The CDTFA released an update recently relating to the cannabis excise tax on CBD products. For a quick refresher on the cannabis excise tax, take a look at our guide for cannabis retailers. As you prepare your cannabis taxes, here’s what you need to know about the excise tax on cannabidiol products.
Cannabis and CBD Products: Definitions
Per direction from the CDTFA, "Cannabis" refers to all parts of the Cannabis sativa L. plant, excluding industrial hemp. Likewise, "Cannabis products" refers to cannabis and cannabis plant material that has been processed and transformed into defined as cannabis that has undergone a process that transforms it into a concentrate, edible, topical, or other things that contain cannabis.
Does Cannabidiol count as cannabis products?
Cannabidiol comes from both the hemp and marijuana varieties of cannabis. In this case, the CDTFA is focused on the marijuana variety: hemp varieties only have small amounts of THC and have been legal in the US for a while. Therefore. CBD products made from industrial hemp are not subject to the cannabis excise tax. Check with the California Department of Food and Agriculture (CDFA) for specific regulations related to the industrial hemp industry.
CBD and Excise Tax Regulations
Cannabidiol (CBD) products containing "cannabis" are subject to the cannabis excise tax. CBD products that do not contain cannabis are not subject to the cannabis excise tax, even if the CBD product contains trace amounts of Tetrahydrocannabinol (THC).
Questions about the excise tax? Get in touch with our experts today!
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.
The 2018 tax reform bill passed by Congress brought a lot of new changes to federal taxes for California cannabis businesses. You may have some questions about how to take advantage of these changes, which is why we’re covering all new deductions, liabilities, and tax considerations in ongoing blog updates. Today: should you convert your S-Corp to a C-Corp?
Background: types of business entities
As a quick refresher, there are a number of different ways to structure your cannabis business. The way you set-up your new venture has significant tax implications. Here is a quick, high-level overview of some of the most common business structures you might consider forming:
This is a very high level overview of the options available to your business, and if you have specific tax questions for the structure of your cannabis business, we suggest consulting with one of our experts. Let’s move on to the latest tax reforms – and how they impact S-Corps and C-Corps.
2018 Tax Reform Updates
Traditionally, small businesses have been encouraged to avoid filing a C-Corporations due to the double taxation issue. S-Corps have always been more appealing business structures for anyone looking for a lower tax rate: typically, individual income tax rates are much lower than business income tax rates. Therefore, especially for small businesses that don’t qualified for the reduced corporate tax rate, setting up a structure where you can claim business income as personal helps owners save money on federal taxes.
Congress’s tax reforms in January, 2018 changed that. The tax reforms reduced the corporate tax rate from a maximum of 35% to 20%. Many individual tax rates can reach up to 42%, the tables have turned, and now a 20% tax rate looks more appealing to many business owners who want to avoid paying higher tax rates on their income.
Should you convert to a C-Corp?
Note that there is some tax relief planned for S-Corps as well. The new tax bill included a temporary provision allowing pass-through entities to deduct up to 20% of their income on their return. This is known as the “qualified business income” deduction (and also applies to partnerships and sole proprietorships). However, this is a temporary provision: and making the switch to the C-Corps would allow your business to access a lower long-term tax rate.
Likewise, there are a variety of other deductions that S-Corps and C-Corps businesses can take advantage of. For example, C-Corps can claim the foreign income tax deduction and dividends-received deduction on the repatriation of foreign income where the US Corporation owns 100% of the foreign company. The latest tax reform suggests the current administration and Congress is doing its best to ease regulations on traditional corporations – something your cannabis startup may inevitably benefit from.
How do you convert to a C-Corps?
It’s relatively straightforward to convert an existing company to a C-Corporation in California. The process starts when you file a set of articles of incorporation with the California Secretary of State. You can read more about the process on the California Franchise Tax Board website.
Of course, before making any major business decisions, we recommend consulting with an expert to understand the full implications of your tax liability and business obligations. Filing as a C-Corps may lead to tax benefits, but this business entity comes with lots of other responsibilities.
The recent tax reform law passed by Congress has brought a ton of new changes – and new opportunities – for businesses looking for tax deductions this year. Read our recent updates on changes to the international income tax deduction and the corporate dividends received deduction. This week, we’re covering the Qualified Business Income (QBI) Deduction.
What is the QBI?
Under the new tax law passed by Congress in January, 2018, certain types of business entities are entitled to take a 20% deduction on “qualified business income” earned. These entities include:
What is qualified business income? Basically, it’s the ordinary, non-investment income your business generates. Think of it as your revenue from sales, without things like interest or dividend income or any other gains from sale of property. It also excluded earned income like salaries and guaranteed payment. Before you start celebrating what looks like a lot of free money, note that the deduction is limited to the lesser of EITHER 20% of qualified business income, or 50% of the total W-2 wages paid by the business.
Here’s an example of the MAJOR impact the QBI can have on your tax return (its an over simplified version for ease of explanation):
The fine print: this limitation does not apply for taxpayers below the following threshold amounts. Likewise, this table is a bit of an oversimplification of a complicated deduction. To fully understand if your business can claim QBI, contact one of our experts.
These amounts are indexed for cost-of-living adjustments in $50 increments.
How to take advantage of the QBI Deduction
As previously noted, the QBI can only be claimed by certain business entities. Cannabis companies that have registered as partnerships, S corporations, or sole proprietorships may be able to take advantage of the QBI. Registering your business as one of these entities gives you a competitive tax advantage over C corporations, as well as a competitive advantage over employees. Its important to structure your business in a way that can allow maximum deductions.
The QBI deduction can get complicated pretty quickly, so if you want to take advantage of this deduction on your taxes this year, get in touch with the experts at California Cannabis CPAs.
Lastly, please note that the QBI deduction will not apply after 2025. Therefore, if you’re interested in taking advantage of this deduction, now is the time! It also means that you shouldn’t structure your entire business around this one deduction: if none of these business entities feel right for your particular needs, it’s not worth changing your entire business model to suit a deduction that expires in 2026. If you do decide an S Corp, sole proprietorship, or partnership is right for you, consult with our experts to make sure your company is structured appropriately to take advantage of the QBI.
Nearly three months into the legalization of cannabis in California, and we’re still covering state updates to taxes related to running a cannabis business. This is a big update for dispensary owners located in Los Angeles – and impacts how you pay your city taxes. Today’s post: Los Angeles’ updates to the existing L050 Medical Marijuana business tax classification.
As of January, 2018, the previous business tax classification was replaced by the following rates.
For more on cannabis taxes for retailers and cannabis cultivators, check out our blog series on cannabis taxes.
When do you need to pay these taxes?
These tax payments are due on a quarterly basis starting in January 2018. To give businesses time to adjust, any activities related to the first quarter of 2018 (January, February, March) and the 2nd quarter of 2018 (April, May, June) will be both due on July 1, 2018. After that, quarters will be due after the last day of that quarter. For example the 3rd quarter of 2018 will be due October 1, 2018. In July 2019, the schedule will change to reporting on a monthly basis.
How do you report these taxes?
Look for tax certificates to come in the mail from the Office of Finances within 3 to 4 weeks after registering as a business. These business tax registrations certificates (BTRC’s) are for the purpose of business tax compliance, and you should not consider them as your permit to begin operating as a cannabis business. For more information about these business tax classifications please refer to the Los Angeles Municipal Code sections 21.51 and 21.52 or get in touch with the experts at California Cannabis CPA.
We’re back from our coverage of Michigan’s medical cannabis licensing updates with more tax law changes that may benefit your cannabis business. As CPAs we want to help your small business understand the implications of the new 2018 tax plan and figure out how to get the most from your tax return. Today’s topic: corporate changes for international taxes. Of course, if you have specific questions, please reach out to an expert at California Cannabis CPAs.
