) subject to sales tax or exempt under the agricultural exemption?
Vermont takes the position that CBD is generally subject to sales and use tax as it DOES NOT qualify for various potentially applicable exemptions for agriculture supplies.
Therefore, in Vermont, CBD oil is subject to sales and use tax.
The reason CBD oil does not qualify for the agricultural exemption (which is essential to note for other states) it is NOT used and consumed directly in the production of tangible personal property on farms, food and food ingredients, or dietary supplements.
When you register for sales tax in a state that is one step, you must select the correct amount of taxes to collect when you set your tax settings for your shopping cart or platform, like Amazon or your website. If you check off the wrong tax settings, you may be under-collecting sales tax and paying a certain percentage out of your pocket.
For example, back to Vermont, where the state sales tax rate is 6%. If your CBD is part of a taxable meal, that is subject to the state’s higher rate (9%) meals and room tax instead of the 6% sales tax.
Vermont, like most states, has a local sales tax amount of 1%, which brings the total to either 7% or 10%, in this example.
The critical part is your tax settings when you collect sales tax. The process of setting the correct tax settings on your shopping cart is a separate service from sales tax registration.
In California, like Vermont, your sales of cannabis and cannabis products are generally subject to sales tax unless your customer provides you with a valid Medical Marijuana Identification Card.
Are Cannabis Accessories Subject to California Sales Tax? What about Excise Tax?
The retail sale of cannabis accessories, such as pipes, rolling machines, vape pens (without cannabis), rolling papers, shirts, hats, books, and magazines, are subject to sales tax, but NOT the 15 percent excise tax (the calculation for the markup rate will be 80%, as of January 2020, up from the current 60%).
If you sell items that contain both cannabis and a cannabis accessory, such as a vape pen preassembled with cannabis cartridge and battery, only the cost of the cannabis is subject to the excise tax.
Most retailers are not involved in CBD sales, and most come from online sales. CBD companies need to be in tune with the 2018 Wayfair vs. South Dakota decision, where there are 44 states with economic nexus and 18 states with both a sales amount or sales transaction threshold, many of which create nexus with as little as 200 transactions.
If you are selling on a marketplace facilitator platform like Amazon, they collect sales tax for third-party sellers in 34 states out of 40 marketplace nexus states. That number will continue to grow. If you are using FBA to distribute your products on Amazon, there are eight states where you may have FBA stock for which Amazon does not collect, and you have a responsibility to do so from the first sale.
More resources and updates by states:
Other states like Missouri are quiet on the subject and need more time to determine taxability.
Here is another resource with a list of states with legal cannabidiol (CBD). This shows that 33 states have legalized medical marijuana, the remaining 17 states have all passed laws allowing the use of CBD extract.
In Florida, sales of tangible personal property are subject to sales and use tax unless they are specifically exempted by law or rule. This is a typical pattern in most states. The critical part is determining if there is an exemption that the CBD oil may fall into in any particular state.
There is an argument to be made in Florida that CBD products fall within items listed on the exempt list.
However, there is a strong argument that CBD products fall within the listed items on the general groceries exempt list, specifically as “herbal supplements.”
The best approach is to call the department of revenue and receive a response in writing about the taxability of your CBD oil products state by state.
If you need support for your sales tax registrations for your CBD oil business, we can help you register. Learn more here.