Illinois Leads the Way with New Cannabis Regulation and Tax Act

Illinois Breaks New Ground by Legalizing and Taxing Adult-Use Cannabis Without a Voter Referendum

As part of a comprehensive legislative package recently passed in Illinois, the legislature legalized and will tax the adult recreational use of Cannabis.  The short title of the new law is the Cannabis Regulation and Tax Act, generally effective on January 1, 2020.  What is unique about this law is that Illinois is the first state to legalize the commercial sale of adult-use Cannabis by direct legislative action rather than first by voter referendum.  We believe this is likely to set a trend for other states to do the same.  Illinois believes that the new law will create jobs and bring in millions of new dollars in taxes, as well as licensing and other fees in FY 2020 and beyond.

When Governor JB Pritzker first proposed the change back in February as part of his state budget for 2020, he said

“…By legalizing and regulating adult-use cannabis in this legislative session, we will create jobs and bring in $170 million in licensing and other fees in fiscal year 2020. I have noted many times that I don’t view this issue through a purely financial lens. I think we should take this action for our state because of the beneficial criminal and social justice implications and the jobs it will create. And let’s be honest, like it or not, cannabis is readily available right now. I would rather the state tax it and regulate it than deny the reality of its use and accessibility….”

How Is Illinois Going to Tax It?

In addition to the current sales and use state tax rate of 6.25% (plus local rates of up to 3.5%) on the “sale of tangible personal property at retail”, there are 2 new taxes imposed on cannabis:

  • Cannabis Cultivation Privilege Tax
  • Cannabis Purchaser Excise Tax

Cannabis Cultivation Privilege Tax (Article 60)

What are the general rules?

The tax is imposed upon the privilege of cultivating cannabis at the rate of 7% of the gross receipts from the first sale of cannabis by a cultivator. The sale of any product that contains any amount of cannabis or any derivative is subject to the tax on the full selling price of the product. The Department of Revenue (DOR) may determine the selling price of the cannabis when:

  • The seller and purchaser are affiliated persons
  • The sale and purchase of cannabis is not an arm’s length transaction
  •  Cannabis is transferred by a craft grower to the craft grower’s dispensing organization or infuser or processing organization and a value is not established for the cannabis.

The value must be commensurate with the actual price received for products of like quality, character, and use in the area. If there are no sales of cannabis of like quality, character, and use in the same area, then the DOR must establish a reasonable value based on sales of products of like quality, character, and use in other areas of the State, taking into consideration any other relevant factors.  The tax is in addition to all other occupation, privilege, or excise taxes imposed in Illinois, including any unit of local government.

What are some key definitions in the new law?

“Cultivator” or “taxpayer.” This means a cultivation center or craft grower. “Cultivation center” means a facility licensed to cultivate, process, transport, and perform other necessary activities to provide cannabis and cannabis-infused products to cannabis business establishments.  A “Craft grower” means a facility licensed to cultivate, dry, cure, and package cannabis and perform other necessary activities to make cannabis available for sale at a dispensing organization or use at a processing organization.

Infuser.  “Infuser organization” or “infuser” means a facility operated by an organization or business that is licensed by the Department of Agriculture to directly incorporate cannabis or cannabis concentrate into a product formulation to produce a cannabis-infused product.

Selling Price.  “Selling price” or “amount of sale” means the consideration for a sale valued in money whether received in money or otherwise, including cash, credits, property, and services, and determined without any deduction on account of the cost of the property sold, the cost of materials used, labor or service cost, or any other expense whatsoever, but does not include separately stated charges identified on the invoice by cultivators to reimburse themselves for their tax liability.

Gross Receipts.  “Gross receipts” from the sales of cannabis by a cultivator means the total selling price or the amount of such sales. In the case of charges and time sales, the amount must be included only when payments are received by the cultivator.

Who is responsible for the tax?

The tax is solely the responsibility of the cultivator who makes the first sale and is not the responsibility of a subsequent purchaser, a dispensing organization, or an infuser. Persons subject to the tax may, however, reimburse themselves for their tax liability by separately stating reimbursement for their tax liability as an additional charge.

Who must register for this tax?

Every cultivator and craft grower must apply to the DOR for a certificate of registration.  All applications for registration must be made by electronic means (unless a hardship applies) in a manner similar the retailers’ occupation tax rules.  In addition, no certificate of registration can be issued unless the applicant is licensed.

What should be included on the invoices?

Every sales invoice for cannabis issued by a cultivator to a cannabis business establishment must contain the cultivator’s certificate of assigned registration number, date, invoice number, purchaser’s name and address, selling price, amount of cannabis, concentrate, or cannabis-infused product, and any other reasonable information necessary for the administration of the new law. Cultivators must retain the invoices for inspection by the DOR.