Background on the Federal Income Tax
Before giving you an update on the changes, let’s first have a quick recap of how US taxpayers have traditionally reported their income tax. Current law mandates the US taxpayer report their worldwide income and offers a foreign tax credit for any taxes paid overseas. For example, if you went on a trip to Europe for three months and worked during that time, you will be taxed on that income by the US government. You may also have paid taxes on that income to the country in which you worked, in which case you would receive a credit from the US compensating you for that amount.
Historically, this rule has been applied to corporations as well. Foreign income earned by a foreign corporation that is owned by a US citizen was not subject to US taxes, unless the income was distributed in the form of a dividend.
Changes to the International Income Tax
The new law deploys a “territorial” income tax system. Under this system, companies are only taxed on their US earnings, meaning that any foreign income can be excluded from your income report. Why? The goal of the new law is to encourage companies to bring their profits back to the US.
The new provisions incentivize the repatriation of foreign income to the US with tax-free status. Cash repatriated back to the US will be untaxed when the transfer takes place, however no foreign tax credit is allowed for taxes paid overseas. Essentially, this is both a carrot and stick approach to bringing your profits stateside. If you bring your cash back to the US economy, you’re rewarded with tax-free status. If you don’t, the US will no longer be reimbursing international taxes.
International Income Tax: The Details
As with any tax law, the new bill includes many provisions to ensure that corporations do not have excess untaxed returns on earnings from low tax jurisdictions:
It’s also important to note that C-Corporations will get a 100% dividends-received deduction on the repatriation of foreign income in the future where the US Corporation owns 100% of the foreign company.
What does this mean for your cannabis business?
If you’re just starting to form a business and considering what business structure is right for your cannabis business, a C Corporation may look more appealing. In addition to being able to take advantage of the DRD, a C Corporation has many benefits if you’re looking to eventually expand internationally. And international expansion might be the next big move for cannabis companies: the California is in good company with 20 other countries that have legalized cannabis to some degree. Besides commonly known places like The Netherlands, Uruguay, Peru, and Jamaica all have cannabis legalization rules in the books. Likewise, Germany, Spain, Portugal and the Czech Republic are all weed-friendly communities well on their way to full legalization. If you’re looking to diversify your customer base, consider expanding outside of US borders.
Curious what other deductions the new tax law holds? Talk to one of our experts or sign up for our email newsletter for new updates each week.
TAX LAW CHANGES: Corporate Changes in Reduction of Dividends Received May Benefit Your Canna Business
Tax season is well underway: are you ready?
We’re starting a series to help cannabis companies understand how the recent tax reforms passed by Congress will impact your tax obligations. Like many small businesses, the intricacies of the new tax plan have big implications for California cannabis companies. From what you can deduct on your tax return to what you need to be responsible for moving forward, we’re here to help you catch up. If you have specific questions, please reach out to an expert at California Cannabis CPAs.
What is a DRD?
DRD stands for Dividends Received Deduction. This is a federal tax deduction that certain corporations – ones that receive dividends – can take. The goal of the DRD is to prevent the same income from being taxed three times. The DRD makes it so that if Company A receives a dividend payout from Company B, Company A can claim that dividend as income and accordingly receive an income tax reduction.
How much can you claim on your DRD?
DRD is a little more complex than it may seem at first glance. The deduction amount that a company may claim depends on its percentage of ownership in the company paying the dividend. For example, if Company A owns a 20% stake in Company B, and Company C owns a 60% stake in Company B, Companies A and C will be able to claim different amounts of DRD. The amounts are based on their ownership stake.
As of 2018 and the changes in the tax law, the percentage DRD a company can claim changed:
Effective for years beginning after 12/31/17, the 70% DRD will be reduced to 50% and the 80% DRD will change to 65%.
The Fine Print
There are a few key limitations to know, including the taxable income limitation and the timeline for owning shares limitation.
What this means for Cannabis Companies
It’s not uncommon for our experts to see a cannabis holding company (the company which a main investor will agree to fund) operate with a subsidiary (e.g., a real estate company, operating company, or management company). Creating a structure that allows you to maximize your DRD will decrease your overall effective tax rate and increase your cash flows to re-invest in your companies. Be aware of the latest changes in the tax code if you want your company to survive in the new highly taxed marketplace.
Specific questions? Get in touch with our experts today to make sure you’re claiming your full deductions on this year’s tax return and mitigate the possibility of overpaying your taxes.
2018 and the new tax code presents itself with a myriad of changes on both an individual and corporate level. One of the biggest changes, from a corporate level, was the elimination of the AMT (Alternative Minimum Tax). Today, we will talk about the definition of AMT, why it started and how it will impact the cannabis industry.
What is AMT?
The corporate Alternative Minimum Tax (AMT) is a separate and distinct method of taxation that runs parallel to the “regular” corporate income tax. Prior to 2018, every corporation had to calculate its tax burden under both the regular corporate income tax and the AMT, paying the higher of the two. It’s important to note, today we will strictly be talking about AMT as it relates to corporations, not individuals (the AMT was not eliminated for individuals).
The Alternative Minimum Tax began in 1969. The start of AMT can be traced to then Secretary of Treasury Joseph W. Barr. He testified before Congress that 155 individual taxpayers, with incomes exceeding $200,000, had paid no federal income tax in 1966. Adjusted for inflation, those numbers would translate to $1.5 million dollars today.
The idea that the wealthiest citizens could pay zero income tax did not sit well with the government. Therefore, the AMT was created. This ensured that even those with higher incomes would pay a minimum amount of tax. Otherwise, through tax deductions and credits, citizens could essentially pay zero taxes. With so many deductions available, lawmakers wanted to ensure everyone paid at least some base minimum of tax regardless of how many tax breaks they could use to their advantage.
Changes For 2018
Prior to the changes of 2018, the United States had one of the highest corporate tax rates in the world at 35%. The new 2018 regulations establish a flat 21% corporate rate for businesses and personal service corporations (PSCs). The corporate tax rate average for the developed world is 22%. Theoretically, the reduction of the corporate tax rate by 14% should create a nice boom for U.S. based companies, allowing them to keep their operations and profits here in the U.S.
Prior to the changes for 2018, the corporate AMT tax rate was 20 percent. Additionally, C corporations with average gross receipts less than $7.5 million over the preceding three tax years were not subject to AMT. As of January 1, 2018 – the corporate AMT was completely eliminated. Individual AMT still applies, although a few things have changed. Please consult California Cannabis CPA if you’d like some guidance on individual AMT regulations.
How Do These Changes Affect The Cannabis Industry?
If your cannabis business is a corporation, you may benefit from the elimination of the AMT. If you are still researching how to set up your business, read our 10 steps to start a cannabis business. California Cannabis CPA is happy to walk you through the process.
Theoretically, the removal of AMT should be a benefit. The AMT was a completely separate tax code that created a lot of additional record keeping. The elimination simplifies dozens of other tax code sections that were related to the corporate AMT. And unlike before, if your business made over a certain amount of money, you had to pay the higher of the two taxes. Not the case anymore.
Second, functioning businesses are able to write off (or deduct) certain business expenses from their overall income. Normally, these include expenses such as operating costs, employee expenses and equipment. However, the cannabis business has certain limitations due to tax code 280E.
On the federal level, cannabis is still considered a Schedule 1 drug. Therefore, licensed marijuana businesses have to file federal taxes under tax code 280E because of the Controlled Substances Act. The downside to filing under 280E is that licensed cannabis businesses pay more in federal taxes than other businesses do. 280E bans any tax deductions besides the cost of goods sold. If you try to deduct other expenses (similar to how other businesses operate) you will likely face an audit.
