New report from Auditor Fitzpatrick finds the Department of Revenue needs to improve oversight of marijuana tax returns

While Missouri's marijuana industry is experiencing rapid growth and a resulting increase in state revenues, a new report released by State Auditor Scott Fitzpatrick finds the Missouri Department of Revenue (DOR) has failed to develop a sufficient environment of compliance for marijuana tax returns that would help detect and prevent fraud and tax evasion. The finding is part of an annual review of the Missouri Department of Revenue sales, use, and marijuana tax collections, which gives the department a rating of "good."

"With the significant growth we've seen in the marijuana industry it's important the department provides proper oversight of marijuana tax returns to identify potential fraud and give the public confidence that taxes are being collected as required by law," said Auditor Fitzpatrick. "The department has now had more than four years with medical marijuana and more than two years with adult use marijuana to develop a plan to audit these returns. Department officials should quickly finalize their audit procedures to ensure appropriate oversight of this new and growing industry."

The report notes approximately 1,500 marijuana tax returns were processed by the DOR with taxable sales totaling approximately $806.9 million during fiscal year 2023. The DOR collected marijuana taxes totaling approximately $16.4 million and $19.6 million for medical marijuana and adult use marijuana, respectively, during that same period of time. The need to audit the marijuana tax returns is increased because these are newly-created forms that were developed by the DOR and are separate from the standard sales tax return, which creates a higher risk of noncompliance. DOR officials indicated they are still in the process of developing audit procedures for marijuana tax returns.

The report also found the DOR did not document any calculations or justification to support how the collection fee withheld from medical and adult use marijuana tax collections was determined. DOR personnel stated the collection fee for marijuana taxes was set at the same 1 percent used for retail sales and use taxes. No documentation was maintained by the DOR to support this decision. Under the Missouri Constitution, the DOR is authorized to retain no more than 2 percent for its actual collection costs for medical marijuana tax, and no more than 2 percent of the total tax collected or its actual collection costs, whichever is less, for adult use marijuana tax.

As it has in past reports, the annual review also found Missouri's timely sales and use tax discount remains the most generous such discount in the nation, and significantly benefits the state's largest retailers. Under Missouri law, businesses remitting sales and use taxes are allowed to retain 2 percent of sales taxes payable to the DOR if the business remits payments in a timely manner. The state originally established the discount so businesses could recover a portion of their costs for compliance with state sales tax laws and to encourage timely remittance of sales and use taxes. For fiscal year 2023, this resulted in businesses retaining $174 million of sales and use tax collections.

In designating Missouri's discount as the most generous in the nation, the report notes that while some other states may have a higher percentage discount, they put a cap on the amount of the discount that can be retained by businesses. According to the Federation of Tax Administrators, 27 other states have similar vendor discounts with eight having a lower discount rate than Missouri and 19 having a cap to limit the amount of discount businesses can retain.

The audit recommends the General Assembly evaluate the timely sales tax discount and consider the implementation of a monthly cap on the amount of discount retained. The report also notes the DOR is not required to report and does not routinely report the amount of timely discounts retained by businesses to the General Assembly, and recommends changes to state law to require the department to report annually.

Additionally, the report found the DOR did not follow existing policy and procedures to ensure taxpayers are assessed the correct local sales tax rate for motor vehicle sales tax transactions. A review of 90 motor vehicle sales tax transactions for the year ended June 30, 2023, identified 22 transactions (24 percent) with an incorrect site code resulting in the incorrect amount of local sales tax being assessed.

The complete audit of the DOR sales, use, and marijuana taxes can be found here.