It is important for all commercial cannabis business operators to be well-versed in the tax requirements they will be subject to. The California Department of Tax and Fee Administration (CDTFA) has made clear that each commercial cannabis business that sells cannabis or cannabis products must register with the CDTFA for a seller’s permit, and must regularly file sales and use tax returns. In addition to these general requirements, there are also specific tax requirements that ALL commercial cannabis businesses must be aware of.
Within the California cannabis industry, there are two main taxes to be aware of: the Cannabis Excise Tax, and the Cannabis Cultivation Tax.
Cannabis Excise Tax
“Effective January 1, 2018, a 15% excise tax is imposed upon retail purchasers of cannabis and cannabis products.”
An excise tax is a tax imposed upon the sale of a specific item, which individual consumers do not pay directly to the government, but rather, the cannabis distributor collects and remits to the CDTFA. The retailer will then build the cost of the tax into the price of the product that the consumer pays at retail and will remit that tax to the distributor for payment to the CDTFA.
|California Cannabis Excise Tax|
|Rate: 15% of Average Market Price|
|Transaction Type||Basis for Calculation||Mark-Up Rate* Effective 1/1/2018 – Present|
|Arm’s Length Transaction||Wholesale cost of the cannabis or cannabis products, plus a mark-up.||60%|
|Non-Arm’s Length Transaction||Retailer’s gross receipts||Not applicable|
* The mark-up rate is determined by the CDTFA on a biannual basis in 6 month intervals.
Cannabis Cultivation Tax
Additionally, a cultivation tax on all harvested cannabis that enters the commercial market is imposed on cultivators at the following rates:
|California Cannabis Cultivation Tax|
|Category||Rates* (Effective 1/1/2018)|
|Cannabis Flowers||$9.25 per dry-weight ounce|
|Cannabis Leaves||$2.75 per dry-weight ounce|
|Fresh Cannabis Plant||$1.29 per ounce**|
*Beginning January 1,2020, the CDTFA is required to annually adjust the cultivation tax rates for inflation.
**All fresh cannabis plants must be weighed within two hours of harvesting without any further processing.
Specific Cannabis Tax Information by Business Type
The CDTFA Cannabis Website has a lot of valuable information about the requirements of the Cannabis Cultivation Tax, Cannabis Excise Tax, and collection of these taxes by appropriate licensees. You can also sign up for the CDTFA’s email list on their website, here.
— CDTFA (@cdtfa) January 17, 2019
The CDTFA cannabis portal and special notice provides the following information, among much more:
Cannabis distributors are required to obtain both a seller’s permit and a cannabis tax permit. Distributors are responsible for the collection of both the cannabis cultivation tax, as well as the cannabis excise tax.
Distributors must collect the cannabis cultivation tax from cultivators and/or manufacturers from which the distributor receives cannabis and/or cannabis products, and collect the cannabis excise tax from the cannabis retailers the distributor supplies (sell and/or transport) with cannabis and/or cannabis products. Distributors must remember to provide receipts to the businesses from which the distributor collects the cultivation taxes and excise taxes.
Moreover, distributors must electronically file both their sales and use tax and cannabis tax returns and pay the amount due to the CDTFA.
Retailers must obtain a seller’s permit. In general, retailers are required to charge and collect sales tax on taxable retail sales of cannabis and/or cannabis products (and other products), and must also charge and collect the cannabis excise tax from customers who purchase cannabis and/or cannabis products. Retailers will pay the cannabis excise tax that is due to the retailer’s distributor.
Retailers must also electronically file sales and use tax returns, and pay the sales and/or use tax to the CDTFA. Cannabis excise taxes should not be remitted on the retailer’s sales and use tax return.
All customers should be provided an invoice or receipt which states: “The cannabis excise taxes are included in the total amount of this invoice.” Note that customers are liable for the cannabis excise tax until it has been paid to the state or until the retailer provides the customer with such an invoice or receipt.
Cultivators must obtain a seller’s permit. In general, cultivators are required to pay the cultivation tax to either the distributor or manufacturer upon the first sale or transfer of unprocessed cannabis. Cultivators will pay the cultivation tax to a manufacturer if the first transfer or sale of unprocessed cannabis is to a manufacturer, and not to a distributor. In such a case, the manufacturer is required to collect the cultivation tax from the cultivator, and the manufacturer will pass that cultivation tax on to a distributor for payment to the CDTFA.
Additionally, cultivators must electronically file sales and use tax returns and pay the tax due, if any, to the CDTFA. Note that even if a cultivator does not make taxable sales of cannabis, cultivators are still required to file a return which indicates the total sales with claimed nontaxable or exempt sales during that particular reporting period.
According to the CDTFA:
“The cultivation tax applies to all harvested cannabis, medicinal or adult-use, that enters the commercial market. Cannabis ‘enters the commercial market’ when the cannabis or cannabis products, except for immature cannabis plants, clones and seeds, have completed and comply with both the quality assurance review and testing as required in the Medicinal and Adult-Use Cannabis Regulation and Safety Act. The cultivation tax also applies to cannabis transferred or sold to a distributor if the licensing agency allows cannabis or cannabis products to enter the commercial market without being tested. If the cannabis or cannabis product does not pass testing, cannot be remediated, and does not enter the commercial market, [cultivators] are entitled to the return of the cultivation tax collected from [them]. The distributor is responsible for returning to [the cultivator] the cultivation tax collected from [the cultivator].”
Cultivators should be aware of invoicing requirements and ensure that they receive an invoice or receipt from the manufacturer or distributor each time the cultivation tax is paid. The CDTFA makes clear that “the invoice or receipt [the cultivator] receive[s] from the manufacturer or distributor showing the amount of cultivation tax paid relieves [the cultivator] of the liability for the cultivation tax.”
The invoice or receipt should always include the following:
- the distributor or manufacturer’s name, as the licensee receiving the product;
- the cultivator’s name;
- the associated unique identifier for the cannabis;
- the amount of Cultivation Tax; and
- the date of sale or transfer.
Manufacturers must obtain a seller’s permit. Manufacturers are required to electronically file sales and use tax returns and pay any sales and/or use tax owed to the CDTFA. Even if a manufacturer does not make taxable sales of cannabis, the manufacturer is still required to file a return indicating the total sales with their claimed nontaxable or exempt sales during that particular reporting period.
Additionally, manufacturers will collect the cannabis cultivation tax from cultivations from which the manufacturer received unprocessed cannabis, and provide that cultivator with an invoice or receipt. The manufacturer will pay the cultivation tax collected from the cultivator to a distributor.
Please note that all cannabis microbusinesses licensed to act as distributors, cultivators, manufacturers, and/or retailers must comply with all of the same requirements as those individual licensees.
Rogoway Law Group recognizes that there are many complex tax questions that arise for cannabis businesses, aside from cultivation taxes and cannabis excise taxes. If you have tax-related questions and would like to discuss potential implications for your business, please reach out to Rogoway Law Group for counsel. Beginning February 2019, Rogoway Law Group will also have a new tax attorney joining our firm, who will be able to assist with and advise on tax questions that may arise for your business.