However, there are situations where additional write-offs may be allowed. This is usually the case if your business participates in marijuana for medicinal purposes. 280E is a very complicated tax code, so we recommend consulting with California Cannabis CPA to ensure every detail is covered.
In conclusion, it looks like the removal of the AMT will be beneficial, but cannabis companies will still run into challenges with the amount of expenses they are able to deduct. California Cannabis CPA is happy to speak with you to discuss your individual circumstance, ensuring you remain compliant with the new tax codes.
We’ve offered guides for cannabis retailers and cannabis distributors, and here we cover tax responsibilities for cannabis cultivators and manufacturers. If you’ve been following our guides, many of these responsibilities will be familiar.
Cannabis cultivators are anyone who grow, harvest, plant, dry, cure, grade, or trim the cannabis plant. If you are a nursery or cannabis plant processor, you are considered a cultivator. If you are someone who produces or prepares cannabis products, labels or re-labels cannabis containers, or who packages/repackages cannabis products, you are a manufacturer. Cultivators have to register for a seller’s permit with the CDTFA online at cdtfa.ca.gov.
As a cultivator, when you make sales to other cannabis businesses, you will be required to get resale certificates, file sales and use tax returns, and report and pay use tax on taxable items purchased without tax and used by the cultivator. In addition, cannabis cultivators pay the cultivation tax to the distributor or manufacturer. In cases where unprocessed cannabis is first sold or transferred to a manufacturer, the manufacturer must collect the cultivation tax from the cultivator and pass it to the distributor for collection by the CDFTA.
As a manufacturer, your responsibilities are similar to cultivators. You must also register for a seller’s permit, obtain resale certificates, file sales and use tax returns, and report and pay use tax on taxable items on taxable items purchased without tax and used by the manufacturer. Likewise, you are responsible for collecting cultivation tax from the cultivators and supplying a receipt if the unprocessed cannabis is transferred or sold to you first. Then, you will pay the cultivation tax to the distributor, who transfers the payment to the CDTFA. Be sure you keep proper records and have the right permits and licenses – in addition to a seller’s permit, both cultivators and manufacturers may need local or municipal-level licenses. We can help you sort out your licensing needs.
This tax applies to all harvested cannabis that has entered the commercial market: that is, cannabis that has completed testing and complies with the quality assurance review as required by law.
How much is cultivation tax? It depends on the type of cannabis products being sold.
*Fresh cannabis plant fee only applies when the cannabis plant is weighed in an unprocessed state within 2 hours of harvesting. If you have immediate questions, please get in touch with our experts.
Once again, distributors collect the cultivation tax from cultivators and manufacturers. Tax is due when the cannabis enters the commercial market. The distributor will provide an invoice or receipt when they collect the cultivation tax, and you should keep this for your records.
Sales and Use Tax
File your sales and use tax returns separate from your cannabis and income tax returns. Sales and use tax returns should be filed on the CDTFA website based on the due dates, which may vary. There are also some prepayments you will be asked to make which can be found on the same site. Keep copies of your returns in case there’s ever a question on your record-keeping.
Sales tax applies to the retail sales of tangible personal property, including some labor or service costs if they are related to the sale of tangible property. Sales tax does not apply to valid sales for resale, though, so as a cultivator or manufacturer, virtually all your sales should be for resale (meaning your sales tax responsibilities are negligible). When you make a resale, use Form CDTFA-230 as your resale certificate. Don’t use a resale certificate for any personal property – you may be penalized!
Use tax is a tax on all items that you use and consume and purchased without paying tax. In the real world, this might include getting a massage – it was a service you used that likely didn’t include tax when you originally paid the masseuse. Use tax is the same rate as sales tax and will generally apply to purchased from outside California that you didn’t pay state tax on at the time of purchase.
These tax responsibilities can seem overwhelming, but that’s where our experts come in to help. If you have any questions pertaining to cultivation, sales, or use tax, please don’t hesitate to get in touch. We’re here to help you stay compliant!
Leading up to 2018, the CDTFA passed two key regulations clarifying their requirements for correctly paying your cannabis cultivation and excise taxes. Regulations 3700 and 3701 pertain to collecting tax on inventory you’ve had in stock before the full legalization of cannabis in California, and are important to understand before filing your first-quarter report on April 30, 2018.
Cannabis Tax Regulation 3700: Cannabis Excise and Cultivation Taxes
Passed in December, 2017, this regulation clarified the existing excise and cultivation tax policy everyone must follow starting January 1, 2018. Specifically, this regulation clearly defines terms such as “fresh cannabis plant,” “distributor,” “cultivator,” and cannabis leaves and flowers. It also lays out the cultivation tax rates, which we’ve covered in previous articles.
Perhaps most importantly, Regulation 3700 also lays out the process for collecting the cannabis excise tax. Distributors are responsible for collecting, reporting and remitting cannabis excise tax from the cultivators and retailers each quarter. Late payments incur the following penalties:
However, if the CDTFA finds that a failure to make a timely payment is due to reasonable cause, you may be relieved of penalty. To be relieved, you must prove that payment was late due to circumstances beyond the person’s control, and occurred in absence of willful neglect. If you find yourself in this situation, it’s best to consult with a tax or law expert to file a statement explaining the facts pertaining to your claim.
Cannabis Tax Regulation 3701: Collection and Remittance of the Cannabis Excise Tax
After passing Regulation 3700, California officials discovered a loophole to the cannabis excise tax– which regulation 3701 aims to close. Prior to the full legalization of cannabis in California, no person was required to obtain a distributor license until January 1, 2018. However, there were certainly individuals and companies operating as distributors before January 1 – distributors in the medical cannabis industry, for example. These companies would have existing cannabis inventory – so should this inventory be subject to the new cannabis excise tax?
Regulation 3701 says that if a retailer possesses or controls cannabis or a cannabis product at 12:01 a.m. on January 1, 2018, and makes a retail sale of that cannabis or cannabis product on or after January 1, 2018, then that retailer must charge a cannabis excise tax based on the average market price. This excise tax is due to the distributor by the fifteenth day of the calendar month following the close of the calendar month in which the tax was collected.
Here’s how this works in practice. A retailer purchases cannabis in 2017, and on January 3, 2018, purchases cannabis from a distributor for $100/oz. The wholesale cost is $100/oz. Therefore, the average market prices of an ounce is $160.00 ($100 x 1.6). The cannabis excise tax due on the sale of the cannabis purchased in 2017 is $24.00 ($160 x 15%) and the retailer must collect this excise tax from its customer.
Lastly, distributors need to know how to report the pre-2018 excise tax. When remitting the excise tax to the CDTFA, distributors should include the following information:
Include this information on your first quarter tax return, due April 30, 2018. Questions? Get in touch, we’re happy to help.
Continuing our series from last week, today we’re covering the key tax policy that cannabis distributors in California are responsible for now that proposition 64 has been approved. If you’re a retailer looking for detailed tax information, check out this for California cannabis retailers.
Distributors are also responsible for collecting and submitting a variety of taxes, including cannabis cultivation, sales, excise, and use taxes. Distributors are also responsible for filing the cannabis taxes after collecting cultivation and excise tax from the retailers and cultivators, and for keeping resale certificates on file from retailers. Here’s how to file your taxes, how much to collect from your cannabis partners, and how to handle sales tax.
Please consider that we are not a law firm, and this advice should not substitute any proper legal advice.
Are you a cannabis distributor?
You are cannabis distributor if you procure, sell and/or transport cannabis between licensed cannabis businesses such as cultivators, manufacturers or retailers. Distributors must meet also meet the following requirements:
If you are also making sales, and not just transporting product, you are responsible for registering with the CDTFA to get a separate seller’s permit. This will also require filing Sales and Use Tax Returns.
