As you know, cannabis operators have to pay many different taxes.
From sales tax to excise tax, the system is quite complex; and once your cannabis company starts to thrive, the tax system becomes even more complicated.
California’s sales tax is a great example of where successful cannabis entrepreneurs get tripped up with being compliant while maximizing their profit.
California’s state sales tax for cannabis operators is 7.25% – 6% state tax, plus a 1.25% mandatory local tax. Depending on where your business is located, the local tax may be an additional 3% to well over 10%.
For cannabis operators who are achieving a certain amount of sales each month, you will be required to pay the sales tax monthly, rather than quarterly.
Here’s how the process works, and how our experts can help you manage your tax burden more effectively.
Why is proper tax reporting important?
As the saying goes, there are two things certain in life: death and taxes.
Taxes are the number one reason why most cannabis companies fail; the IRS is not shy about auditing cannabis operators, and the 280E is one of the primary tools the government uses to penalize cannabis ventures.
This burdensome 280E regulation makes a lot of money for the IRS in the form of fees and fines; so much so that Colorado is able to fix roads that aren’t even broken because they have so much tax revenue.
It’s important to protect you business as much as possible from the tax authorities; and the first step is to understanding cannabis sales tax and commit to paying your taxes monthly.
As a side note: having a CPA prepare your taxes is best because they will use an accepted methodology for their calculations that can then be used as exhibits during a potential audit.
What is cannabis sales tax?
As previously mentioned, the state sales tax rate varies slightly depending on where you are. Most cannabis organizations can expect to pay 8% - 10% of sales. Sales tax is charged at the cannabis dispensary on top of the sales price and the cannabis business tax. Here is a breakdown of cannabis tax calculations for California.
Cannabis sales tax in California is paid to the CDTFA. When you apply for a sales tax permit, the Administration will ask you a series of questions to see what your payment schedule should be.
Typically, most companies pay their taxes quarterly – meaning that taxes are due April 30, July 31, October 31, and January 31 for the periods Q1, Q2, Q3, and Q4 (respectively). If you have low sales volume (meaning less than $5,000 in sales), the CDTFA may put you on an annual payment schedule.
For successful, high sales organizations, it’s likely that you will be asked to pay sales tax monthly to the city and state. Here’s what that process looks like and why it’s best to have an experienced CPA calculate your payments for you.
How to calculate sales tax for the state
In our experience, some clients are asked to pre-pay sales tax every single month because they have such high cannabis sales. How does this work?
In this instance, the cannabis operator must pay estimated payments for month one and month two of the quarter. Then, when the quarterly return is filed, the CPA firm squares up discrepancies from the first two months of the quarter into the third month’s payment.
How do we estimate your month one and two sales?
The GreenGrowth CPAs usually look at your POS software on the 20th day of the month to see your current run rate, and in addition compare that rate to the past year for the month we are evaluating.
From there, we create an estimate of the monthly of ABC$$ to the CDTFA, thereby covering your state taxes.
The CDTFA will now let you know that you are subject to pre-payments or any changes to the frequency of your payments.
If you don’t make payments on time, then penalties and interest will be assessed. Note that these penalties are compounding – so if you are faced with a fine, pay it right away.
How to calculate sales tax for your local jurisdiction
In addition to paying your state sales tax, cannabis operators must also pay city sales tax. This rate and due date varies depending on your location.
For example, if you are based in the city of Vallejo, you are required to file a monthly return based on gross receipts, rather than sales. These are due by the 20th or 25th of the following month. Get in touch with our experts or the local tax authority to make sure you know the deadline and cannabis sales tax rate you are responsible for.
There’s a lot of confusion and grey area when preparing for your tax payments to the city – mostly because cannabis is an all-cash industry, and most cities aren’t equipped to process monthly payments of cash.
Most cities have self-reporting taxes with no audits required (yet). It’s likely, however, that California cities are missing out on major tax revenue, and as a result will insist on proper reporting and auditing in the future. It’s best to be rigorous about your tax payments to make sure there are no issues down the road.
How can you make sure you’re paying the right amount?
Make sure you’re instituting great cash-handling practices and create strong SOPs. Despite having little to no access to a bank account, manage your cash responsibly to make sure everything balances correctly.
Plan ahead: if you're looking at your cash or bank account, start setting up an account or repository for taxes. Put money aside each week so that you’re not forced to come up with a large sum of cash all at once.
To give yourself total peace of mind, engage an accountant with specific cannabis-industry experience who can give you monthly guidance and be by your side in the event that you get audited by the city, state or federal government. Click the button below to get started with one of our experts.