New California Cannabis Taxes Begin January 2018

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

Background:

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:

• Distributors: produces, sells and/or transports marijuana between licensed marijuana businesses such as cultivators, manufacturers or retailers
• Cultivators:  engages in the business of planting, growing, harvesting, drying, curing, grading or trimming marijuana
• Manufacturers:  produces or prepares cannabis products at a fixed location that packages or repackages marijuana or cannabis products or labels or relabels its container
• Retailer (Dispensary):  sells marijuana or cannabis products directly to consumers

Step 1: Secure Permits and Licenses

• Local permits and/or licenses: All marijuana distributors, cultivators, manufacturers and retailers must contact the local jurisdiction in which they plan to operate their business and apply for the appropriate permits and/or licenses.  Each city and/or jurisdiction has their own process.  It is important for distributors to secure the local permit by following their process and paying any applicable fees.
• State Licenses:  All marijuana distributors, cultivators, manufacturers and retailers must contact the appropriate state agency (listed below) to secure the appropriate license/permit for their business.  

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:

• Business Information (name, contact information)
• Federal and state tax identification numbers
• North American Industry Classification Number (NAICS)

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. 

• Cultivation Tax Collection:  Distributors must collect cultivation taxes from retailer, manufacturers and/or cultivators from which they receive any marijuana and/or cannabis products.  The process for the cultivation tax is different for the cultivator and manufacturer. They are applied the following ways:
  • Cultivator: The cultivation tax is collected when the product is “harvested” and “entering the commercial market” after it has met all quality assurance and testing standards
  • Manufacturer:  The cultivation tax is collected when the product is first “sold or transferred” to the distributor for quality assurance, inspection and testing
  • There are two cultivation tax rates: 
    • $9.25 per dry-weight once of cannabis flowers
    • $2.75 per dry-weight ounce of cannabis leaves  
  • 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:
  • Licensee receiving the product
  • Cultivator where the product originates with the product identifier number
  • Amount of cultivation tax

 

• Excise Tax Collection:  Distributors are required collect excise taxes from retailers that they supply (sell and/or transport) with marijuana or cannabis products.
  • The excise tax must be collected within 90 days of the sale or transfer of marijuana or cannabis products in an arm’s length transaction.  The state of California defines an arm’s length transaction as a sale “that reflects the fair market price in the open market between two informed and willing parties”.  If the sale is “no arm’s length” the taxes must be collected from the retailer on or before 90 days after the sale or transfer of marijuana or cannabis product to the retailer or at the time of the retail sale by the cannabis retailer, which ever is earlier.   from the retailer on or before 90 days after the sale or transfer of cannabis or cannabis product to the retailer, or at the time of the retail sale by the cannabis retailer, whichever is earlier.from the retailer on or before 90 days after the sale or transfer of cannabis or cannabis product to the retailer, or at the time of the retail sale by the cannabis retailer, whichever is earlier.from the retailer on or before 90 days after the sale or transfer of cannabis or cannabis product to the retailer, or at the time of the retail sale by the cannabis retailer, whichever is earlier.the retailer on or before 90 days after the sale or transfer of cannabis or cannabis product to the retailer, or at the time of the retail sale by the cannabis retailer, whichever is earlier.from the retailer on or before 90 days after the sale or transfer of cannabis or cannabis product to the retailer, or at the time of the retail sale by the cannabis retailer, whichever is earlier.
  • Like with the cultivation tax, distributors must provide documentation like a receipt or invoice with the following information must be provided:
    • Licensee receiving the product
    • Cultivator where the product originates with the product identifier number
    • Amount of cultivation tax

 

• Sales Tax Collection: Distributors are responsible for transporting marijuana and cannabis products between cannabis businesses and are responsible for filing returns and reports with the CDTFA. 
  • The customer (ex: retailer) must provide the marijuana distributor with a valid and “timely” resale certificate whether sales are subject to tax or not.  The resale document supports the sales for the resale.  If the resale document is not provided all sales are assumed to be taxable and will be taxed.  The California State Board of Equalization (BOE) offers additional information on “sales for resale” in Publication 103.
  • Distributors are not subject to sales tax when transporting marijuana or cannabis products from cultivators or manufacturers that the retailers contract with directly.
  • It is important that all marijuana or cannabis products sales or transportation by the distributor is recorded through invoice or receipt.  This will assist the distributor in filing their returns. 

