What is the current state of cannabis taxation in California? State cannabis taxes contribute to California’s economy, the 5th largest in the world. So how is cannabis taxed? Who’s involved? What do cannabis distributors, retailers, cultivators, and manufacturers have to do to stay on the good side of the state?
What Kind of Taxes Apply to Cannabis?
There are three types of taxes that apply to cannabis in California. California imposes:
Cannabis Excise Tax
California imposes a 15% excise tax on retail purchasers of cannabis and cannabis products. The excise tax is calculated based on the average market price of the cannabis or cannabis products sold in a retail sale.
What is the Mark-Up Rate?
The mark-up rate is used when calculating the average market price to determine the cannabis excise tax due in an arm’s length transaction.
Effective January 1, 2020, the mark-up rate is set at 80% (formerly, 60%). The California Department of Tax and Fee Administration (CDTFA) sets the cannabis mark-up rate every six months. It analyzes market data to determine the average mark-up rate between the wholesale cost and the retail selling price of cannabis and cannabis products.
What is an “Arm’s Length Transaction?”
In an arm’s length transaction, the average market price is:
- the retailer’s wholesale cost of the cannabis or cannabis products; plus
- the mark-up rate determined by the CDTFA.
In a non-arm’s length transaction, the average market price is the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.
Cannabis Cultivation Tax
A cultivation tax on all harvested cannabis that enters the commercial market is imposed on cultivators at a rate of:
- effective January 1, 2020, $9.65 per dry-weight ounce of cannabis flowers (formerly, $9.25);
- effective January 1, 2020, $2.87 per dry-weight ounce of cannabis leaves (formerly, $2.75); and
- effective January 1, 2020, $1.35 per ounce of fresh cannabis plant (formerly, $1.29).
Beginning in 2020, these rates apply to cannabis that a cultivator sells or transfers to a manufacturer or distributor.
Cannabis Sales and Use Tax
Sales and use tax applies to retail sales of cannabis and cannabis products. Cannabis and cannabis products are generally considered tangible personal property.
Sales and use tax does not apply to sales of medicinal cannabis and cannabis products if a purchaser provides:
- his/her Medical Marijuana Identification Card; and
- a valid government identification card.
What Are the Compliance Requirements for Cannabis Businesses?
There are many compliance requirements that apply to cannabis businesses. Those include:
- filing returns; and
- payment of taxes due.
Any person required to be licensed as:
- a cannabis retailer, cultivator, distributor, and/or manufacturer must collect the excise or cultivation tax; and
- a cannabis distributor must obtain a seller’s permit and pay the sales and use tax to the California Department of Tax and Fee Administration (CDTFA).
Cannabis retailers, cultivators, manufacturers, and distributors making sales must register with the CDTFA for a seller’s permit. They must also report and pay any sales and use tax due to the CDTFA. A cannabis business must get a valid resale certificate from the purchaser if the business makes sales for resale.
Tax Return Requirements
Cannabis sellers must file regular sales and use tax returns.
Distributors of cannabis and cannabis products must electronically file their cannabis tax returns with the CDTFA. The cannabis tax return is due on the last day of the month following the reporting period.
Most cannabis businesses typically engage in transactions using cash. Those who pay their sales and use tax or cannabis tax in cash should contact the CDTFA to arrange for an exemption from the CDTFA’s no cash policy.
An exemption may be granted if paying in cash causes an undue hardship. A taxpayer must fill out a No Cash Exemption Request form and explain why they can’t:
- get a bank account; or
- pay by cashier’s check or money order.
The CDTFA will notify the taxpayer in writing when the request has been approved or denied.
Taxpayers who get approved must call their local office to schedule an appointment. They must make their payment at least 21 days in advance.
Taxpayers who meet the following estimated monthly tax liability thresholds must pay any amounts due by electronic funds transfer (EFT):
- over $20,000 for cannabis tax accounts; or
- over $10,000 for sales and use tax accounts.
How Much Revenue Have California’s Cannabis Taxes Generated?
According to the CDTFA, total program revenue generated from January 1, 2018 to date is $845.3 million. That amount includes:
- $411.3 million in excise tax;
- $98.9 million in cultivation tax; and
- $335.1 million in sales tax.
In 2019 alone, and as of November 15, 2019, California’s cannabis taxes generated:
- $82.2 million in excise tax;
- $21.9 million in cultivation tax; and
- $59.4 million in sales and use tax.
By Carol Kokinis-Graves, J.D.