Are you a microbusiness? This complicates things a little. Microbusinesses may operate as a distributor, but in that case they are only required to hold one license that authorizes the microbusiness as a distributor. A microbusiness may operate as a cultivator, distributor, manufacturer and/or retailer. Microbusinesses are responsible for all of the same requirements as distributor requirements listed above.
Distributor Cannabis Tax Requirements
As a refresher, The cultivation tax is imposed imposed on all of the harvested cannabis that enters the commercial market. Cultivators are responsible for paying the cultivation tax to the distributor. In some cases, the cultivator is responsible for paying the tax to the manufacturer if the cannabis is transferred or sold to a manufacturer first. Either way, as a distributor, you are responsible for remitting the cultivation tax to the CDTFA. Cultivation tax rates are:
To qualify for the third point, the cannabis plant must be weighed in an unprocessed state within 2 hours of harvesting. If you have immediate questions, please get in touch with our experts.
When you collect the cultivation tax, you will need to provide a receipt to the cultivators and manufacturers that lists the amount of the tax collected and relieves your cannabis partners from liability.
CANNABIS EXCISE TAX
Excise tax is a bit complicated: put most simply, excise tax is an added 15% of the average market price to the listed retail price of the cannabis product. It’s also contingent on the type of transaction between the customer and retailer. Read more about the cannabis excise tax under our post for retailers.
FILING YOUR CANNABIS TAX RETURN
The process for filing your cannabis tax return is slightly different from filing your income tax return and sales and use tax return. File your return on the CDTFA.gov site according to the quarterly schedule (so, your first return is due April 30). On this return, you are responsible for reporting the both the excise and cultivation taxes due for any cannabis and cannabis products that entered the commercial market during the reporting period. For example, on your April 30 return, you will report excise and cultivation taxes for January 1 – March 30, 2018. When reporting the excise tax, you must include reports for any product that has been transferred to a retailer (whether or not the product has already been sold).
Keep copies of your returns for future reference, and speak to one of our experts if you have any help.
Distributor Excise Tax Requirements
CANNABIS EXCISE TAX
As a distributor, you are responsible for paying the cannabis excise tax to the CDTFA and collecting it from your retailers you supply.
Sales tax does not apply to valid sales for resale. Unless you’re operating as a cannabis microbusiness, your sales as a cannabis distributor are likely to be all resale – meaning you won’t be responsible for paying sales tax. Enter: resale certificates.
Resale certificates allow you to buy resale inventory without paying sales tax reimbursement to the seller. You must provide a timely resale certificate to your supplier, with your seller’s permit information at the time you are making your purchases. Use Form CDTFA-230 as your resale certificate. Don’t use a resale certificate for any personal property – you may be penalized. Also, when you sell products to retailers, those retailers will give you a resale certificate that you should keep for your records. If you have any questions about using the resale certificate, get in touch! We’re happy to help.
Retailer Sales Tax Requirements
CANNABIS SALES TAX
Retailers will collect the sales tax from their customers and remit it to the CDTFA. The sales tax rate is based on where your sale takes place. To find the correct tax rate, check the database on the CDTFA site.
As we previously discussed, there are some key taxes with retailers and distributors must know about to stay compliant with California cannabis regulations. The two we’re outlining in this guide are the cannabis sales tax, and the cannabis excise tax.
Cannabis Sales Tax
Retailers are primarily responsible for the sales tax, which applies to all “tangible personal property” in California – including cannabis, cannabis products, and cannabis accessories (rolling papers, vape pens, etc.). To calculate the amount of sales tax, use the total amount on your receipts (including the excise tax).
The sales tax rate is based on where your sale takes place. Is it a sale that takes place over the counter in your store, or when you deliver the product yourself? For example, if you sell cannabis at your store location in Los Angeles, you may have a different sales tax than if you make a delivery to a customer in San Diego. To find the correct tax rate, check the database on the CDTFA site.
Why are the tax rates variable by location? This is because the sales tax has three key components:
Check with your local municipality for your sales tax rate. Note that certain medicinal cannabis sales are exempt from sales tax. A customer is exempt from paying sales tax when they present a valid Medical Marijuana Identification card (issued by the California Department of Public Health), along with a valid government ID. Be careful: a doctor’s note or prescription isn’t sufficient for that customer to qualify for sales tax exemption. Keep track of these transactions – you’ll need to report any sales tax exemptions when you file your taxes! If you need help, give us a call or get in touch for a quick consultation.
Cannabis Excise Tax
Retailers and microbusinesses must collect an excise tax from their customers. As we outlined in this brief explainer for cannabis retailers, an excise tax is usually included in the price of the product, so you collect this tax from your customers every time you make a sale. Charge excise tax on everything from cannabis to cannabis edibles, oils, lotions, and waxes.
How much should your excise tax be? The short answer: add on an extra 15% of the average market price to the listed retail price of your product. The average market price is based on the type of transaction between the seller and you. There are two types of transactions for you to know about:
Once you have determined whether you’re dealing with an arm’s length or non-arm’s length transaction, you can figure out how much your excise tax should cost. Check with your local municipality for your local excise tax rate. Here’s an example.
You are a Los Angeles dispensary selling cannabis directly to a customer in an arm’s length transaction. The sale of one gram of cannabis is $20. On top of that, you charge an excise tax at 15% - so the sale goes to $23. Then you have to add Los Angeles sales tax (9.75%). The total out the door price is therefore $25.25.
While this sounds complicated, the end result is simple. You are not required to list the excise tax separately on your receipt. However, you must have the phrase “The cannabis excise taxes are included in the total amount of this invoice” included on every receipt.
Questions about the sales and excise tax rates? Get in touch – our experts are happy to help.
While we’re not a law firm and cannot provide legal advice, there are a few key tax laws that cannabis retailers in California are responsible for now that cannabis is legal. The goal of this article is to give you an overview of these taxes and make you aware of your responsibilities as a cannabis business owner in California. In subsequent posts, we’ll dig into the excise, sales, and use taxes to give you everything you need to know about these tax requirements – and make sure your business stays compliant. For now, here are the basics you need to know.
Are you a cannabis retailer?
You are a retailer if you sell cannabis and/or cannabis products directly to a consumer. Microbusinesses that are licensed as retailers also must abide by the same regulations as traditional retailers.
A cannabis microbusiness is type of license category (Type 12) that allows your company to engage in multiple cannabis activities at one location. For example, as a microbusiness you could cultivate up to 10,000 sq. ft. of cannabis canopy and distribute your product under one license. Because often you are selling your product to a consumer, these microbusinesses follow the same regulations as retailers (detailed here). If you’re not sure whether you’re a cannabis retailer, get in touch with California Cannabis CPAs.
First Steps to Becoming a Cannabis Retailer
Before we dive into the tax law basics, a quick refresh: to be a cannabis retailer in California, you must start by applying for a seller’s permit and also secure local and state cannabis permits. Click this link to register with the CDTFA for a seller's permit. For details on what you need to get a seller’s permit – including a checklist of the documents you need to submit in your application – check out this blog post. Please keep in mind that you may be responsible for getting additional permits and licenses from your local county or city government. More on that to come!
Next, if you are an existing cannabis retailer (i.e., not a new company) you are also required to report all your sales and pay sales tax due to the California Department of Tax and Fee Administration (CDTFA). The amount of tax you’ll pay is based on your gross receipts, meaning the tax rate is set based on where the sale takes place and when the sale is over the counter vs. when you deliver the item yourself. Finally, keep in mind that as you grow your business, you will be taxed on items you use that are purchased without tax – so hold onto your receipts and keep track of your inventory.
Retailer Tax Law Basics
There are a few key taxes that retailers are responsible for as of January 1, 2018.