 

• Additional Tax Collection Information: 
  • Any purchases of product that distributors make that will be resold are not subject to sales or use tax as long as they provide the seller with a “valid” and “timely” resale certificate.  Distributors essentially take on the role of retailers in this transaction. 

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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.    

• Sales:  Cannabis Cultivators are subject to the cannabis cultivation tax when they sell to a distributor, manufacturer or retailer.  There are two cultivation tax rates: 
  • $9.25 per dry-weight once of cannabis flowers
  • $2.75 per dry-weight ounce of cannabis leaves 

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. 

• Purchases:  Most purchases made by cannabis cultivators will be subject to a sale or use tax.  There some cases when some supplies and products may not be taxable or may qualify for a partial tax exemption.
  • Use or Sales Tax Items: General cannabis cultivation business items (ex: computers, gloves, pesticides) will be subject to a sale or use tax at the time of purchase.  Vendors are responsible for collecting the taxes on these items. Out-of-state vendors may not apply the California state tax. In this situation the cannabis cultivator is responsible for reporting and paying the sales or use tax when they file their return with the CDTFA. 
  • Partially Exempt Use or Sales Tax Items:
    • Farming Equipment and Machinery:  Cannabis cultivators may qualify for a partial exemption rate available through the state general fund.  The current rate is 5% meaning that if the tax is 7% the partial rate is subtracted from the tax so the taxes paid by the cultivator will be 2%.  To qualify for this partial exemption, the following requirements must be met: Sold to a qualified person.
      • Sold to a qualified person
      • Used exclusively or primarily (50 percent or more of the time) for producing or harvesting agricultural products
      • Defined as farm equipment or machinery including but not limited to appliance, device or apparatus used in agricultural operations

The following are examples of items considered cannabis cultivator farm equipment and machinery:
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• Plant equipment
• Trimming tools
• Drying racks and trays
• Hydroponic equipment

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. 

• Buildings:  Facilities, like greenhouses, specifically designed for and exclusively use for commercially raising plants may qualify for a partial exemption. Vendors should provide the cannabis cultivator with a partial exemption certificate.
• Diesel Fuel:  Diesel fuel used to prepare land for planting, protecting, harvesting and/or growing crops may also qualify for a partial exemption.  According to the state of California, to qualify for this exemption the fuel must be used “in carrying on a trade or business of farming; on a farm in California; and for farming purposes, by the owner, tenant, or operator of the farm.”
• Exempt Items:  The following items are exempt from use and sales taxes:
  • Seeds, plants and clones:  Seeds, plants and clones grown to be resold as part of the cannabis business do not have an applicable sales and use tax
  • Fertilizers: Fertilizers used to produce cannabis products.
  • Liquid Petroleum Gas (LPG): LPG used for commercial cannabis crop production or harvest.  The seller should provide the cannabis cultivator with an LPG exemption certificate.  

Manufacturer: The manufacturer must collect taxes from the cultivator and must pay the distributor a cultivation tax. 

• Cultivation Tax Collection and Payment:   Cannabis manufacturers are required to collect the cannabis cultivation tax from cultivators when the “unprocessed cannabis is first sold or transferred” to the manufacturer.  Manufacturers are then required to pay the cultivation tax collected from the cultivator to the distributor when products are transported for distribution.  There are two cultivation tax rates: 
  • $9.25 per dry-weight once of cannabis flowers
  • $2.75 per dry-weight ounce of cannabis leaves 

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:

• Licensee receiving the product
• Cultivator where the product originates with the product identifier number
• Amount of cultivation tax

 

