How to Calculate Cannabis Sales and Excise Taxes

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:

• State tax
• District taxes
• City and county taxes

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:

• Arm’s length transaction: this is a transaction made between two informed and willing parties. The payment received by the retailer must reflect the fair market value of the cannabis or cannabis products in the open market. Here, average market price is defined as the wholesale cost plus a mark-up.
  • How do you know the wholesale cost? This is the amount you pay for the cannabis products, including transportation costs and adding back in discounts or trade allowances. For example, if you purchase a cannabis product at $100, and pay $50 to have the product shipped to you, the wholesale cost will be $150.
  • How do you know the mark-up rate? Simple. As of January 1, 2018, the standard mark-up rate is 60% for cannabis and cannabis products. The CDTFA reevaluates the markup every six months, so stay tuned for changes. Keep in mind that this rate is only relevant during an arm’s length transaction, and retailers may put any markup they like on a retail selling price.

 

• Non-arm’s length transaction: this is a transaction where the average market price is defined as the retailer’s total gross receipts from the retail sale. For example, if your business is both a retailer and a distributor of cannabis products, you are probably using a non-arm’s length transaction to sell your goods.

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.