On January 1, 2018, two new cannabis taxes went in effect in California: the excise tax and the cultivation tax. These taxes only apply to cannabis that is in the commercial market, not cannabis grown for personal or medical use as legally permitted. The cannabis tax program is administered by the California Department of Tax and Fee Administration (CDTFA), formerly called the Board of Equalization (BOE).
California’s cannabis tax law is found in Revenue and Taxation Code Sections 34010 – 34021.5. These sections were approved by the voters as part of Proposition 64, and were subsequently amended by clean-up legislation. In addition to the statutes, the CDTFA recently proposed emergency regulations regarding the excise and cultivation taxes, and these emergency regulations were approved by the Office of Administrative Law (OAL) in late-December. These new emergency regulations can be found at Cal. Code of Regs. Sections 3700 and 3701.
Anyone who is selling cannabis or cannabis products must obtain a seller’s permit from the California Department of Tax and Fee Administration. Licensed cannabis distributors must also obtain a cannabis tax permit. If a licensee is selling cannabis goods for resale, they will also need a valid reseller’s certificate. Any sale or transport of cannabis must be recorded on an invoice or receipt. Licensees must keep these records for a minimum of seven years.
There is an excise tax imposed on purchasers of cannabis products at a rate of 15% of the average market price, which is determined by the type of transaction. Transactions between a retailer and the licensee from whom they purchase wholesale cannabis are considered either “arm’s length,” meaning the consideration received reflects the fair market value between two parties under no requirement to participate in the transaction, or “nonarm’s length.”
In an arm’s length transaction, the average market price means the average retail price determined by the wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a mark-up, as determined by the department on a biannual basis in six-month intervals. Currently this predetermined mark-up rate is 60%. In a nonarm’s length transaction, the average market price means the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products. (Rev. & Tax §34010.)
On and after January 1, 2018, retailers are required to collect the excise tax from purchasers of cannabis products, and then pay the collected tax to a licensed distributor with whom the retailer has a business relationship (i.e., a distributor that they purchase or acquire cannabis or cannabis products from on or after January 1, 2018). Additionally, retailers who acquired cannabis or cannabis products prior to January 1, 2018 and didn’t pay the excise tax to the distributor at that time must collect the 15% excise tax from their customers. Retailers must pay the excise tax on those sales to a licensed distributor by the 15th of the following month in which they collected the taxes. Ordinarily, the excise tax is due quarterly on or before the last day of the month following the end of the quarter. Electronic returns shall be filed on or before this date.
Retailers must include the following statement on their receipts: “The cannabis excise taxes are included in the total amount of the invoice.” Most retail sales are also subject to sales tax, which is due on the retail selling price of the cannabis goods, including on the excise tax. (In other words, the tax is taxed.)
When a distributor collects the excise tax from a retailer, the distributor must provide an invoice, receipt, or other similar document that includes the following: (1) Date of execution of the invoice, receipt, or other similar document; (2) Name of the distributor; (3) Name of the cannabis retailer; (4) The amount of cannabis excise tax; (5) The number of the seller’s permit held by the cannabis retailer; and (6) The number of the seller’s permit held by the distributor. If the distributor is not required to hold a seller’s permit because the distributor makes no sales, the distributor must include a statement to that effect on the receipt in lieu of a seller’s permit number.
There is a tax on the cultivation of cannabis that enters the commercial market beginning on January 1, 21018, and this tax is imposed on cultivators. The cultivation tax does not apply to harvested cannabis a cultivator transferred or sold prior to January 1, 2018. (Rev. & Tax §34012.)