Anyone who cultivates cannabis is responsible for paying a cultivation tax – including retailers who grow their own cannabis. Pay this tax to the distributor in a similar process to the excise tax collection. Current cultivation tax rates are $9.25 per dry-weight ounce of cannabis flowers, as well as a tax of $2.75 per dry-weight ounce of cannabis leaves. Exempt from the cultivation tax are businesses that cultivate cannabis for personal use or by a qualified patient or primary caregiver -- i.e., medical cannabis cultivators.
Cannabis Excise Tax
An excise tax is a fancy name for a tax paid when purchases are made on a specific good – like cannabis and cannabis related products. The excise tax is usually included in the price of the product, meaning you’ll collect this tax from your customers every time you make a sale. Charge excise tax on everything from cannabis to cannabis edibles, oils, lotions, and waxes.
How much should excise tax be? Add on an extra 15% of the average market price to the listed retail price of your product. The average market price is based on the type of transaction between the seller and you. We will dig into this in detail later on.
Note that you are not required to list the excise tax separately on your receipt – this makes it much easier for you to pay your sales tax, as you will see in the following section. You do need to have the phrase “The cannabis excise taxes are included in the total amount of this invoice” included on every receipt.
There remains an exemption for sales and use tax for all medicinal cannabis products, but usually, as a retailer, you will need to pay sales tax. Sales tax applies to retail sales of “tangible personal property” in California – in plain terms, this means anything you can touch and feel, including cannabis, cannabis products, and cannabis accessories such as rolling papers, vape pens, or pipes.
When calculating the amount of sales tax due, you must include the amount of your excise tax in the receipts. Since the excise tax should be included in your total sales price, this shouldn’t require any additional effort from you in totally your gross sales tax. You are liable for sales tax even if you don’t collect sales tax reimbursement. This means you must pay the excise tax even if you don’t sell the product.
How much is your sales tax? That depends. The sales tax rate is based on where your sale takes place when it is over the counter, or when you deliver the product yourself. So, for example, if you sell cannabis at your store location in Los Angeles, you may have a different sales tax than if you make a delivery to a customer in San Diego. All tax rates are on the CDTFA website – and more on this tax to come.
Use tax is a tax on items you use or consume that you purchased without paying tax. An example of a use tax in everyday life might be a tax on getting a massage. The use tax rate is the same rate as your sales tax rate. Broadly, expect to pay use tax on items you purchased outside the state of California without paying California state sales or use tax. If this sounds confusing, it is. We’ll cover in greater detail what kinds of products you can expect to pay use tax on in future posts. In the meantime, if you have any questions, don’t hesitate to reach out to the experts at California Cannabis CPAs!
Happy New Year and welcome to a world where cannabis is officially legal in the state of California! We hope this year brings big things for your business. To help you stay on track, we’re helping you start off the year right with a checklist of all the forms your business will need come tax time. Whether you’re filing for the first time or a seasoned pro, take a look at this list to make sure your business is prepared. Questions? The experts at California Cannabis CPAs are here to help. Just let us know!
What you Need to File Your Taxes
Cultivators and retailers of cannabis products must pay a cultivation and excise tax to the distributor. Distributors are required to electronically file a tax return with the CDTFA on the last day of the month following the reporting period. This is where you file both the cannabis taxes and sales taxes.
To file your return, you need the following things:
Check out the graphic below for a breakdown of collected taxes from commercial cannabis businesses in California.
State vs. Federal Taxes for California Cannabis Companies
Starting in this month, California is introducing a 15% state excise tax on every purchase of a cannabis product. Retailers are required to charge that tax on customers at the point of sale -- and you will need to keep track and report that accounting when you file your own taxes. Likewise, it will be mission critical to keep track of the California licenses and permits you need before tax time. The cultivation and excise taxes will be collected by distributors from cultivators and retailers and paid to the California Department of Tax and Fee Administration.
As for the federal tax system, your cannabis business should file an income tax return just like any other business. What you file will depend on your business entity -- the way you’re structured. For example, a corporation would file a Form 100, California Corporation Franchise Tax or Income Tax Return. The main difference in filing your taxes will be in the deductions, credits and records you’ll be asked to submit at the time of your filling. To convert your nonprofit cannabis company into a for-profit, check out this guide. Or, if you’re just getting started setting up your business structure, you may want to take these tax ramifications into account.
Not only will you have California state taxes, but there are also local taxes and fees to pay. Cities and counties may impose additional taxes to produce revenue for their community, and fluctuating tax rates depend on where your cannabis company operates and is located. To find your local tax regulations, contact your municipality.
Have questions about being prepared for tax time? Get in touch, we’re happy to help!
There’s more big news for cannabis businesses as we roll closer to 2018 and the start of legal cannabis in California! Existing cannabis nonprofits who wish to convert to a for-profit entity can file with the California Secretary of State to do so starting January 1.
Why would you consider converting a non-profit to a for-profit? There are two big drawbacks to being a non-profit to consider:
Therefore, if you’re interested in building a business and selling it, or making a profit that you don’t need to reinvest back into your business, a for-profit would be the way to go.
Sound like a promising model? Here’s what you need to know to convert your cannabis non-profit into a for-profit.
Who does this apply to?
First, remember that everyone starting a cannabis business in California needs to file with the Secretary of State. Specifically, entrepreneurs seeking to start a cannabis-related business in need to register their business entity, as well as any trademark or service mark.
Next, if you’re an existing nonprofit -- a mutual benefit corporation or a cooperative corporation -- and you wish to convert to a for-profit entity, you must register this change with the Secretary of State starting January 1, 2018. This applies to any businesses looking to become a Corporation, Limited Liability Company (LLC), Limited Partnership (LP) or limited Liability Partnership (LLP). If you’re a new business, you are required to register with the Secretary of State before applying for any license(s) with other local and state agencies.
Not sure what business structure is right for you? Luckily, there’s a guide for that. The California Secretary of State has this overview of the different forms your canna-business can take. Of course, if you have any questions about the differences between a corporation, LLC, LP, or any of the other options, GreenGrowth CPAs are here to help.
Steps for Registering Your Cannabis Business
The office of the Secretary of State has set up an online portal to make the process of registering your business relatively straightforward. (And if you like Cheech, there’s a great PSA to go with the new site that you should definitely watch.)
Follow these simple steps to get your business registered correctly.
This is a lot information to take in, and if you’re feeling overwhelmed, GreenGrowth CPAs are here to help. Get in touch with any questions and we’ll guide you through the registration process.
EMERGENCY RELEASE: CALIFORNIA CANNABIS DISPENSARIES MUST PAY TAXES BEFORE GETTING SELLERS PERMIT
What happened: In news this week, California’s Department of Tax and Fee Administration is requesting dispensaries to pay any unpaid taxes before getting a seller’s permit. It’s an effort to bring those gray-area operators who haven’t formally been paying taxes up to code before the marijuana industry takes off in 2018. For any businesses already growing or selling cannabis, the California state government will request that all dispensaries must pay their taxes before applying for a sellers permit.
Why is it important: The cannabis industry in California is projected to bring in $1 billion in taxes by 2020, and the government wants to kickstart that windfall early. Not only that, but regulators are hoping to quash any lingering black market operators. The goal in requiring operators to pay back-taxes is to bring the industry above board before January 1 -- not to punish any existing operators, says one expert. Therefore, the state is likely to continue to work with any business owners who still want to get a seller’s permit and haven’t yet paid their taxes.
What you need to do now: If you’re one of those gray areas operators, start to go through your records to determine how much tax you potentially owe before January 1. Under the state’s recent legislation, retailers and growers need temporary business permits from their individual towns or jurisdictions. These permits will last for four months, at which point they will be approved by state regulators for the official seller’s permit. That means now is the time to catch up on any lingering back taxes -- or risk getting shut down four months from now.
