Cannabis Taxation in Montana

By Abraham Finberg, CPA and Rachel Wright, CPA MST |AB FinWright LLP

and Jim Marty, CPA and Founder of Bridge West CPAs and Advisors to the Cannabis Industry

 

Montana voters legalized cannabis for medical use in 2016 under the Montana State Initiative I-182[1].  Somewhat similar to states such as California, Initiative I-148, passed in 2004[2], allowing for patient use and cultivation but did not formally legalize the commercial sale of cannabis.  The law was tightened and limited by Legislative action[3].   Initiative I-190 legalized adult use in 2021 and allowed existing medical marijuana dispensaries to sell cannabis for recreational purposes on January 01, 2022 in counties that voted yes on the initiative[4].   Additional legislation and further refined adult-use law[5]

The purpose in writing this article is to inform operators in Montana and their advisors on the conformity to Internal Revenue Code (IRC) 280E as well as other taxes specific to the state.  Finally, we’ll discuss the upsides and downsides of operating in Montana from a tax perspective.

The Montana tax code, in general, conforms to the Internal Revenue Code (IRC) for both individual and corporate taxation.[6][7]

The Montana Department of Revenue, since 2017, has allowed business deductions for licensed (legal) cannabis corporations. Allowance for business deductions has its own separate Montana tax code that does not directly tie into IRC definitions of business expenses.[8]

The Montana Department of Revenue has interpreted the law for pass-through entities and individuals with licensed cannabis operations to allow deductions of ordinary and necessary business expenses. Montana individual tax law begins with IRC defined adjusted gross income and business deductions are not directly mentioned in individual tax law.[9]

Montana charges both the regular sales tax as well as a 4% (Medical Marijuana) and a 20% cannabis retail sales tax.[10] The retail tax is a tax for retail medical marijuana sales and not wholesale sales.[11] Both the retail tax and the regular sales tax are exempt from the taxable price, i.e.  Montana does not charge “tax on tax.”[12]  [13]

Montana assesses the marijuana tax on the retail price that excludes discounts or even products given away.[14]

As of this writing, Park, Yellowstone, and Missoula (Medical only for Missoula) Counties have an additional 3% tax based on the same state retail price definition with an exclusion for discounts or gifted products.[15]

Is Montana actually a low tax state for cannabis? Montana allows regular operational expenses on income tax returns (so no 280e disallowed deductions).

Montana has a relatively low marijuana tax which only applies at the retail level for medical sales and a relatively high tax on adult use.  Adult-use tends to be the vast majority of sales for dispensaries.[16]

Montana is generally a low cannabis tax state due to Montana’s income tax savings and since cultivators and manufacturers do not have to pay any cannabis excise taxes. Compared to California, with its cultivation tax and a functional 27% excise tax charged to retailers (the tax is theoretically assessed to the consumer but is in reality charged by a distributor to a retailer.  There, retailers have to be careful to avoid occasional discounts since the cannabis tax is assessed on the regular retail price rather than the discounted price.

Do you have further questions about cannabis taxation in Montana? Bridge West CPAs offers cannabis and hemp advisory services, and many other essential cannabis accounting services. Now well into our second decade of helping entrepreneurs navigate the cannabis industry with expert bookkeeping and advisory services, we’re confident that Bridge West CPAs can help set you on the road to success; don’t hesitate to reach out anytime.

[1] https://sosmt.gov/Portals/142/Elections/archives/2010s/2016/I-182.pdf

[2] https://ballotpedia.org/Montana_Medical_Marijuana_Allowance,_I-148_(2004)

[3] https://legiscan.com/MT/text/SB423/id/277384

[4] https://sosmt.gov/wp-content/uploads/I-190.pdf

[5] https://leg.mt.gov/bills/2021/billpdf/HB0701.pdf

[6] Montana Code Title 15, Chap. 30 Part 21 10 (2021)

[7] Montana Code Title 15, Chap. 31 Part 1 13 (2021)

[8] Montana Code Title 15, Chap. 31 Part 1 14 (2021)

[9] Montana Department of Revenue, “Montana Tax News You Can Use,’ December 14th 2017.

[10] Montana Code Title 15, Chap. 64 Part 1 02 (2021)

[11] Montana Code Title 15, Chap. 64 Part 1 02 (2021)

[12] Montana Code Title 15, Chap. 68 Part 1 01 (2021)

[13] Montana Code Title 15, Chap. 64 Part 1 01 (2021)

[14] Montana Code Title 15, Chap. 64 Part 1 01 (2021)

[15]https://montana.servicenowservices.com/citizen/kb?sys_kb_id=37c9bc641bbcc150d707a82eac4bcb67&id=kb_article_view&sysparm_rank=1&sysparm_tsqueryId=a2d72fcd1b380950135cebdbac4bcbc8

[16] Author’s experience with clients from California Oregon, Washington State and Nevada; states with both adult use and medical sales as of this writing.   Montana does not have a commercial adult use program as of this writing.