As spring warms up and nicer weather starts bringing customers out of hibernation, you may be wondering how to increase your sales this season. As a cannabis retailer or manufacturer, one tactic is to offer free cannabis samples to customers to encourage them to try – and buy more of – your product. Is that legal, and what are the tax repercussions of giving away free cannabis? We discuss below.
Can I give away free samples of my cannabis product?
First, check to make sure that you can offer free samples legally in your area. You can ask your local officials or ask for guidance guidance from the Bureau of Cannabis Control and the California Department of Public Health.
Second, know that these details only apply to licensed manufacturers, not dispensaries.
Use Tax and Free Cannabis Samples
So, assuming you can legally offer free samples of cannabis, do you have to pay use tax? Remember, use tax is charged on all items that you use or consume and purchased without paying tax. The rate for use tax is the same rate as sales tax.
The short answer: yes, you do have to pay use tax when you give away free samples of cannabis.
Here’s a more detailed explanation. The use tax comes into play when a product is, literally, “used.” As long as cannabis is part of your inventory being held for sale in the regular course of business, it’s not being used, and therefore you do not pay tax on that supply. When you offer your cannabis product for use – i.e., for a customer to try for free – the use tax will kick in.
The tax due on that sample is based on the purchase price by the manufacturer. If you want further details on how this works, read Regulation 1669, Demonstration, Display and Use of Property Held For Resale-General, subdivision (a) as well as Regulation 1670, Gifts, Marketing Aids, Premiums and Prizes.
What if I’m offering free samples to employees?
Ok, so maybe you’re not so tempted to give away free samples to customers. But what about to your employees? It can be helpful in making a sale to have knowledgeable employees who can personally attest to the quality of your product. So, do you need to pay use tax on cannabis being used for internal promotional purposes?
Unfortunately, yes, you still need to pay use tax on free samples given to employees. This still falls under the realm of “use,” as in you are using tangible personal property for any purpose other than demonstration and display. Use tax is measured by the cost of the cannabis product purchase price.
Does the use tax rate ever vary?
Use tax can vary not by who you are selling cannabis to, or why you are giving it away (e.g. free sample versus normal sale), but by where you sell or give away the cannabis product. The tax rate depends on where the manufacturer gives the sample away. For example, if you give a sample to an employee, the tax applies where the sample was dispensed from (not where the recipient then used the sample). If the sample is given to an employee for personal use, the rate of tax that applies is that of where you made the gift to the employee.
Summary and Conclusion
While it may be tempting to give away samples of your product for free, note that you will still have to pay use tax on the transition of those samples. The use tax rate that you will pay depends on where the sample was gifted, not where the sample is consumed. Likewise, it doesn’t matter whether you’re offering a sample to an employee or customer; use tax still applies. You may still decide it’s a worthwhile marketing tool to offer a sample, but make sure you are legally allowed to do so before continuing your marketing effort.
If you still have questions, check out additional resources in the CDTFA’s Tax Guide for Cannabis Businesses or consult with one of the experts at California Cannabis CPA.