Questions on how this applies to you? Get in touch with the experts at California Cannabis CPA today to get some advice on how to best proceed for your canna-business. We can help you easily get caught up on your taxes and get your return filed in a week!
So, you want to start a business in California’s booming cannabis industry. Now seems like the perfect time to get in on the ground floor: the market estimates that cannabis will bring an additional $5 billion to California each year. It would be nice to get a slice of that pie, no?
Before you dive in, take some time to learn about the different ways to structure your business in a way that will give you the biggest slice of the pie -- not the leftover sliver that’s all crust (unless crust is your thing). The way you setup your company can mean the difference between growth and success and burning out after a year in business. Ask these five tax questions when setting out to structure your canna-business!
1. What kind of legal entity do you want to be?
Historically, before California decided to have a fully regulated state system for medical marijuana, cannabis companies were set up as non-profits. Now, there are other options for structuring your business. Figuring out which model is right for you depends on many factors, including your role in the cannabis industry (i.e. grower, distributor, or partner); county and local regulations; and your projected growth. Here are some options available:
Nonprofit (allowed pre-2018):
For profit (allowed in 2018):
2. What are your growth goals?
Do you plan to have multiple locations and holdings? Depending on how your business operates, you can structure to account for different levels of liability. If you have multiple corporate entities, for example, you can limit your liability within each one. Then if one of your locations is sued or forced to shut down, your other locations can continue to operate independently. Conversely, managing multiple corporate entities can be a logistical nightmare -- especially if you intend to grow big or go home. It is much more efficient to run all your branches under one corporate entity if you’re smart about handling your risk.
3. What are your investors looking for?
Investors will be interested in your company’s assets, inventory, cash receivables, and profit potential. They will want to see your business model in all its parts: trademarks, intellectual property, physical locations, and more. When you want to raise some serious capital -- going beyond your personal investment and a Kickstarter campaign -- the way you structure your company can impact an investor’s interest. For example, in a multi-entity structure with different locations and sub-companies, an investor can pick and choose which parts of your business they want to fund. Having a multi-entity structure can be very attractive if you’re shopping your canna-business around to people with low risk tolerance (and it widens your potential pool of funders). However, different ownership stakes can start to lead to conflicting interests for you as a manager. Having a seat at many tables with multiple influential voices can cause some real cross-company conflicts for you as a leader.
4. How should you structure compensation and benefits?
Cannabis tax regulations have two special rules. First: cannabis companies can deduct the cost of goods sold on their tax return. Second: cannabis companies cannot deduct any sales and marketing expenses. Ouch.
What this means is that many traditional expenses can’t be claimed as decreed by tax law section 280E. Know the ins and outs of payroll tax, executive compensation, and healthcare benefits you’ll be accountable for as a business owner in the California cannabis industry. The best way to do that is to consult with a tax professional in your community.
5. What do you need to do to be compliant?
This is a big question -- and pretty broad at that. If you’ve made it this far, this step is the most crucial. Knowing what forms you need to fill out, what licenses you need, and how to best account for your expenses is what will make or break your business in the long run. California Cannabis CPA will be releasing more guides and checklists in the coming weeks to help you keep track of everything, but know that compliancy varies by district, county, and between the federal and state levels. If you’re going to have locations in different parts of California, do the research for each area you’re operating in. When in doubt -- pay your taxes!
Currently the city of Coalinga, CA is accepting applications to obtain a permit for cultivation, processing, extraction, manufacturing, testing, and distribution activities with an approved Conditional Use Permit (CUP) and Regulatory Permit within areas of the City zoned Manufacturing and Business Light (MBL).
Anyone interested in operating a Commercial Cannabis business within the City of Coalinga must obtain the following:
Step 1: Attend Mandatory Pre-Application Meeting
Step 2: Identify Property Zoned Location Suitable for Commercial Cannabis Activity
Step 3: Submit Regulatory Permit Application Packet Requirements
Obtaining a Commercial Cannabis Permit is a dual submittal process. Application documents must be filed with both the Police Chief and Community Development Department.
Cannabis Permit Processing Matrix
Step 1: Attend Mandatory Pre-Application Meeting
There is a prerequisite of scheduling a mandatory pre-application meeting prior to the submission of an official application package for a Commercial Cannabis Permit. All prospective applicants must schedule a pre-application meeting with the City of Coalinga by contacting Amy Martinez, Community Development Secretary at 559-935-1533 x141. The purpose of the pre-application meeting is to provide a comprehensive review of the application process, the application content, and the expectations of the City as it relates to permitting requirements such as the security plan, floor plan, cannabis operational characteristics, employee permits, licensing fees and taxes, monitoring and compliance, legal documents, etc.
Step 2: Identify Property Zoned Location Suitable for Commercial Cannabis Activity
According to the City of Coalinga’s Commercial Marijuana Operations Ordinance, all licensed Commercial Marijuana Operations are permitted within the Manufacturing and Business Light Zoning Designations (MBL). Also, in the ordinance is a restriction of 1,800 feet from any currently sited and future sited school (K-12). For more information regarding school siting you can view the attached map that identified locations in town outside that restriction.
The following applications for land use will need to be submitted:
Additional information on fees and regulations can be found at the following links:
Lands Zoned for Cannabis Operations:
Step 3: Submit Regulatory Permit Application Packet Requirements
It is of utmost important to the City of Coalinga City Council to regulate the commercial cannabis industry in a manner which takes into consideration the needs of patients and their caregivers while promoting the health, safety and welfare of residents and businesses. It is the responsibility of the Community Development Department and the Police Department to implement the City’s Commercial Cannabis Ordinance (No. 797) and the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which was signed into law on June 25, 2017 by the Governor which created a licensing and regulatory framework for both adult use and medicinal cannabis.
At this time, the City of Coalinga is accepting permit applications for commercial cannabis cultivation (indoor), manufacturing (volatile/non-volatile, testing, distribution and wholesale nurseries, in accordance with the standards of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) and the City’s adopted Commercial Marijuana Operations (CMO) Regulations (Ordinance No. 797). The City’s ordinance does not allow for the licensing of retailers at this time.
There is an application fee of $2,000.00 and an employee fee(s) of $400.00 per employee that is due when submitting an official application.
The Police Chief will review the entire application package once a completed package along with receipt of paid application fees have been received. The Police Chief will issue a recommendation to the City Council to approve/deny the regulatory permit in accordance with Section 95.128.
There are several Regulatory Permit Application Requirements: Application Checklist
Please contact Sean Brewer, Community Development Director with any questions at 559-935-1533 x 141 or firstname.lastname@example.org.
Beginning January 1, 2018, the state of California’s marijuana tax laws will change for distributors, cultivators, manufacturers and retailers of marijuana and cannabis products.
The information outlines the process for collecting, paying and filing taxes under the new laws:
Step 1: Secure Permits and Licenses
Step 2: Register with California Department of Tax and Fee Administration (CDTFA)
Step 3: Collect and/or Pay Taxes
Step 4: File Taxes
On November 8, 2016 voters in California approved Proposition 64 (Prop 64), the “Control, Regulate and Tax Adult Use of Marijuana Act”. This proposition was designed to reshape the use and taxation of marijuana in the state in a number of ways including designating specific agencies to regulate and licenses of the marijuana industry in California. Prop 64 also impacts the collection and payment of taxes for the following marijuana business groups defined below:
Step 1: Secure Permits and Licenses
Under the new state law, marijuana businesses will be required to obtain licenses from the state agency listed above. The Bureau of Cannabis Control (BCC) is the agency developing regulations for medicinal marijuana use and those regulations should be available November 2017. Marijuana businesses are highly encouraged to apply for a temporary license from the BCC as soon as the regulations are available. The BCC will also issue temporary licenses which be effective January 1, 2018. In order to secure a temporary license through the BCC, a business must have authorization from a local government (city and/or county) to run a marijuana business in their local community. Temporary licenses will be good for 120 days from the date of issuance.
