Now that marijuana is legal in California, you had better believe the government wants its share of all the green. That is, all the money that'll be rolling in as a result of state, city, and county taxes.
Heavy-handed state regulation of marijuana sales comes as no surprise. In fact, we've already seen it play out in Colorado, Washington, and other states that have legalized marijuana. But unfortunately for cannabis business owners, comprehensive resources that spell out state and local tax obligations are limited at best.
With so much at stake as we wade into new territory, it's important that you understand how to register your business, calculate and remit taxes, and stay sales tax compliant.
To help you set your business up for continued compliance, we put together this handy guide with info on everything you need to know about California cannabis sales tax.
- Testing Lab, Dispensary, Distributor, Microbusiness, Event Organizer, and Transporter
- Cultivators / Growers
- Manufacturers (Edibles and Concentrates)
REGISTERING YOUR BUSINESS
Who do I need to register with and what permits do I need?
This graphic, provided by the California Department of Tax and Fee Administration (CDTFA), breaks it down by business type:
In addition to registering for the required CDFTA permit(s) outlined above, you also need to obtain the appropriate cannabis license(s) for your business. More on that below...
LICENSING YOUR BUSINESS
In addition to registering with the state, you must also apply for the appropriate licenses to legally run your cannabis business.
Who's eligible to receive a state cannabis business license?
Per the Medicinal and Adult-Use Cannabis Regulation and Safety Act:
- Cannabis businesses that have already acquired the appropriate licenses or permits from their local jurisdiction may apply for state licenses
- Once issued, businesses operating under a valid state license may choose any form of valid business structure for their business.
- Business can operate on a for-profit or not-for-profit basis
Use the information below to determine which of the three state agencies you need to license your business through, based on what type of establishment you operate or plan to operate.
1). Bureau of Cannabis Control
License Types Offered
Facilities involved in the comprehensive testing of cannabis will typically test cannabis for residual solvents, physical and microbial contamination, potency, and terpenes.
Government regulated retail location where people can purchase cannabis and cannabis related items for medical or recreational (aka adult) use.
The middleman between growers, and dispensaries. Services may vary, but distributors often handle packaging, labeling, and cannabis order fulfillment for retailers.
Provides secure transport and delivery services for dispensary owners, cultivators, and the like.
Cannabis Event Organizer:
License required to create and host cannabis events that allow the public to attend. To host an event, you must obtain a license and get written approval from the local jurisdiction that authorizes you to engage in onsite cannabis sales to, and onsite consumption by, persons 21 years of age or older.
Act as a retailer, distributor, manufacturer (Level 1), and cultivator (on an area less than 10,000 sq. ft). Must engage in at least three of the following commercial cannabis business activities:
-- Retailer or Retailer – Non-Storefront
-- Distributor or Distributor – Transport Only
-- Cultivation (less than 10,000 sq. ft.)
-- Manufacturer (Level 1, Type 6)
2). CalCannabis Cultivation Licensing
- Website: calcannabis.cdfa.ca.gov
- Phone: (1-833-CALGROW) 1-833-225-4769
- Email: CalCannabis@cdfa.ca.gov
- Apply Now
License Types Offered
Any activity involving planting, growing, harvesting, drying, curing, grading, or trimming cannabis.
$1,000 nonrefundable application fee per category.
3). California Department of Public Health
- Website: calcannabis.cdfa.ca.gov
- Phone: (1-833-CALGROW) 1-833-225-4769
- Email: CalCannabis@cdfa.ca.gov
License Types Offered
Facility that creates cannabis food products and/or cannabis concentrates
Many dispensaries sell edible gummies, brownies, and other treats with measured amounts of THC in them. Each edible item is manufactured, tested, and labeled before being sold to customers for recreational (adult) or medical use.
Surety bond certificate in the amount of $5,000 made payable to the State of California.
CURRENT TAX RATES
California has two basic categories of tax rates; one for growers and one for distributors.
- $9.25 per ounce of marijuana flowers: Includes all dried flowers of the cannabis plant, whether trimmed or untrimmed)
- $2.75 per ounce of leaves: Includes all parts of the dried cannabis plant other than flowers that are consumed or sold)
- $1.29 per ounce of fresh cannabis plant: Includes flowers, leaves, or a combination of adjoined flowers, leaves, stems, and stalks of the unprocessed fresh cannabis plant. To qualify for the "fresh" plant category, the unprocessed cannabis must be weighed within two hours of harvesting.
According to their website, the CDTFA is required to adjust the cultivation tax rates annually to account for inflation beginning January 1, 2020. Registered cannabis businesses will receive a notice of rate changes in the mail.
- 8-10.25% - state base tax (7.25%) + local tax (varies)
(Need to confirm your sales tax rate? Look it up by zip code here).
- 15% excise tax on the average market price of the product
- 5-15% cannabis business tax (varies by city / county; some counties are exempt). Typically supports local programs.
