The CDTFA (California Department of Tax and Fee Administration) Cannabis Tax Law is a set of regulations that were put in place to ensure cannabis businesses are complying with all state and local tax laws. This law was created by the California Department of Tax to govern the cannabis tax revenues, which includes both medicinal and adult-use marijuana. It also covers activities such as cultivation, manufacturing, distribution, sales, and use taxes.
Throughout this guide, we’ll provide an overview of the Cannabis Tax Law for 2020-2021. Whether you’re worried about cannabis tax revenues you’ll need to report or other revenue numbers, you’ll have a better understanding of how businesses in the cannabis space can make the most of the revenue they earn with each sale.
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Latest Updates on Cannabis Tax in California
CDTFA has determined that an 80% mark-up will be applied to the average market price of cannabis or cannabis products sold to a retailer in California in an arm’s length transaction.
The rate was set at 60% for 2019, but it is now up 33%. Distributors must adhere to the mark-up rate.
Basic Information on Cannabis Business Tax on California
Below is some basic information you should know before/while running a cannabis business in California.
Cannabis Excise Tax
Since January 1st, 2018, you will be charged a 15% cannabis excise tax for any cannabis sales made at the retail cannabis shop or dispensary. This tax is calculated by taking an average market price as your base and adding that percentage charge to it.
You have to pay a ‘Cultivation Tax’ on any harvested cannabis product that enters the commercial market.
When cannabis plants are first harvested, they’re categorized as either “cannabis flower,” “cannabis leaves,” or “fresh cannabis plant.” The cultivation tax is imposed based on these categories and weight.
To qualify for the “fresh” plant category, a California grower must have their cannabis weighed within two hours of harvest.
Cannabis Business Registration
California Department of Tax and Fee Administration offers online registration on sales and use tax account. The service is available 24 hours a day, 7 days a week. For more information and register, click here.
In addition to CDTFA registration, you’ll have to collect tax permit(s) from other responsible authorities. This is a requirement for obtaining a cannabis business license(s).
- The California Department of Food and Agriculture provides tax permits for cannabis cultivators.
- The California Department of Public Health provides tax permits for cannabis manufacturers.
- The Bureau of Cannabis Control within the California Department of Consumer Affairs provides tax permits for cannabis retailers, distributors, testing laboratories, and microbusinesses.
Be sure to contact your city or county government office to learn more about any that you might need for operating the business in the area.
No seller’s permit is required in California if you don’t sell tangible personal property. However, as per the requirements for a commercial cannabis license, one must provide a certification letter stating that no such permit is needed before they can be legally licensed to operate their business within this industry.
Obtaining such certification is not that difficult. You’ll need to email all the credentials to the California tax authority and declare that you are not engaged in any transaction of tangible personal property. After reviewing all the information, the authority will mail you the certification letter.
Sales & Use Tax Return
As a licensed cannabis merchant, you have to file sales and use tax returns regularly. This will show the sales and help the authority to verify tax revenue.
If you incur no taxable transactions, you are still required to file your sales and use tax return, and report your business activities to the CDTFA.
Here you can find the deadlines for submitting tax returns.
Cannabis Tax Return
If you are a distributor of cannabis products, you have to file your cannabis tax return electronically. The tax return should include both the cannabis excise tax and the cultivation tax.
The California Department of Tax and Fee Administration offers a wide range of online services to easily report cannabis sales, revenues, and taxes, especially during the pandemic. Here’s where you can find the link to all the video tutorials on their online services.
Though the CDTFA intends to conduct its activities online as much as possible, it offers some exemptions for those who prefer paying their cannabis taxes in cash. To qualify for this exemption, they require you to make arrangements with one of their offices and explain why a change is necessary from the No Cash Policy before giving them your money.
If you are looking to pay in cash, call the office for an appointment at least 21 days before your due date.
For any amount over $10,000 for sales and use tax accounts or monthly cannabis tax account liability greater than $20,000 subject to EFT payments because they exceed those thresholds. If not paid electronically, will be assessed 10% penalties on top of whatever fees were already owed.
