California Explains Calculation of Cannabis Tax on Nonarm’s Length Transactions

California explains how microbusinesses and businesses with multiple licenses should calculate the cannabis excise tax on nonarm’s length transactions.

Nonarm’s Length Transactions

Distributors or microbusinesses authorized to operate as distributors are required to calculate and collect the 15% cannabis excise tax. The excise tax is collected from cannabis retailers on the sale or transfer of cannabis or cannabis products. The excise tax is based on the average market price of the cannabis.

In a nonarm’s length transaction, generally when a cannabis retailer is also the distributor:

– the average market price of the cannabis is equal to the gross receipts; and

– the 15% cannabis excise tax is applied to the gross receipts of the retail sale of the cannabis.

What is Included in Gross Receipts?

Gross receipts include all charges related to the sale of cannabis, such as:

– labor;

– services; and

– certain transportation charges.

For example:

– when a retailer delivers cannabis to customers using the retailer’s vehicles; and

– there is no explicit written agreement prior to the delivery that passes title to the purchaser before delivery;

– the charge for that delivery is included in the gross receipts subject to the cannabis excise tax.

A retailer may add a separate amount to customers’ invoices or receipts to cover a city cannabis business tax. That amount is then included in the gross receipts subject to the cannabis excise tax.

Cannabis Tax Fact, California Department of Tax and Fee Administration, February 6, 2019

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