This proposition imposes specific marijuana excise and cultivation taxes. Prop 64 was later amended by Senate Bill 94 (SB 94) which repealed the Medical Cannabis Regulation and Marijuana Safety Act (MCRSA) while defining the payment and collection of taxes. Below is the breakdown of tax collection and payment between distributors, cultivators, manufacturers and retailers:
Step 2: Register with California Department of Tax and Fee Administration (CDTFA): All marijuana distributors, cultivators, manufacturers and retailers are required to register with the CDTFA for seller’s and tax permits. Seller’s and tax permits are different and require that businesses apply for separate permits. Below is information that will be required for businesses to provide when registering with the CDTFA:
The NAICS number for most medicinal marijuana businesses is classified the same as pharmacies and drug stores therefore the code is 44610. Manufacturers may fall under a different NAICS code, depending on their business activities. The manufacturer section offers additional business code information on their NAICS classification.
Distributor: Marijuana distributors must collect the following taxes: cultivation, excise and sales from the cultivators, manufacturers and retailers.
All business equipment and supplies (computers, signage, etc.) are generally subject to sales tax. Most retailers will collect the tax at the time of purchase. If the distributor is not taxed but the seller of the equipment, they should include the purchase on the “Purchases Subject to Use” tax on the “sales and use tax return”. Supplies like wrapping for marijuana and cannabis products (ex: bags) may fall under resale. The Tax and Fees section of the BOE offers additional information on use tax.
Cultivator: The cultivator must pay the manufacturer and distributor a cultivation tax.
Please note that cultivation tax rate may change. Beginning January 1, 2020, the CDTFA will be required to annually adjust the cultivation tax rate based on inflation.
The cannabis distributor, manufacturer and retailer must provide the cannabis cultivator with a “timely” and “valid” resale certificate. If a resale certificate is not provided a sales tax will be applied to the sale and the cannabis cultivator must report and pay tax to CDTFA. The California State Board of Equalization (BOE) offers additional information on sale for resale in Publication 103.
The following are examples of items considered cannabis cultivator farm equipment and machinery:
Cannabis cultivators who qualify for partial farm equipment exemptions may also qualify for partial exemption on solar power equipment. The state issued a special notice on solar power farm equipment offering additional details.
Manufacturer: The manufacturer must collect taxes from the cultivator and must pay the distributor a cultivation tax.
Please note that cultivation tax rate may change. Beginning January 1, 2020, the CDTFA will be required to annually adjust the cultivation tax rate based on inflation.
Documentation like a receipt or invoice with the following information must be provided for these transactions. The information below should be included:
Retailer: The retailer charges and collects sales tax on “taxable retail sales” marijuana and cannabis products as well as other products. They are also required to collect cannabis excise tax from customers and pay this tax to the distributor.
Exemptions: Effective November 9, 2016 certain sales of medicinal marijuana are exempt from sales and use tax as defined by the Business and Professions code. Some items included are: medical cannabis, medicinal cannabis concentrate, edible medicinal cannabis products or topical cannabis.
Customer must provide their MMI and ID at the time of purchase. Retailers must keep an electronic or paper record of the following information for exempt transactions:
Retailers should not collect sales tax on these purchases and should claim a deduction on sales and use tax return for exempt medicinal marijuana and cannabis products sales.
Purchases: Purchases made on products that will be resold can be made without paying sales or use tax. Retailers must provide the seller a “valid” and “timely” resale certificate. Out-of-state vendors may not apply the California state tax. In this situation the cannabis retailer is responsible for reporting and paying the sales or use tax when they file their return with the CDTFA.
Items for use in a retail business like signage, scales, and computers are subject to sales tax at the time of purchase. Packaging and other supplies may be purchased for resale without paying sales tax.
Step 4: File Taxes: All marijuana business owners must register for a seller’s permit and file sales and use tax returns. Distributors of marijuana and cannabis products must register for a cannabis tax permit and file tax returns regularly.
As of November 9, 2016, certain retail transactions will be exempt from the sales and use tax. The BOE lists examples and the process for recording tax exempt transactions in a “Special Notice”.
California City Taxes for Medical and Recreational Marijuana
In November 2016, California passed Proposition 64 which legalized recreational marijuana in the state of California. At the same time, voters voted on a number of city tax ordinances which were designed to apply local city taxes to the cultivation, manufacturing, distribution, and sales of medical and recreational marijuana.
With 482 municipalities in California in all, dozens of ballot measures were up for vote in November 2016. For several cities, we have provided summaries of each of the tax laws that have been passed below. While this is only a partial list of the measures that were passed it can help you to get a clearer picture of what taxes you will be required to pay based on where you locate your cannabis business.
The California medical sales tax rate is 7.60%. The majority of these ballot measures do not address the sale of recreational marijuana directly because they left it up to the passage of state laws and/or additional city ordinances to determine whether or not recreational cannabis would be considered legal in their municipalities.
With the passage of Proposition 64, in many cases, these city ordinances now also apply to recreational cannabis businesses. For more specific details, please check with each city to determine the exact ordinances that apply to your medical or recreational cannabis business.
On November 8, 2016, California voters opted to legalize cannabis for recreational use through Proposition 64. Proposition 64, known as the Adult Use of Marijuana Act (AUMA) legalizes and regulates recreational cannabis in the state of California. Proposition 64 will also add state taxes for licensed dispensaries and cannabis cultivators.
15% Medical Marijuana Tax
In 2018, all retail sales of cannabis will be subject to a 15% marijuana excise tax. Although the purchaser of the cannabis or cannabis product technically owes the tax, the seller will actually be obligated to collect the tax, as well as, any other sales and use taxes that apply in the state of California. However, there is one exception that makes businesses and customers exempt from this excise tax. That is, if the individual purchasing the medical cannabis or medical cannabis product provides a state-issued Medical Marijuana Identification Card.
Until now, qualified patients and caregivers have not been required to register as medical marijuana patients with the state. However Proposition 64 will require that these individuals obtain the identification cards if they want to be exempted from the excise tax.
Cultivation Tax for Cultivators
In 2018, all licensed cannabis cultivators, excluding those patients and caregivers who cultivate cannabis for personal use, will be required to pay a cultivation tax on all marijuana that is harvested to be sold on the commercial market per the Compassionate Use Act. The tax will be assessed at the rates of $2.75 per ounce of leaves and $9.25 per ounce of flowers.
Local Taxes for Licensed Cannabis Businesses
The Medical Cannabis Regulation and Safety Act (MCRSA) and Proposition 64 will enable California cities and counties to impose local taxes on licensed marijuana businesses. Several municipalities opted to include their own local tax measures on the recreational marijuana ballot for November 8.
In certain Northern California counties, including Calaveras County, Humboldt County, Lake County, and Monterey County, the cultivator taxes will be based on the grow's total square footage. Mendocino County has opted to place two tax measures on the ballot. These measures are from the County's Board of Supervisors and local marijuana advocates. They both suggest a 2.5% tax based on the gross sales of medical marijuana and the latter having a higher 5% tax on recreational sales of cannabis.
In Southern California, a San Diego tax measure proposal looks to tax dispensaries at a rate of 5% that will rise over time to 8% in 2019. However, a Santa Barbara tax measure looks to tax cannabis businesses at a 20% tax rate. Several Southern California towns have already began taxing cannabis businesses. Coachella is set to vote on a tax measure that will add quarterly taxes of up to 6% for gross sales and 15% per square foot.
