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 47 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.
Most states allow you to sell CBD products as long as they are properly labeled and meet other requirements (like being extracted from hemp sources with less than 0.3% THC of dry weight). Lousiana has a 3% excise tax on cannabidiol.
There are four states where it is not legal to buy or sell cannabidiol (CBD) including Alabama, Iowa, Mississippi, and North Carolina.
If you are selling CBD that is derived from marijuana sources (more than 0.3% dry weight TH) then additional marijuana excise taxes will likely apply. The product might also not be legal depending on the particular state.
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.
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 47 states with economic nexus and 26 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 47 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:
Here is another resource with a list of states with legal cannabidiol (CBD).
If you need support for your sales tax registrations for your CBD oil business, we can help you register. Learn more here.