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California State Tax Rules For The Cannabis Industry



California Cannabis Tax Rules

The cannabis industry is the new hot evolving industry in CA. California became the first state to legalize medical marijuana in 1996. On November 8, 2016, the state’s voters chose to legalize recreational use of marijuana.

The California Tax and Fee Administration (CDTFA) has put together an online guide to help business owners better understand the tax obligations specific to their cannabis business. In the following article, we will summarize these nuances that business owners need to know about this industry. Also, stay tuned for future articles on this topic.

Taxes Involved

In addition to state sales and use tax, effective January 1, 2018, a 15% excise tax is imposed upon retail purchasers of cannabis and cannabis products.  Additionally, a tax on all harvested cannabis that enters the commercial market is imposed on cultivators at a rate of:

  • $9.25 per dry-weight ounce of cannabis flowers,
  • $2.75 per dry-weight ounce of cannabis leaves, and
  • $1.29 per ounce of fresh cannabis plant.*

*To qualify for the “fresh” plant category, the unprocessed cannabis must be weighed within two hours of harvesting.

To complicate things further the excise and cultivation taxes are reported to the CDTFA by distributors (see Distributor below).

Types of Cannabis Entities

When talking about the Cannabis Industry, it is important to distinguish between the different types of entities involved. Each one plays a different function in the creation and delivery of the cannabis product. The cultivator grows the product. The manufacturer produces the product. And the distributor brings the product to retail. In the following section, we’ll discuss each of these types of entities in further detail and how the taxing applies to these entities. Note that some larger cannabis companies are vertically integrated and engage in all of these activities.  These are referred to as “microbusinesses” and will find that tax applies at the various stages.

Cultivator

A cannabis cultivator is a person who is engaged in the business of planting, growing, harvesting, drying, curing, grading or trimming cannabis.

If you are a cannabis cultivator the CDTFA requires that you:

  • Register with the CDTFA for a seller’s permit.
  • Pay the cultivation tax to your distributor or manufacturer.
  • Electronically file your sales and use tax returns and pay the tax due if any, to the CDTFA. Even if you do not make taxable sales of cannabis, you are still required to file a return indicating your total sales with your claimed nontaxable or exempt sales during that particular reporting period.

In addition, you must also:

  • Obtain a cultivation license issued by the California Department of Food and Agriculture.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

Manufacturer

A cannabis manufacturer is a person who produces or prepares cannabis or cannabis products at a fixed location, that packages or repackages cannabis or cannabis products, or labels or relabels its container.

If you are a cannabis manufacturer, the CDTFA requires that you:

  • Register with the CDTFA for a seller’s permit.
  • Collect the cannabis cultivation tax from cultivators from which you receive unprocessed cannabis and provide the cultivator with a receipt.
  • Pay the cultivation tax collected from cultivators to your distributor.
  • Electronically files your sales and use tax returns and pay any sales and/or use tax owed to the CDTFA. Even if you do not make taxable sales of cannabis, you are still required to file a return indicating your total sales with your claimed nontaxable or exempt sales during that particular reporting period.

In addition, you must also:

  • Obtain a manufacturer license issued by the California Department of Public Health.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

If the first transfer or sales of unprocessed cannabis is to a manufacturer, not a distributor, the manufacturer is required to collect the cultivation tax from you at the time of the first sale or transfer of the unprocessed cannabis based on the weight and category of the cannabis sold or transferred. The cultivation tax you pay to a manufacturer will be passed on to a distributor for payment to the CDTFA.

Distributor

A cannabis distributor is a person who procures, sells, and/or transports cannabis between licensed cannabis businesses, such as a cultivator, manufacturer, or retailer. If you are a cannabis distributor, the CDTFA requires that you:

  • Register with the CDTFA for a seller’s permit, if you make sales of cannabis products, or tangible personal property in CA.
  • Register with the CDTFA for a cannabis permit (this is separate from your seller’s permit).
  • Collect the cannabis cultivation tax from cultivators and manufacturers from which you receive cannabis and/or cannabis products.
  • Collect the cannabis excise tax from cannabis retailers you supply (sell and/or transfer) with cannabis and/or cannabis products.
  • Provide an invoice or receipt to the businesses from which you collect the cultivation tax and the cannabis excise tax.
  • Electronically file both your sales and use tax and cannabis tax returns and pay the amounts due to the CDTFA.

In addition, you must also:

  • Obtain a distributor license issued by the Bureau of Cannabis Control with the California Department of Consumer Affairs.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

Retailer

A retailer (also known as a dispensary) is a person who sells cannabis and/or cannabis products directly to a consumer.

If you are a cannabis retailer, the CDTFA requires that you:

  • Register with the CDTFA for a seller’s permit.
  • Charge and collect sales tax on your taxable retail sales of cannabis and/or cannabis products, and other products.
  • Electronically file your sales and use tax returns and pay the sales/or use tax to the CDTFA.
  • Charge and collect the cannabis excise from your customers who purchase cannabis and/or cannabis products.
  • Pay the cannabis excise tax that is due to your distributor. DO NOT remit the cannabis excise tax on your sales and use tax return.
  • Provide your customer with an invoice, receipt, or other document which includes the statement: “The cannabis excise taxes are included in the total amount of this invoice.” (Your customers are liable for the cannabis excise tax until it has been paid to the state or you provide them with such an invoice or receipt.)

In addition, you must also:

  • Obtain a cannabis retail license issued by the Bureau of Cannabis Control within the Department of Consumer Affairs.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

Double-Taxation

California cannabis distributors are warning about double-taxation that could raise costs for businesses due to the sale of cannabis products. Double-Taxation could lead to market instability by squeezing profit margins and raising product costs for consumers. Further, the underground economy continues to thrive, in part because of the perceived over taxation of the industry.

Distributors located in cities and counties already pay taxes to their home jurisdictions, where their actual distribution hubs are located, on wholesale flower, edibles and other marijuana products. In addition, neighboring jurisdictions may also apply gross receipts taxes on products sold to/delivered to customers in their jurisdictions without providing a credit of some kind for tax essentially already paid.  Stay tuned for more on this interesting local tax development.

Interesting Facts

  • Because of the interesting nature of the industry, banking is sometimes difficult for cannabis companies. The CDTFA allows for cash payments of taxes due, but taxpayers have to make an advance appointment at specific CDTFA locations across the state.
  • There is a difference between hemp and cannabis. While hemp plants are the same species as marijuana plants, they don’t produce the psychoactive ingredient (THC) that is in cannabis and cannabis products.
  • The first two drafts of the United States Declaration of Independence were written on paper made from hemp.
  •  The ropes, sails, and caulking of the Mayflower were all made from the hemp fiber.
  • Underground economic activities vary, depending upon the laws of a given jurisdiction. In some countries, alcohol is banned, while other nations encourage legal brewery, distillery, and alcohol distribution operations. While drugs are illegal in most countries, some nations, plus an increasing number of U.S. states, have legalized the sale of cannabis.

What’s Next 

These new guidelines surrounding the cannabis industry can be confusing and tough to navigate. We recommend to businesses that are new to this industry to consult with a professional.

Have a question? Contact Monika Miles

 

 

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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