Under Internal Revenue Code (IRC) Section 280E, no individual is permitted to take a deduction or credit on income taxes if the income resulted from carrying on any trade or business if the business consists of trafficking in controlled substances, such as marijuana, under the Controlled Substances Act (CSA). This section of the IRC was designed to prohibit individuals from taking individual tax deductions from marijuana sales. However, how does federal tax law apply to California corporations, s-corps, LLCs for the purposes of deducting expenses?
California Corporations and the Revenue and Taxation Code
The differences between federal law and California state laws have created an unique situation for California marijuana businesses due to the treatment of income and expenses for personal income tax (individuals and partnerships) versus corporation tax law (including statutory cooperatives).
For individuals and partnerships, Revenue and Taxation Code Section 17282 has prohibited taxpayers from taking deductions on any of his or her gross income as a result of income derived from illegal activities, including drug trafficking. However, the taxpayer must be found to have engaged in these activities first due to a criminal or other proceeding in which the state, county, city, or other subdivision was a party.
For corporations, including statutory cooperatives, California has enacted a stand-alone law. A statutory cooperative is a cooperative that has organized and registered as a corporation under the Corporations or Food and Agricultural Code (Id. at Section 12311(b)).
According to California tax law, an entity that is taxed as a corporation per Part 11 of the Revenue and Taxation Code and is also involved in medical marijuana activity is permitted to deduct its ordinary and necessary businesses expenses, along with the cost of goods sold, provided that the entity can substantiate any deductions that it claims with adequate records.
How California Classifies C Corporations, S Corporations, and LLCs
In California, a C corporation refers to an entity that is doing business in California, organized in California, or registered with the California Secretary of State. A C Corporation is business entity that is taxed as a separate entity from its shareholders. The C Corporation pays corporate taxes on its profits while the shareholders are not taxed on the C corporation's profits. The shareholders of a C corporation only report and pay taxes on the income that is paid to them by the corporation.
In addition, California also has specific definitions for corporations that are S corporations or LLCs:
The owners of LLCs that have not made the election for the LLC to be classified as a corporation for federal tax purposes are not required to pay a salary so they can take their earnings as distributions. Therefore, when they report the net income for the LLC, there may be no salary expenses to be disallowed under Section 280E. Additionally, if the owners are involved in the selling, marketing or delivery of marijuana and they do take a salary, this salary expense is disallowed under Section 280E.
However, if the LLC is taxed as a C corporation, the LLC owners are required to pay themselves reasonable salaries, and this salary expense may be disallowed under Section 280E.
California Tax Law Does Not Automatically Conform to Federal Tax Law
In California, individuals are bound by the provisions of Section 280-E. However, this tax law does not automatically conform for corporations. This is due to the fact that California law has not been designed to conform to changes in federal tax law, except under specific circumstances. Instead, California policy makers are required to affirmatively conform to changes in federal tax law.
However, legislative sessions in California do not systematically address nonconformity with federal law and they haven’t in sometime. In fact, the last time that California policy makers agreed to address nonconformities with federal tax laws on an annual basis occurred from the years 1982 through 1992. Beginning in 1992, the California Legislature stopped enacting annual conformity bills that were designed to require policymakers to act on federal tax law changes by a specified date each year.
As a result, several nonconformity issues, such as the nonconformity of California corporations with Section 280-E of the IRC, have gone unaddressed.
When it comes to taxes, many hemp businesses are unsure about Internal Revenue Code Section 280-E and whether or not it applies to their businesses. Section 280-E was passed in order to prevent drug dealers from taking business deductions on income from trafficking in controlled substances, like cocaine and marijuana. Here is what you should know about growing hemp versus marijuana and its application to 280-E.
The cultivation of hemp has been considered by the federal government to be a violation of the Controlled Substances Act because hemp is botanically related to marijuana. In addition, hemp also contains low levels of THC, which is the same psychoactive substance found in marijuana. These properties are why the government sought to include hemp by default in the Controlled Substances Act.
The government did make some distinction between hemp and marijuana with the passage of the Agricultural Act of 2014, which removed the federal restrictions on growing industrial hemp and permitted any states that have legalized the manufacturing of hemp to set up research programs in order to study the benefits of cultivating hemp.
Since the federal government has failed to create an exception for hemp in the list of Schedule I substances of the Controlled Substances Act, Section 280-E still applies to hemp growers and hemp distribution businesses.
As a result, hemp growers still face the same restrictions on permitted deductions as marijuana growers when it comes to taxation. The full list of deductions that are available to hemp growers can be found here.
In the same way that hemp growers are treated like marijuana growers for taxation purposes, hemp distributors must also follow the same rules as marijuana distributors. The full list of deductions that are available to hemp distributors can be found here.
The IRS is getting tough on cannabis business in Colorado and is going after cannabis entrepreneurs who failed to fill out Form 8300. If you want to avoid being audited by the IRS, it is important for you to stay on top of these filings. Here is what Form 8300 is and why it is important.
What Is Form 8300?
Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is a form used by the federal government to keep track of cash payments of more than $10,000. These filings are designed to assist law enforcement in investigating and preventing money laundering, tax evasion, drug dealing, financing of terrorism activities, and other criminal acts.
For purposes of Form 8300, cash doesn't only include U.S. dollar coins and bills and foreign currency notes; it may also include cashier's checks, bank drafts, traveler's checks, and money orders if the face value is $10,000 or less.
These filings are designed to assist law enforcement in investigating and preventing money laundering, tax evasion, drug dealing, financing of terrorism activities, and other criminal acts.
Who Must File Form 8300?
Every person who engages in a trade or business and also receives more than $10,000 in cash in a single transaction or in two or more related transactions is required to file Form 8300. Transactions that are considered related transactions are those that are conducted between a payer (or its agent) in a 24-hour period. The transactions may also be considered related if the recipient of the payment knows that each transaction is a part of a series of transactions.
The IRS has also issued IRS Form 8300 Reference Guide to help you determine which transactions qualify as reportable transactions. Cash doesn't only include U.S. dollar coins and bills and foreign currency notes. It may also include cashier's checks, bank drafts, traveler's checks, and money orders if the face value is $10,000 or less.
Form 8300 Filing Examples
Here are two examples to help you understand when you need to file Form 8300:
Example 1. Jack asks an employee to purchase cannabis for his dispensary. The employee orders the product in two shipments and he pays with two cash payments, each for $6,000. The cannabis grow business who received more than $10,000 in the designated reporting transaction must file Form 8300.
Example 2. A cannabis supply shop sells growing equipment for $9,000 in cash to Adam at 10 a.m. During the afternoon on the same day, Adam returns to buy more equipment and pays an additional $9,000 in cash. Since, both transactions occurred within a 24-hour period, they are related transactions and the grow equipment supplier must file Form 8300.
When Do I File Form 8300?
Each time you receive a payment that meets the criteria for filing Form 8300, you must file the form for the transaction within 15 days of receiving the payment. You can file online using the Bank Secrecy Act (BSA) Electronic Filing (E-Filing) System at the FinCEN website.
What Are the Penalties for Failing to File Form 8300?
If you simply fail to file Form 8300 on time, a penalty of $250 per occurrence will be assessed. This penalty is capped at $1,000,000 per year for businesses with gross receipts not exceeding $5 million. If you fix the error and make sure that the forms are filed within 30 days of the deadline, then this penalty limited is reduced to $175,000 per year for businesses with gross receipts not exceeding $5 million. However, if your business grosses more than $5 million, then the penalty cap increases to $3 million.
However, if you intentionally fail to file Form 8300, the penalty increases to $25,000 of the total amount of the transaction, up to a maximum of $100,000 for each time that you failed to file. In addition, felony charges may be brought against you in more severe cases. Criminal penalties will be applied by default if you structure or appear to structure payments in order to avoid filing Form 8300 for the transactions.