• Purchases:
  • When manufacturers purchase a product that will be resold they can purchase it without paying sales and use tax by providing seller with a valid resale certificate.  Sales tax apply if the product is sold at retail. Products consumed or used by the manufacturer will be taxed based upon the amount of the purchase price.  According to the CDTFA, “use tax rate is the same as the sales tax rate in effect at the location of use”.  They can be reported as a “purchase subject to use” when the tax return is filed.
  • Products (signs, display cards, scales, computers) for your business are subject to sales tax at time of purchase.  Out of state purchases, not taxed must be included on “Purchases Subject to Use Tax” and are subject to tax.  Wrapping and packing supplies may be purchased for resale and therefore may not be subject use tax.
  • Manufacturing and Research and Development Partial Exemption:  Manufacturers may qualify for partial exemption of sales and use tax on certain manufacturing and research development equipment purchases and leases.  The state outlined the following requirements:
    • Be engaged in certain types of businesses, “qualified person”.  A qualified person is primarily engaged (50% or more of their time) in business activities that fall under NAICS codes “3111 to 3399, inclusive 54711, or 541712”.
    • Purchase “qualified tangible personal property” as outlined below:
      • Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures
      • Equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, but not limited to, computers, data-processing equipment, and computer software, together with all repair and replacement parts with a useful life of one or more years, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the qualified person or another party.
      • Tangible personal property used in pollution control that meets standards established by this state or any local or regional governmental agency within this state.
      • Special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes. Buildings used solely for warehousing purposes after completion of those processes are not included.
    • Use the property in a qualified manner which includes the following 50% or more of the time:
      • Any stage of the manufacturing, processing, refining, fabricating, or recycling process
      • Research and development
      • To maintain, repair, measure, or test any qualified tangible personal property described by the above, or
      • For use by a contractor purchasing that property for use in the performance of a construction contract for a qualified person, provided that the qualified person will use the resulting improvement to real property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process or as a research or storage facility for use in connection with those processes.

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.

Sales: 

• Beginning January 1, 2018 all marijuana and cannabis products (including medicinal) will be subject to an excise tax of 15 percent.  The excise tax is collected from customers and paid to distributors.  Retailer must collect the excise tax at the time of purchase.  Below is a list of products included in the excise tax:
  • Balms
  • Buds and flowers
  • Capsules
  • Edibles (cookies, butters, honey, chocolates, candies, soda, bars)
  • Extracts
  • Gum
  • Hash
  • Infused feminine hygiene products
  • Lotions
  • Oils
  • Plants and clones
  • Pre-rolls
  • Teas
  • Tinctures
  • Tonics
  • Topicals
  • Waxes
• Cannabis accessories are not subject to the excise tax
• The excise tax applies to the average market price which is determined by the type of transaction between the retailer and seller (cultivator, manufacturer or distributor).  Those transactions are:
  • Arm’s length, when the “average retail price is determined by the wholesale cost of the cannabis or cannabis product sold or transferred to the cannabis retailer, plus mark-up”.  Marijuana businesses will be notified when the mark-up rate is set.  The set rate will be posted on the BOE’s Special Taxes and Fees Rate Page. 
  • Non-arm’s length, the average market price means the “cannabis retailer’s gross receipts from retail sale of the cannabis or cannabis products.    
• Customers with valid Medical Marijuana Identification cards (MMI) and government issued identification (ID) are exempt from sales tax
• Retailers are not required to collect sales taxes from their customers but they must report and pay sales taxes to CDTFA.  If retailers choose to include sales tax in their product price, they must post visible signage explaining this to the customer. Otherwise, the sales tax will be on the sale’s price and added to the receipt.  

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:

• A valid nine-digit MMI number with expiration date (visit the CDPH website to validate MMI numbers)
• Sales invoice or other original record of sale

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. 

• Registration:  Marijuana businesses can create an online profile to file and manage their taxes and update any business information.  Electronic payments can be made through the online system as well.  Businesses paying with cash can file for an exemption to the “No Cash” policy.  This exemption requires business owners to explain their financial situation and their lack of a bank account and access to other payment options.
• Documentation:  Record keeping is an extremely important component of the tax process.  All marijuana businesses are required by law to keep accurate business records which helps determine the amount taxes due.  Records should be kept on all purchases and sales transactions to assist in preparation of tax filing.  The state requires that distributors retain all records for at least four years.  The state suggests the following as options for record keeping:
  • Sales invoices
  • Cash register tapes
  • Sales journals
  • Resale certificates
  • Shipping documents
  • Purchase invoices
  • Bank records
  • Purchase orders
  • Purchase journals
  • Tax returns
• Sales invoices and receipts should include the following information:
  • Location of transportation
  • Cost to purchaser (include any discounts)
  • Kind, quantity, size and capacity of package of marijuana and/or cannabis products sold
  • Name and address of purchaser
  • Name and address of seller

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”.

​Additional Information:

• The State of California recognizes that the tax laws can be very complex and difficult to understand.  They encourage all businesses to contact them in writing with any questions about tax laws.  This correspondence with the CDTFA will protect businesses in case them receive erroneous information. 
• CDTFA offers free education consultations for new businesses or business with questions.  Someone from their office will visit the business.  This visit includes advice on procedures on reporting and paying sales and use taxes.  Consultations can be scheduled by ​emailing the CDTFA.