January 22, 2018

Written by Abraham Finberg, CPA

With the emergence of a new industry comes new taxes enforced by new tax laws. Beginning January 1, 2018, two new cannabis taxes took effect – (1) a 15% excise tax is imposed upon purchasers of cannabis and cannabis products by retailers from purchasers, and (2) a cultivation tax paid by cannabis cultivators, to either their distributor or their manufacturer, on all harvested cannabis that enters the commercial market.

Although, as written, the new tax may seem straight forward, in application is where most confusion can occur. Tax and fee laws can be complex and difficult to understand. To help you better understand the tax obligations specific to your cannabis business, we picked four (4) of the most commonly arising issues and discrepancies that clients face and created a potential solution guide detailing the tax issues and important information relevant to your industry. For more detailed information, businesses can always head over to the California Department of Tax and Fee Administration Tax Guide for Cannabis Businesses.

1. Issue: Providing a clear excise tax rate to the purchaser who is responsible for the tax (Part 14.5. Cannabis Tax 34011 (a) (1))

What the law says: “…a cannabis excise tax shall be imposed upon purchasers of cannabis or cannabis products sold in this state at the rate of 15 percent of the average market price of any retail sale by a cannabis retailer.”

CDTFA Cannabis Tax GuideRetail Section; Cannabis Excise Tax and Sales Tax Computation; How to collect the cannabis excise tax due on your retail sales of cannabis

What the CDTFA Cannabis Tax Guide says: You are not required to itemize the cannabis excise tax on your receipt or invoice you provide to your customer

Solution: For 2017 Inventory and non arms length inventory:

List the tax as an additional 15% tax in your point of sale (POS) system. If your POS cannot process a sales tax on the excise tax, add another tax line for sales tax on excise tax, multiplying the rate by 15%. For example, in Los Angeles, Sales tax on excise tax is 9.5% x 15% = 1.425%. For Arms Length Inventory, separately track each product and create hard coded items as an additional item (the complicated but accurate way) or treat it as non arms length 15% on retail and hope it will be about the same (simple but less accurate way).

Notes: The cannabis tax guide never provides an example of itemizing the excise tax.

  1. Issue: Most localities do not impose a cannabis tax on excise taxes (Legal reference varies by Locality)

What the law says: Varies by Locality

CDTFA Cannabis Tax Guide: Retail Section, Local Government Cannabis Business Taxes

What the CDTFA Cannabis Tax Guide says:

Selling price of cannabis, including excise tax                       $35.00
Cannabis business tax [ 10%]                                                 $   3.50
Subtotal ($35.00 + $3.50)                                                        $ 38.50

Notes: The Cannabis Tax Guide shows an example in which a local cannabis tax is imposed on excise taxes even though local ordinances don’t normally define taxes as a gross receipt. This is a difference between local and state definitions of gross receipts as listed in Section 34011 (d) of the cannabis excise tax law.

SolutionCharge the local tax on the pre excise tax sales amount.

  1. IssueSales tax on local taxes (Sales and Use Tax Law Section 6011 (C ) (5))

What the law says: “Sales price” does not include… The amount of any tax imposed by any city, county, city and county, or rapid transit district within the State of California upon or with respect to retail sales of tangible personal property, measured by a stated percentage of sales price or gross receipts, whether imposed upon the retailer or the consumer.

CDTFA Cannabis Tax GuideRetail Section, Local Government Cannabis Business Taxes

What the CDTFA Cannabis Tax Guide says: Some cities have enacted measures requiring that cannabis businesses located in their jurisdictions pay a cannabis business tax. If you add a separate amount to your customers’ invoices or receipts to cover your cannabis business tax, sales tax applies to the business tax amount.

Notes: The law seems to exclude local tax from sales tax. The guide seems to include local tax.

SolutionThis might require a private letter ruling or litigation so your two options are to accept the sales tax on local tax and have an additional tax on your POS for the local tax ( in Los Angeles 9.5% x 5% for medical = 0.475%) or disagree with the tax guide and not have an additional tax line item.

  1. Issue: Retailers do not have a way to pay non arms length transaction excise taxes (Part 14.5. Cannabis Tax 34011 (b) (1))

What the law says: A distributor in a non-arm’s length transaction shall collect the cannabis excise tax from the cannabis retailer on or before 90 days after the sale or transfer of cannabis or cannabis product to the cannabis retailer, or at the time of retail sale by the cannabis retailer, whichever is earlier.

CDTFA Cannabis Tax GuideDistributor Section; Non Arms Length Microbusiness Example

What the CDTFA Cannabis Tax Guide says: Since a microbusiness is both the cultivator and the retailer, there is no sale between two parties that reflects the fair market price in the open market. As such, this is a non arm’s length transaction and the average market price is the $2,500 representing the retailer’s gross receipts from the retail sale of the cannabis flowers. The microbusiness is responsible for reporting and paying the cannabis excise tax… to the CDTFA on their cannabis tax return.

Notes: Most retailers will have non-arms length transactions on retail sales especially from 2017 inventory. Distributors are not interested in taking on the liability of paying tax on products they did not provide to the retailer.

Solution: The CDTFA will issue a Cannabis tax registration to anyone who requests it whether or not the California Bureau of Cannabis Control has issued a distributor license.

The above information is provided as possible solutions to reconcile contradictions between Revenue and Tax Code Division 2. Other Taxes [6001 – 60709] Part 14.5. Cannabis Tax [34010 – 34021.5], various municipal and county ordinances, and the California Department of Tax and Fee Administration (CDTFA) Cannabis Tax Guide. Some of the items discussed may have to be litigated for final resolution. This material has been prepared for informational purposes only and cannot be fully relied on for tax advice.

The Cannabis Tax Guide is an online publication providing suggestions on how to implement gross receipts taxes imposed on the cannabis industry. It is not intended to provide advice or guidance related to other state and local statutes and regulations relating to the cannabis industry.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.