Requirements For a California Cannabis Dispensary

Requirements For a California Cannabis Dispensary

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.

A California cannabis business owner cultivating cannabis in a garden

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.

 

How to Raise Funds For Your Cannabis Business: Create a Pitch Deck

How to Raise Funds For Your Cannabis Business: Create a Pitch Deck

There’s no denying that the cannabis industry can be a lucrative career choice. Do you want to open a dispensary, grow hemp, or deliver it? Maybe you want to do it all! 

Starting a cannabis business can be a costly endeavor. Any business, but even more so a cannabis business, requires licensing fees, extremely accurate accounting records, and operating costs––all of which can be prohibitively expensive. 

Many of the best banks for small business loans operate on the federal scale and are subject to federal banking laws that make lending to a cannabis business nearly impossible. This is why many cannabis business owners and entrepreneurs opt to recruit initial funding from cannabis investors. 

Investors can include friends, family, or a proper venture capital fund. Either way, you will need to put together your vision and business plan into an investor pitch deck.

What is a Pitch Deck?

A pitch deck is a short, but detailed, presentation that describes your vision and cannabis business. Not only will it describe how the business will run and be successful, but also what added value it will create in the world.

It should provide enough detailed information to give a potential investor financial information, as well as a description of your personal and unique value. 

Your pitch deck should include and answer the following:

  1. A friendly introduction

Present your logo, company name, and a picture of your product if you have it. Make sure to include presenter names, job titles, and contact information. It’s always good to start off friendly, to make a positive connection with your audience.

  1. Your “Why”

What is your reason and motivation behind your product?

Any successful business answers a gap or need in the market. Describe the problem you are looking to address in simple terms. Make sure you speak about the current state of the problem, the seriousness of it, the desired future situation, and of course, the benefit a solution will bring to the customer.

  1. Your solution – or your “What”

Your business will only grow if your solution meets the need. Explain your solution in a concise way. Describe the key benefits and features for the customer, present a business product design template and timeline to develop the design.

  1. Your Business Model

Show me the money! Explain how you are going to make money. Whether it’s through direct sales, subscriptions, advertising, etc., speak about all the ways your company will generate an income. To serious investors, this is the most important part; they hear about great ideas every day, but they want to see that you are actually capable of executing the vision.

  1. Your Team

Smart hiring is not only a good business practice, it’s a necessity. List all of your team members and the unique skills, resources, experience, or knowledge they bring to the business. What positions are you recruiting for? Be sure to include partnerships and even professional service providers such as lawyers, CPAs, and more.

  1. Market Overview

It’s important to do market research to see if your business is really feasible. What is the market size and prospective growth potential? Who is your target customer? Are there any market trends that you are leveraging? What other possible applications are there for your products? How will you reach your customers?

  1. Cost and Pricing Model

You will need to crunch some numbers and explain your basic financials. Who are your suppliers? How will you develop the product/service? What’s the cost to develop and produce your product? What is the potential sales price to your customer? Map out your expenses and income to show how you will come out on top. Many business people hire a financial team who is familiar with the cannabis industry for this part.

  1. Competition

There is always competition in business and if there isn’t, there’s probably not a market. Provide a competitive analysis, and compare your solution to the current approach and major competitors. Keep in mind that the more realistic you are, the more believable your case. This is a good way to show your audience that your business model is well researched and thought-out.

  1. Social Impact

Not every business has a social impact, but if you really want to sell your business as a bar above the rest, it would be helpful to define one. What is the impact of your product or service? Will your venture have a positive social impact? Describe the values of your company.

  1. Competitive Advantage

Why choose you? What makes you special from the rest of the cannabis businesses? What are the other businesses missing that you plan to offer?

  1. Conclusion

Conclude the presentation and tie up any loose ends. What are the next steps as a company? What information do you need to move forward?

After the Pitch: What to Expect

Be prepared for a lot of questions. Your investors are going to want to know that you thoroughly researched this business and know what you are doing. The financial information may be an estimate, but you should have research and information to back up your estimates and extensive knowledge of the cannabis market in your area. 

Woman introducing a cannabis business pitch deck

Some examples of questions:

  • What are your plans for growth?
  • The cannabis industry is one of the most regulated industries in the country. Do you have legal counsel and a good accountant already, to help you keep everything in order?
  • What’s your plan for the next funding round?
  • How will X regulation impact your business (such as the IRC 280E tax clause)?

How to Really Sell It

After all is said and done, the numbers are crunched, and the competition has been outed, the most important part of your pitch deck is your why.

There are many cannabis business owners trying to cash in on the exceptionally fast-growing cannabis and hemp/CBD industry. If you’re going to compete for an investor’s time, money and attention, you have to show them why you’re different from every other investment opportunity they have come across. Think about why you are starting this business––why is cannabis important to you, and what makes your customers special?

If you’d like to speak with one of our financial experts at Northstar Financial Consulting Group to see how we can help start your cannabis business, and set you apart from the rest, send an email to info@nstarfinance.com or give us a call at 424.274.3188.