However, if you believe your payment was assessed as wrong, you can request relief from this penalty online.
Cannabis Tax and Fee Administration- Distributors
A distributor is a person who purchases cannabis from licensed growers/manufacturers or one another then redistributes it to their various endpoints, such as retailers on behalf of themselves and others. A microbusiness license can also be issued if they follow all distributor requirements.
Distributors will have to use the mark-up rate to determine the average market price of cannabis or cannabis-related products.
Below are the responsibilities of cannabis distributors:
- Collect the cannabis cultivation tax from cultivators and manufacturers.
- Collect cannabis excise tax from cannabis retailers.
- Provide invoices or receipts to the businesses from which the cannabis taxes were collected.
- Electronically submit both the sales and use tax and cannabis tax returns and pay the due amounts to the CDTFA.
Cannabis Tax and Fee Administration- Retailers
Cannabis retailers are those who sell cannabis products directly to the final consumers. A microbusiness can conduct retail sales if it complies with all the requirements of the cannabis retailers.
If you are a cannabis retailer, the CDTFA requires that you:
- Register as a cannabis retailer with the CDTFA
- Pay all taxes and fees owed to the CDTFA
- Collect tax from consumers on every retail sale of cannabis or cannabis products, including any applicable local sales tax. The latest updates for 2021 are that retailers must collect both state excise tax (15%) plus retail sales taxes (7.25%).
- Be sure not to remit the cannabis excise tax on the sales and use tax returns. Instead, pay the cannabis excise tax that is due to your distributor.
Taxes on Selling and Donating Marijuana of Medical Purposes
Medical marijuana purchases are not subject to the retail sales tax but still have a 15% cannabis excise tax. Municipalities can also slap on their own taxes.
Sales of cannabis and other related products are subject to sales tax unless they provide a Medical Marijuana Identification Card indicating they are qualified patients or primary caregivers. Along with this card, they will also need a government-issued identification card.
Beginning March 1st, 2020, in California, cannabis retailers are allowed to donate free medicinal products as a way of saying thank you for being dedicated customers. This applies only when given away without charge and does not apply if the customer pays some form of the fee before receiving the product (i.e., donation box). Medical Marijuana is exempt from taxes when donated by retailers.
Cannabis Tax and Fee Administration- Cultivators & Manufacturers
A cannabis cultivator is a person engaged in planting, harvesting, growing, drying, grading, trimming, or curing cannabis. A manufacturer is a person engaged in manufacturing cannabis or cannabis-related products in a fixed location and packages or repackages them or labels or relabels its container.
Microbusinesses involved in any such activities (cultivators or manufacturers) must comply with all the requirements as cultivators or manufacturers.
Cultivators shall pay the cultivation tax to the manufacturers/ distributors. However, they shall file sales and use tax returns and pay any tax due to the CDTFA.
Manufacturers shall pay the cultivation tax to the distributors upon collection from the cultivators.
Cultivators of cannabis and cannabis products in California have to pay a cultivation tax. As discussed above, this ‘cultivation tax rate is determined based on the weight and category of the products.
Effective from January 1st, 2020, the cultivation tax rates are as follows:
- Cannabis Flower- $9.65 per dry-weight ounce
- Cannabis Leaves- $2.87 per dry-weight ounce
- Fresh Cannabis Plant- $1.35 per ounce
For the latest updates, click here.
CDTFA Response to COVID-19 Pandemic
The CDTFA has created a cannabis tax guide for COVID-19. This new pandemic is going to affect the entire world and will devastate many lives. To make the lives easier for the cannabis businesses in California, the CDTFA is offering extended filing and payment deadlines.
To find the extended payment and filing deadlines for COVID-19, please click here.
California is one of the most regulated states in America, and it’s no different when it comes to the cannabis industry. The CDTFA has been doing its best to ensure a fair play situation for all parties involved, which means that you need to be educated on how they operate as well!
To help make things easier for everyone, we compiled this guide with everything you need to know about filing your taxes as a cannabis company in California.
Hopefully, this guide gave you a good understanding of the basics of filing with CDTFA. If not, feel free to contact us with any questions you might have!