Opening any business has many steps and procedures to ensure that your business is legal and in good standing. Cannabis businesses are no different in that regard, except that there are extra stringencies you must be aware of, to be a compliant cannabis business in the State of California.
The department you will become most familiar with as you go through registering and setting up your business, is the California Department of Tax and Fee Administration (CDTFA). The CDTFA administers California’s sales and use; alcohol; tobacco; fuel; and cannabis taxes; as well as a variety of other taxes and fees that fund specific state programs and services, such as transportation, public safety and health, libraries, schools, social services, and natural resource management programs.
The CDTFA requires that any distributor or microbusiness licensed to act as a distributor, that sells cannabis and/or cannabis products, must register with them, and routinely file sales and use tax. The CDTFA will then provide a seller’s permit and additionally require you register for a cannabis tax permit.
Here is a quick breakdown of tax expectations:
Cannabis Excise Tax
An excise tax is a tax imposed upon the sale of a specific item that customers do not pay directly to the government, but rather, the cannabis distributor collects and sends to the CDTFA.
As of January 1, 2018, retailer purchasers of cannabis and cannabis products are required to remit a 15 percent excise tax. The 15 percent excise tax is calculated based on the average market retail sale price. As a retailer, you will need to build the cost of the tax into your product’s price so that the customer will pay at retail. It is important to keep this tax separate from other revenue, as it will need to be paid to the CDTFA.
The sale of cannabis accessories, such as pipes, vape pens (without cannabis), rolling papers, rolling machines, apparel, books, and magazines, are subject to sales tax, but not the 15 percent excise tax. Sometimes a sale will contain both cannabis, and a cannabis accessory (such as a vape pen preassembled with cannabis cartridge and battery), only the cost of the cannabis is subject to the excise tax.
If you are authorized to give cannabis or cannabis products away free of charge (such as in medicinal cases), the cannabis excise tax does not apply; however, you do owe use tax on your purchase price of cannabis or cannabis products.
Cannabis Cultivation Tax
The CDTFA defines a cannabis cultivator as a person who is engaged in the business of planting, growing, harvesting, drying, curing, grading, or trimming cannabis. A microbusiness licensed to act as a cultivator must comply with all of the same requirements as a cultivator
If you are a cultivator of cannabis, you are required to remit a cultivation tax on all harvested cannabis that enters the commercial market at the following rate:
$9.25 per ounce of cannabis flowers (dry-weight),
$2.75 per ounce of cannabis leaves (dry-weight), and
$1.29 per ounce of fresh cannabis plant, which must be weighed within two hours of harvesting with no further processing.
Be aware that beginning January 1st, 2020 the CDTFA is required to adjust the cultivation tax rates for inflation annually.
You should also note that even if, as a cultivator, you do not make taxable sales of cannabis, you are still required to file a return that lists the total sales with claimed nontaxable or exempt sales during that specific reporting period.
Sales and Use Tax of Cannabis Products
To understand sales and use taxes, you first you have to understand what is considered “tangible property” by California law. The law defines tangible personal property as an item that can be seen, weighed, measured, felt, or touched. In California, all retail sales of tangible personal property are taxable unless the law provides a specific exemption.
Cannabis and cannabis products are generally considered tangible property and usually don’t qualify for a specific exemption. Sales of these items are subject to sales and use tax.
Specific exemptions on tax could include things like Proposition 64, outlining the exemption for certain sales of medicinal cannabis. On November 8, 2016, California voters approved Proposition 64, Control, Regulate and Tax Adult Use of Marijuana Act. Proposition 64, among other things, states that effective November 9, 2016, certain sales of medicinal cannabis are exempt from sales and use tax. This sales and use tax exemption applies to the retail sales of medicinal cannabis, medicinal cannabis concentrate, edible medicinal cannabis products, or topical cannabis as defined in the Business and Professions Code section 26001. To qualify for the exemption, patients or their primary caregiver must provide their valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health, and a valid government-issued ID at the time of purchase.
Tax Filing and Payments for a Cannabis Business
As a cannabis seller, you are required to file regular sales, and use tax returns to report your sales. You can go to the CDTFA website to find filing due dates, file online, pay online, or update your business’ information.
Cannabis tax accounts are separate from other accounts you may have with the CDTFA, and you are required to electronically file your cannabis tax return with the CDTFA on the last day of the month following the reporting period. Your tax filings and accounting have to be extremely accurate and timely, as cannabis businesses tend to get audited more than other businesses and are subject to cannabis-specific tax and business laws.
Cannabis businesses have considerable challenges when it comes to filing these taxes, managing finances, and all the red tape involved. The vast majority of cannabis businesses are losing money unnecessarily––simply because there are too many laws and loopholes to keep up with. We strongly recommend using an experienced tax accountant that specializes in cannabis businesses as there are many details that could either save you money or cost you thousands.
If you have tax-related questions and would like to discuss potential implications for your cannabis business, please reach out to us for counsel. We would be happy to advise on tax or compliance questions that may arise for your business.