Cultivators are required to pay the cultivation tax to a distributor or a manufacturer, depending on who the first sale is to. The cultivation tax rates are:
- $9.25 per dry-weight ounce of cannabis flower, and
- $2.75 per dry-weight ounce of cannabis leaves, and
- $1.29 per ounce of fresh cannabis plant
In the context of the cannabis tax laws and regulations, “cannabis flowers” are defined as “the flowers of the plant Cannabis sativa L. that have been harvested, dried, and cured, and prior to any processing whereby the plant material is transformed into a concentrate, including, but not limited to, concentrated cannabis, or an edible or topical product containing cannabis or concentrated cannabis and other ingredients.” The term “cannabis flowers” does not include leaves and stems. The term “cannabis leaves” means “ all parts of the plant Cannabis sativa L. other than cannabis flowers that are sold or consumed.”
The category of “fresh cannabis plant” is new. “Fresh cannabis plant” is defined as “the flowers. leaves, or a combination of adjoined flowers, leaves, stems, and stalk from the plant Cannabis sativa L.that is either cut off just above the roots, or otherwise removed from the plant.” To be considered “fresh cannabis plant,” the flowers, leaves, or combination of adjoined flowers, leaves, stems, and stalk must be weighed within two hours of being harvested and without any further processing such as any drying, trimming, or curing.
All cannabis removed from a cultivator’s premises is presumed sold and thus taxable. This presumption can be overcome by evidence of fire, flood, pest control, processing, storage prior to the completion of quality assurance review, testing, or a similar activity whereby the cannabis was removed from the premises but has not yet entered the commercial market.
Distributors are responsible for reporting and paying the cultivation tax that is collected from the cultivator to the CDTFA. If a manufacturer collects the cultivation tax because the first sale of the cannabis was to the manufacturer, the manufacturer is responsible for paying this tax money to a licensed distributor. The distributor or manufacturer (whoever buys the cannabis from the cultivator) shall provide the cultivator with an invoice, receipt, or similar document that identifies the following: (1) the licensee receiving the product; (2) the cultivators from which the product originates, including the associated unique identifier; (3) the amount of the cultivation tax; and (4) any other information deemed necessary by CDTFA.
Ordinarily, the cultivation tax is due and payable quarterly on or before the last day of the month following the end of the quarter. Electronic returns shall be filed on or before this date.
The cannabis cultivation tax and excise tax are in addition to state and local sales and use taxes. All sellers of cannabis goods are required to file regular sales on time and use tax returns to report your sales to the state. If you are paying your sales and use taxes in cash, you must contact the CDTFA to obtain an exemption from their “no cash” policy.
Sales and use tax does not apply to sales of medicinal cannabis goods to a qualified patient who possesses a state-issued medical cannabis ID card. Simply having a physician’s recommendation is not sufficient for the tax break. However, there are still recordkeeping requirements for sales of medical cannabis that are exempt from sales and use taxes.
There are stiff penalties for failing to pay the cannabis cultivation or excise tax. Late payments can result in financial penalties of 50%, and failure to pay can result in financial penalties as well as license revocation.
See the following Special Notices from the CDTFA:
- Guidance on How Taxes Apply to Cannabis Inventory Beginning January 1, 2018
- New Proposed Cultivation Tax Category, Tax Application, and Invoicing Requirements for Cannabis Businesses
- Cannabis – What You Need to Know about the Tax Rates and Registration
- New Cannabis Taxes Begin January 1, 2018
Recently adopted emergency regulations from CDTFA:
- Cal. Code of Regs. § 3700 (Cannabis excise and cultivation taxes)
- Cal. Code of Regs. § 3701 (Collection and remittance of the cannabis excise tax)
For examples of tax calculations, as well as other helpful guidance specific to each type of operator, visit the CDTFA’s Tax Guide for Cannabis Businesses page. They have a number of helpful videos for cannabis operators.
The above information is provided as a public service. It is not intended as legal advice. It is also not intended as tax advice. For specific tax advice, please speak with a tax specialist. For answers to specific legal questions or for legal assistance, including for local and state licensing and compliance purposes, please contact the Law Offices of Omar Figueroa at (707) 829-0215 or email@example.com to schedule a confidential legal consultation.