Every entrepreneur’s dream is to grow a successful business. For most, that means steadily increased sales and profits, with a healthy balance of income and expenses. As an LA-based distributor, increased sales and momentum comes with a catch—the more sales you get per month, the more complicated the tax requirements of your cannabis distribution company become. That’s why it’s essential that you get acquainted with the ins and outs of tax requirements for a Los Angeles Cannabis distributor.
Getting Started as a Cannabis Distributor
First off, the basics: A cannabis distributor is a person or business that “procures, sells, and/or transports cannabis between licensed cannabis businesses, such as a cultivator, manufacturer, or retailer,” as defined by the California Department of Tax and Fee Administration (CDTFA).
In order to begin running a legal and compliant cannabis distribution business, you need to receive
- A business license. This is standard for all businesses to legally operate.
- A seller’s permit from the CDTFA
- A cannabis tax permit from the CDTFA
- A distributor license from the BCC (Bureau of Cannabis Control), a sub-agency of the California Department of Consumer Affairs
A seller’s permit is required if you sell any physical cannabis plants or products within the state of California. As a distributor, you are likely selling products to retailers or fellow distributors or microbusinesses. There are a few instances where you may not be required to obtain a seller’s permit. In those cases, you still need official documentation from the CDTFA clearly stating that your business is exempt. Learn more about the Seller’s Permit here.
The cannabis tax permit requires you to regularly file tax returns. For a business that is fully-operational, that can mean reporting every month on the last day of the month, during which the transactions you are reporting took place.
Filing Monthly Tax Returns
This is where things can get complicated.
However, as you become well-versed in LA cannabis tax laws, you will be able to develop an SOP (standard operating procedure) for efficiently and thoroughly documenting all of the necessary information needed in every transaction for your monthly tax returns. Incidentally, this is a major factor in the decision of many cannabis distributors to hire or outsource CFO services.
As a fully operational cannabis distributor, CDTFA requires you to do the following in order to file for monthly tax returns:
- Collect cultivation tax
- Collect cannabis excise tax
- Document all transactions with an official receipt or invoice for the tax records of businesses you are collecting either of the above taxes from
- File your Sales and Use tax with the CDTFA, pay the amount due, in addition to the above cannabis tax returns
Calculating and Collecting Cultivation Tax
Cultivation tax is collected from any cultivators or manufacturers of any harvested cannabis products that you purchase. Cultivation taxes are calculated based on the weight and the state of the cannabis plant at the point of the transaction.
As for rates, the CDTFA will begin accounting for inflation by annually adjusting cultivation tax rates on the first day of this coming new year. Cannabis businesses will receive notices of every adjustment directly from the CDTFA.
With regard to taxes based on category of cannabis, there are three different types that are taxed per dry-weight ounce of product:
Dry cannabis flowers: $9.25
Dry cannabis leaves: $2.75
Fresh cannabis plant, where the weight is recorded within two hours of harvesting: $1.29
When you are documenting the amount of cultivation tax you received, be sure to record the category and exact amount of cannabis you purchased.
Calculating and Collecting Cannabis Excise Tax
The cannabis excise tax is collected from cannabis retailers you sell or transfer cannabis plants or cannabis products to. This is a 15% tax that’s “imposed upon all purchasers of cannabis or cannabis products sold at retail.”
There are three categories of purchases that deem this tax applicable or not:
- Arm’s length
- Non-arm’s length
- Distributor-to-distributor transactions
Arm’s length purchases indicate that the transaction is taking place between two consenting parties who have no relationship outside of that transaction. So the lounge on .. street purchases a supply of cannabis oil, or a batch of recreational marijuana, from you, you deliver, and the story ends there. Perhaps they are regular customers, but neither one of you receive any further benefits from your relationship aside from the transaction of the goods.
In these cases, the calculated tax is the whole cost of the product, plus the 15% markup. This would be an example of the standard market price.
Non-arm’s length transactions, also known as arm-in-arm transactions, are, as you can imagine, the opposite. Perhaps the transaction is between family members. Or perhaps it is done between two companies that have the same shareholders or umbrella company. In this case, the cannabis excise tax is calculated based on the retailer’s gross receipts, with no fixed markup. This transaction does not reflect the market price of the product.
You are also not responsible for collecting cannabis excise tax in cases where you are selling products to another distributor or microbusiness. These transactions should be documented to clearly state the following, as indicated on the CDTFA’s website:
- The selling distributor’s name and license number,
- The purchasing distributor’s name and license number, and
- A statement that no cannabis excise tax was collected.
California Cannabis Track-and-Trace Metrc System
The state of California requires that all compliant distributors implement the track-and-trace Metrc system by using the Wholesale Manifest for each transaction with a retailer. This means recording the wholesale cost of each unit the retailer has to pay, and as of January 1st, 2020, this includes the cost of transportation.
Sales Tax and Resale Certificates
As a distributor, you are required to collect sales tax when selling products to retailers. But, given the nature of your business, most if not all of your transactions with retailers will be resales. In the state of California, sales tax is not required for products that have been resold. So be sure to obtain valid resale certificates from retailers you supply to, declaring that you did not receive any sales tax.
This, among other reasons, is why it’s crucial that you only engage with other licensed businesses, you need this official documentation to present to the CDTFA when declaring monthly tax returns so that you won’t be penalized.
Keep in mind that, even if all of your transactions are resales, you’re still required to file your sales tax returns, stating that you have not collected any sales tax.
Reap the Rewards of Running a Compliant Business
There’s no doubt that running a compliant cannabis business is challenging. Keeping your finger on the pulse of current regulations and tax policies, maintaining a rock-solid paper trail, and developing a business model and budget that accounts for tax increases is no simple task.
That is why we do recommend having a go-to for all your tax-related questions. Top financial advisors like the team at Northstar that specialize in the cannabis space can give the best financial advice on how you can run a business that is both successful and compliant.
Call us now for your free consultation: +1.424.274.3188