Tax Policies for Kentucky’s Potential Marijuana Industry

By: Allan Amburn

            A haze is looming on Kentucky. Public opinion has shifted to favor the legalization of marijuana.[i] This shift was expressed in a major way with the legalization of the recreational use of marijuana in both Colorado[ii] and Washington.[iii] This provided Colorado an additional $53 million in tax revenue for 2014,[iv] with “tax revenues…expected to climb to $94 million annually by 2016.”[v] In Washington, marijuana is projected to “bring in more than $694 million in state revenue through the middle of 2019.”[vi]

            With a clear economic advantage arising from the legalization of marijuana, Kentucky politicians are beginning to examine Kentucky’s marijuana laws. In the Kentucky Legislature’s 2015 session, House Speaker Greg Stumbo sponsored a bill that would have legalized medical marijuana.[vii] Although marijuana is still considered a Schedule I controlled substance,[viii] the Kentucky House of Representatives proposed legislation that would lessen the penalty for possession of marijuana from a Class B misdemeanor to a $100 fine.[ix] If Kentucky decides to legalize medical and/or recreational marijuana, then Kentucky can model its tax policy on this new industry from Colorado and Washington.

            In Colorado, the total marijuana tax revenue includes: a 2.9% state sales tax; a 10% state tax on retail marijuana sales; a 15% excise tax based on the average wholesale market rate; and application and licensing fees.[x] Due to a 2015 Colorado House Bill, the retail marijuana sales tax will reduce to 8% in 2017.[xi] Additionally, varied local sales taxes and local marijuana taxes also apply.[xii] In spite of this duplicitous tax system, “Colorado’s marijuana tax collections” were not “as high as expected.”[xiii]

                  In Washington, the total marijuana tax revenue is derived from: “a 25% tax on producer sales to processors; a 25% tax on processor sales to retailers; a 25% tax on retailer sales to customers; a state Business & Occupation…gross receipts tax; a state sales tax of 6.5% ; and varied local sales taxes.”[xiv] The main tax burden consists of the three separate 25% taxes “at the production, wholesale, and retail levels.”[xv] In total, “the trio of taxes translates into an effective rate of 44%.”[xvi] Although analysts predicted that this high tax rate would deter consumers from Washington’s burgeoning marijuana industry,[xvii] it was quickly determined that “Washington’s legal recreational marijuana market [was] bringing in more tax revenue to the state than originally predicted.”[xviii]

            Kentucky could receive significant tax revenues by legalizing marijuana.[xix] To achieve this, it would be prudent to follow Colorado and Washington’s tax structures. I would recommend following Washington’s example of having three separate taxes on the production, wholesale, and retail level.[xx] I would then suggest following Colorado’s example by implementing a lower rate for each of these separate taxes.[xxi] I would additionally recommend a rate that is higher than Colorado’s, but lower than Washington’s. With this type of tax system, Kentucky’s marijuana industry could produce a very real “green rush.”


[i] See Seth Motel, 6 Facts about Marijuana, Pew Research Center (Apr. 14, 2015),; Christopher Ingraham, A Majority Favors Marijuana Legalization for First Time, According to Nation’s Most Authoritative Survey, The Washington Post (Mar. 4, 2015),


[ii] Matt Ferner, Amendment 64 Passes: Colorado Legalizes Marijuana for Recreational Use, Huffington Post (Nov. 20, 2012),


[iii] Jonathan Martin, Voters Agree to Legalize Pot, The Seattle Times (Nov. 6, 2012),


[iv] Katie Lobosco, Recreational Pot: $53 Million in Tax Revenue to Colorado, CNN Money (Feb. 12, 2015),

[v] Christopher Ingraham, Colorado’s Legal Weed Market: $700 Million in Sales Last Year; $1 Billion by 2016, The Washington Post (Feb. 12, 2015),


[vi] Rachel La Corte, Legal Pot in Washington Bringing in Even More Tax Than Predicted, Huffington Post (Nov. 20, 2014),


[vii] Kentucky House Speaker Emerges As Medical Marijuana Champion for 2015, Marijuana Policy Project, (last updated Apr. 23, 2015).


[viii] Ky. Rev. Stat. Ann. §218A.050 (West 2015).


[ix] H.B. 305, 2015 Reg. Sess., (Ky. 2015).


[x] Joseph Henchman, Taxing Marijuana: The Washington and Colorado Experience, The Tax Foundation (Aug. 25, 2014),; Colorado Marijuana Tax Data, Colorado Department of Revenue, (last visited June 10, 2015); H.B. 15-1367, §3 & 5, 2015 Leg. (Colo. 2015).


[xi] H.B. 15-1367, §3, 2015 Leg. (Colo. 2015).


[xii] Joseph Henchman, Taxing Marijuana: The Washington and Colorado Experience, The Tax Foundation (Aug. 25, 2014),


[xiii] Josh Barro, Marijuana Taxes Won’t Save State Budgets, The New York Times (Apr. 9, 2015),


[xiv] Henchman, supra note 12.


[xv] Niraj Chokshi, Moody’s: Washington Might Not See the Marijuana Tax Windfall Previously Projected, The Washington Post (July 22, 2014),


[xvi] Id.


[xvii] Andrea Unsworth and Robert A. Kurtter, Moody's: Slow Marijuana Sales Will Have Little Impact on Washington State Credit Quality, Moody’s (July 21, 2014),


[xviii] La Corte, supra note 6.


[xix] Erik Cederwall, New NerdWallet Report Project Significant Revenues from Marijuana Legalization, The Tax Foundation (Oct. 1, 2014),


[xx] Chokshi, supra note 15.


[xxi] H.B. 305, 2015 Reg. Sess., (Ky. 2015).