More Marijuana Sales Taxes Are Coming

Todd Campbell 

Overall, 29 states (including D.C.) have medical marijuana laws on the books and eight states have embraced recreational marijuana markets. Creating those markets is complex, but tax revenue statistics suggest the effort is worth it. Marijuana advisory firm GreenWave Advisors estimates marijuana sales taxes added $1.6 billion to state tax receipts last year, and GreenWave's Matt Karnes estimates that by 2021, marijuana sales taxes could total more than $4 billion.

Racking up revenue

Pro-pot advocates have used state tax revenue from marijuana sales as a major selling point to win support, and so far, their claims of billions of additional dollars in tax revenue appear to be spot on.

In 2016, GreenWave Advisors pegs total retail marijuana sales of $6.5 billion, up 35% from 2015, including recreational marijuana sales of $1.8 billion. Medical marijuana sales remain the bigger of the two markets, with California accounting for the lion's share of sales. Californians voted to open up a recreational market last November, so that revenue mix could change over the next few years.

Assuming an estimated 25% sales tax on retail marijuana sales, Karnes thinks pro-pot states collected about $1.6 billion in retail sales taxes on cannabis in 2016, including about $450 million in states with recreational laws in place.

In Colorado, where retail marijuana sales eclipsed $1 billion in 2016, the state collected $16.7 million in sales and excise taxes in February, up 47.3% year over year. The state collected $8.2 million from the 10% retail marijuana special sales tax and $5.5 million from the 15% marijuana excise tax. It also collected an additional $3 million from its 2.9% retail and medical marijuana sales tax.

That's a pretty nice haul for one month -- especially if you also include marijuana fees. Including fees, cannabis added $17.7 million to Colorado's coffers last month. If we annualize that number, it works out to $212 million in calendar year taxes and fees, but it's likely to come in much higher than that because that figure doesn't factor in seasonality of sales or additional sales growth.

Marijuana state tax revenue is becoming more of a needle-mover in Washington, too. Washington's taxable marijuana retail sales were $64.2 million last July, and that translated into state sales tax collections of $4.17 million. In December, taxable marijuana sales of $72.6 million resulted in state sales tax collections of $4.72 million. Washington also collects a 37% excise tax on marijuana, and that tax produced $25 million in February.

More marijuana taxes ahead

I recently discussed how it's possible that every state in the country will legalize marijuana by 2021, and if that forecast holds up, then GreenWave Advisors thinks marijuana sales could jump to $30 billion nationally that year. If so, then Karnes believes that new taxes on marijuana in those additional states will cause state marijuana tax revenue to climb to $4 billion or more in 2021.

Of course, there's no guarantee that pro-pot laws will continue to win voter support or that the current leaders in Washington, D.C., won't act to restrict the spread of recreational marijuana marketplaces.

In the past, Donald Trump and his attorney general, Jeff Sessions, haven't supported the concept of recreational marijuana use. It's also uncertain if states will follow in the footsteps of Colorado's tax scheme or will establish different tax rates than what we've seen so far.

How to profit from marijuana's momentum

The massive growth potential of this market has many Americans wondering if there's a way to safely invest in it. Unfortunately, most pure-play marijuana stocks are unproven, and they trade on high-risk, unregulated over-the-counter stock markets.

Recently, marijuana vending machine company Medbox and its founder settled SEC allegations of improperly inflating the company's revenue in press releases. That settlement is an important reminder that marijuana stocks can be incredibly risky.

Instead of focusing on small, pure-play marijuana stocks, a better idea might be to focus on bigger companies that also benefit from Americans' improving attitude toward cannabis.

For example, GW Pharmaceuticals plc (NASDAQ: GWPH) has been researching marijuana as medicine since the 1990s, and last year, it demonstrated that its Epidiolex, a purified formulation of a non-psychoactive chemical found in cannabis, can reduce seizures in uncommon forms of epilepsy.

Patients experienced about 40% fewer seizures when taking GW Pharmaceuticals' Epidiolex in trials, and that's got management targeting a filing for FDA approval of the drug this year. If the FDA gives Epidiolex a green light, then doctors throughout the United States should be able to prescribe it to patients next year.

Investors might also want to take a closer look at Scotts Miracle-Gro (NYSE: SMG). The gardening and herbicide company has spent hundreds of millions of dollars buying companies that sell hydroponics equipment and supplies, and management believes marijuana legalization could be a significant driver of its future sales growth. General Hydroponics, Gavita, Botanicare, and AeroGrow are among the companies they've either acquired outright or bought big stakes in.