Governor Newsom Signs Cannabis Trailer Bill, Resulting in Largest Changes to State Cannabis Tax Policy Since Prop. 64
Cultivation Tax Immediately Terminated; Excise Tax Modified; and Tax Relief Provided to Certain Licensees
By Lauren Mendelsohn
July 1, 2022
Yesterday, California Governor Gavin Newsom signed Assembly Bill 195, a budget “trailer bill” containing various items related to cannabis, into law. Among other things, the bill makes significant changes to how cannabis is taxed in the Golden State. The full text of the bill is available here, and key provisions are discussed below.
Cultivation Tax Immediately Terminated
As of July 1, 2022 the state cultivation tax on cannabis that enters the commercial market is no longer in effect. Revenue & Taxation Code § 34012. Cannabis is deemed to “enter the commercial market” once passing the required testing and quality assurance review. Revenue & Taxation Code § 34010(m).
This means that cultivators are no longer required to pay this tax for cannabis that enters the commercial market on or after July 1, 2022, and other licensees are no longer required to collect or remit it. Cannabis received prior to July 1, 2022 but which has not yet passed the required testing and quality assurance review is not subject to the tax; if tax has been collected on any such cannabis then it must be returned to the cultivator who paid it.
Distributors must report and pay to CDTFA any excess cultivation tax they’re not able to return to the appropriate cultivator; manufacturers who are unable to return excess cultivation tax collected to the appropriate cultivator must get it to a distributor, so it can be reported and paid to the state. Revenue & Taxation Code § 34012.5. Licensees should keep accurate records pertaining to tax payment and collection.
See this notice from CDTFA for more information.
Excise Tax Capped, and Remittance of Excise Tax Modified
Effective January 1, 2023 the point of remittance (i.e., the licensee responsible for transferring the excise tax collected from customers to the California Department of Tax and Fee Administration (CDTFA)) of the cannabis excise tax will move from the distributor to the retailer. Revenue & Taxation Code § 34011.2. This means that licensed retailers will have to obtain a cannabis tax permit, and ensure that the state actually receives the taxes — which may involve driving to a CDTFA office. Revenue & Taxation Code § 34014(a)(2).
While not part of this trailer bill, the CDTFA independently decided to lower the mark-up rate for the excise tax from 80% to 75% effective July 1, 2022. See this notice for more information.
The entire concept of the “mark-up rate” and the calculations involving “arm’s length transactions” and “average market prices” will go away on January 1, 2023 once the excise tax is both collected and remitted by the retailer — at that point, the excise tax will simply be 15% of the cost of each retail purchase by a customer.
AB-195 locks in this 15% excise tax rate until the 2025-2026 fiscal year, at which point it can be adjusted to make up for revenue lost from the elimination of the cultivation tax. However, the excise tax rate is capped at 19%. Revenue & Taxation Code § 34011.2(a)(2).
Other Benefits for Equity Licensees and Employers Offering Benefits
The bill also contains some tax credits for equity businesses. Specifically, after January 1, 2023 and before January 1, 2028, licensees who’ve received approval for an equity fee waiver are eligible for a $10,000 state tax credit, and if the credit amount exceeds their net tax, they can carry the remainder over for up to 8 years. Revenue & Taxation Code §§ 17053.82, 23682.
Additionally, after January 1, 2023 and before January 1, 2028, Type 10 and Type 12 licensees that provide full-time employees with certain listed benefits are eligible for a state tax credit in the amount of 25% of their “qualified expenditures” (which include: employment compensation for full-time employees; safety-related equipment, training, and services; and workforce development and safety training for employees), capped at a maximum of $250,000 per year. A total of $20,000,000 has been reserved for all such credits from all qualified taxpayers. Revenue & Taxation Code § 23664.
Vendor Compensation for Equity Retailers
Furthermore, beginning January 1, 2023 and until December 31, 2025, licensed retailers who have been approved for a DCC equity fee waiver can apply to retain 20% of the excise tax collected as “vendor compensation.” Revenue & Taxation Code § 34011.1. The details of how this will work will be spelled out by CDTFA in forthcoming regulations.
Other Changes
AB-195 also reduced the number of employees a licensee must have in order for a labor peace agreement to be required from 20 to 10 effective July 1, 2024, and made some changes related to civil penalties, among other things.
This is a developing story — stay tuned for more information.
This information is provided as a public educational service, and is not intended, nor should be construed as, legal advice. For specific questions regarding cannabis taxes or related topics, contact the Law Offices of Omar Figueroa at 707-829-0215 or info@omarfigueroa.com to schedule a confidential legal consultation.