What are the rules for filing a return and paying the tax?

Each person who is required to pay the tax must file a return and pay the tax electronically on or before the 20th day of each month for the preceding calendar month.

Allowable discount.  A discount of 1.75%, but not to exceed $1,000 per return period, is allowed to reimburse the taxpayer for the expenses incurred in keeping records, collecting tax, preparing and filing returns, remitting the tax, and supplying data to the DOR upon request. However, no discount may be claimed by a taxpayer:

  • On returns not timely filed and for taxes not timely remitted
  • For any return that is not filed electronically
  • For any payment that is not made electronically, unless a waiver has been granted

Combined cultivator privilege and medical cannabis tax return.  The DOR may require a separate return for the cultivator privilege tax.  However, if the DOR requires that the reporting for the cultivator tax is to be combined with the medical cannabis tax, the vendor’s allowed discount and any cap on that discount will apply to the combined return.

Infuser information returns. The DOR may adopt rules that require infusers to file information returns regarding the sale of cannabis by infusers to dispensaries. The DOR may require infusers to file all information returns by electronic means.

Are estimated tax payments required to be made?

Each taxpayer must make estimated payments on or before the 7th, 15th, 22nd, and last day of the month during which tax liability is incurred. The payments must be in an amount not less than the lower of either 22.5% of the taxpayer’s actual tax liability for the month or 25% of the taxpayer’s actual tax liability for the same calendar month of the preceding year.

What are the rights and responsibilities of the DOR and Taxpayers? 

In administering the new law, both the DOR and taxpayers have similar rights, remedies, privileges, immunities, powers, and duties, and are subject to the same conditions, restrictions, limitations, penalties, and definitions of terms, and employ the same modes of procedure, as currently apply under Retailers’ Occupation Tax Act and the Uniform Penalty and Interest Act.   For this purpose, references in the Retailers’ Occupation Tax Act to a “sale of tangible personal property at retail” mean the “sale of cannabis by a cultivator”.

Cannabis Purchaser Excise Tax (Section 65)

How much cannabis may an adult 21 years of age or older possess and purchase?

Possession is limited to: 30 grams of raw cannabis; Cannabis-infused product or products containing no more than 500 mg of THC; and 5 grams of cannabis product in concentrated form. Non-residents could purchase half that amount, or 15 grams of cannabis, 250mg of THC in a cannabis-infused product, and 2.5 grams of concentrated cannabis product.

What are the general tax rules? 

A tax is imposed upon purchasers for the privilege of using cannabis at the following rates:

  • Any cannabis, other than a cannabis-infused product, with an adjusted delta-9-tetrahydrocannabinol level at or below 35% is taxed at a rate of 10% of the purchase price
  • Any cannabis, other than a cannabis-infused product, with an adjusted delta-9-tetrahydrocannabinol level above 35% is taxed at a rate of 25% of the purchase price
  • A cannabis-infused product is taxed at a rate of 20% of the purchase price

Cannabis-infused product. “Cannabis-infused product” means beverage food, oils, ointments, tincture, topical formulation, or another product containing cannabis that is not intended to be smoked.

Purchase Price.  The purchase of any product that contains any amount of cannabis or any derivative is taxed on the full purchase price of the product.

Addition to Sales Tax.  This tax is in addition to all other occupation, privilege, or excise taxes imposed by the State of Illinois or by any municipal corporation or political subdivision

Not in addition to the Medical Cannabis tax.  This tax is not imposed on cannabis that is subject to tax under the Compassionate Use of Medical Cannabis Pilot Program Act.

Purchases for Resale.  Cannabis retailers may purchase cannabis for resale only from authorized cannabis business establishments.

Are there constitutional restrictions on this tax?

This tax is not imposed on any transaction in interstate commerce (those that cross state lines), to the extent the transaction may not, under the Constitution and US law, be made the subject of taxation by Illinois.  In addition, this tax will not be imposed on any purchase by a purchaser if the cannabis retailer is prohibited by federal or state constitution, treaty, convention, statute, or court decision from collecting the tax from the purchaser.

What if the taxpayer bundles taxable and nontaxable items? 

If a cannabis retailer sells cannabis, concentrate, or cannabis-infused products in combination or bundled with items that are not taxable under the new law for one price in violation of specific dispensing organization licensing prohibitions, then the tax is imposed on the purchase price of the entire bundled product. An example of such a prohibition would be the selling any product containing alcohol except tinctures, which must be limited to containers that are no larger than 100 milliliters.

How is the tax collected? 

The tax is to be collected from the purchaser and remitted to the state by the cannabis retailer All sales to a purchaser are presumed subject to tax collection. Cannabis retailers collect the tax from purchasers by adding the tax to the amount of the purchase price received from the purchaser for selling cannabis to the purchaser. The tax, when collected, is to be stated as a distinct item separate and apart from the purchase price of the cannabis.

If a cannabis retailer collects more from the purchaser than the required, the purchaser has the legal right to claim a refund of that amount from the cannabis retailer. If, however, that amount is not refunded to the purchaser for any reason, the cannabis retailer is liable to pay that amount to the DOR.

Tax collected as debt owed to Illinois. Any cannabis retailer required to collect the tax is liable for the tax, whether or not the tax has been collected by the cannabis retailer, and any such tax constitutes a debt owed by the cannabis retailer to Illinois.  To the extent that a cannabis retailer has actually collected that tax, the tax is held in trust for the benefit of the DOR.

How do cannabis retailers register? 

Every cannabis retailer required to collect the tax must apply for a certificate of registration. All applications for registration must be made electronically.  In addition, no certificate of registration can be issued unless the applicant is licensed.

What are the rules for filing a return and paying the tax?

Each cannabis retailer must file a return electronically on or before the 20th day of each month for the preceding calendar month. All returns required to be filed and payments must be made electronically (unless hardship can be shown).

Allowable Discount.  The cannabis retailer must also pay the tax, less a discount of 1.75%, but not to exceed $1,000 per return period, which is allowed to reimburse the cannabis retailer for the expenses incurred in keeping records, collecting tax, preparing and filing returns, remitting the tax, and supplying data to the DOR.  No discount may be claimed by a cannabis retailer:

  • On returns not timely filed and for taxes not timely remitted
  • For any return that is not filed electronically
  • For any payment that is not made electronically, unless a waiver has been granted

Are estimated tax payments required?

Each cannabis must make estimated payments on or before the 7th, 15th, 22nd, and last day of the month during which tax liability is incurred. The payments may not be less than the lower of either 22.5% of the cannabis retailer’s actual tax liability for the month or 25% of the cannabis retailer’s actual tax liability for the same calendar month of the preceding year.

Tax credit.  If any payment exceeds the taxpayer’s liabilities, as shown on an original monthly return, the DOR will, if requested by the taxpayer, issue to the taxpayer a credit no later than 30 days after the date of payment.

What books and records must be kept?

Every cannabis retailer, whether or not they have obtained a certificate of registration must keep complete and accurate records of cannabis held, purchased, sold, or otherwise disposed of, and must preserve and keep all invoices, bills of lading, sales records, and copies of bills of sale, returns, and other pertinent papers and documents relating to the purchase, sale, or disposition of cannabis. Such records need not be maintained on the licensed premises but must be maintained in Illinois.  However, all original invoices or copies covering purchases of cannabis must be retained on the licensed premises for a period of 90 days after such purchase, unless a waiver is granted.

What are the penalties for violations of rules and regulations?

Class 1-4 Felonies.  Depending on the amount of tax due, penalties for violations of the rules and regulations can range from fines from $5,000 to $100,000, as well as felonies ranging from Class 1 to 5.

What are the rights and responsibilities of the DOR and taxpayers? 

In the administration of the new law, both the DOR and taxpayers in general have the same rights, remedies, privileges, immunities, powers, and duties, and are subject to the same conditions, restrictions, limitations, penalties, and definitions of terms, and employ the same modes of procedure, as currently apply under the Use Tax Act, Retailers’ Occupation Tax Act and the Uniform Penalty and Interest Act.

Will Other States Follow Illinois lead on Cannabis legislation?

Not only is Illinois unique in legalizing cannabis through direct legislative action, it also chose to tax the purchase of cannabis differently depending on the amount of THC in the products.  Important to note that the law attempts to piggyback on an already-existing infrastructure developed around medical Cannabis, which should give it a head start on providing a stable regulatory and organizational environment.

Although a more stable regulatory environment should facilitate more rapid sales of cannabis, cannabis-related businesses in Illinois, as well as around the country, will need business, accounting, and tax expertise, as well as advanced technical solutions to stay in compliance and thereby avoid stringent penalties for noncompliance.

We believe Illinois’ first-of-a-kind action to legalize and tax cannabis for adult recreational use will be a model for many other states that have remained on the fence in pursuing similar action.

Visit our website for more sales and use tax information.

AUTHOR

Mark Friedlich

All stories by: Mark Friedlich

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