Understanding Excise Tax
- Excise tax is a business tax paid by retailers, to their distributors
- Applies to all legal cannabis sales; medical and adult-use
- Most commonly absorbed by adding to retail markup
- Money goes to state - is used to support state programs
- Different than a standard sales or use tax as it only applies to very specific items (ex; cigarettes, gasoline)
You are not required to itemize the amount of cannabis excise tax collected from your customer on the receipt; however, you must include the following statement on the invoice or receipt: "The cannabis excise taxes are included in the total amount of the invoice."
Cannabis accessories; i.e., pipes, storage boxes, grinders, and rolling papers, are not subject to the 15% cannabis excise tax. However, they are subject to sales tax and must be reported on your state return.
From the CDTFA website:
Beginning January 1, 2018, licensed distributors who supply you with cannabis or cannabis products are required to calculate and collect the 15% cannabis excise tax from you. When you sell items at retail, you're required to collect cannabis excise tax from your customer.
To collect the excise tax from your customers, apply the 15 percent excise tax to the "average market price." The average market price can be calculated using:
- Gross receipts (retail selling price to a customer)
- Wholesale cost + CDTFA markup (supplier transactions)
- Retail sale to a customer
- Wholesale transaction with a supplier
1. Retail sale - calculate excise tax based on gross receipts:
- Retail price $100.00
- 15% excise tax ($100 × 15%) $15.00
- Gross sum total ($100 + $15) $115.00
- 8% state + local sales tax ($115 × 8%) $9.20
- Total amount due ($115 + $9.20) $124.20
MORE DETAILS ON RETAIL TRANSACTIONS
- The $15.00 excise tax collected from your customer gets passed on to your licensed distributor.
- Sales tax is calculated on your gross receipt (after excise tax has been factored in).
- You must report and pay the $9.20 in sales tax on the quarterly sales and must file a use tax return with the CDTFA.
Excise tax on retail sales can be calculated using gross sales receipts. However, excise tax on wholesale transactions require you to use a predetermined markup set by the CDTFA.
2. Wholesale transaction with supplier; a 60% CDTFA markup
- Wholesale cost: $75.00
- 60% CDTFA markup ($75 × 60%): $45.00
- Average market price ($75 + $45): $120.00
- 15% Excise Tax Due ($120 × 15%): $18.00
MORE DETAILS ON WHOLESALE TRANSACTIONS
- You must pay the 15% excise tax collected from your customer to a licensed distributor with whom you have a business relationship.
- Only applicable on "arm's length" transactions between a retailer and a supplier; not valid on retail sales direct to the end user.
If California follows the trend of other legal states, marijuana prices will begin to fall as production and supply increase.
CALIFORNIA SALES TAX REGULATIONS
Who pays sales tax?
Both growers and distributors are required to pay taxes on cannabis.
Are there exemptions?
Medical patients with valid a state-issued medical marijuana card are exempt from paying state sales tax; recreational (adult) users are required to pay it. However, medical users must still pay a 15% excise tax and any local or county taxes.
How do cultivators and retailers stay compliant?
- Make sure you're registered with the state and that you've obtained all required seller's permits and business licenses.
- Verify rates and collect tax at the correct rate (applies to state + local taxing jurisdictions) as outlined above.
- Remit taxes on time to avoid penalties.
- As a distributor of cannabis and cannabis products, you must e-file your CDTFA tax return.
- The cannabis tax return is due on the last day of the month following the reporting period.
- Your cannabis tax account is separate from other accounts you may have with the CDTFA.
Enlist the help of sales tax experts and focus on growing your profits instead of managing tax compliance!
Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA, SB 94) passed on June 27, 2017
This legislation was designed to provide comprehensive control and regulation of medicinal and adult-use cannabis and related products.
MAUCRSA also defines the power and duties of various state agencies responsible for controlling and regulating the commercial medicinal and adult-use cannabis industry.
More specifically, MAUCRSA contains detailed information on the following:
Questions? Check out this document, drafted by the Cal Grower's Association, for a more detailed breakdown of every policy outlined in the MAUCRSA.
More Information on Cannabis Policy from CA.gov:
The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California.
California’s three state cannabis licensing authorities have announced the publication of proposed regulations in the California Regulatory Notice Register, the first step toward adopting non-emergency regulations. This publication is the start of the formal rulemaking process and marks the opening of the 45-day public comment period.
Emergency Cannabis Regulations
Detailed documents outlining existing emergency regulations, which are in place until non-emergency regulations are approved, can be found here. Proposed non-emergency regulations and rulemaking documents from each of California's three cannabis licensing authorities can also be found here.
Information on when, where, and how to give feedback on both existing emergency cannabis regulations and proposed non-emergency cannabis regulations.
Links to all active cannabis legislation documents, including MAUCRSA, Assembly Bill No. 133, Proposition 64: “Adult Use of Marijuana Act,” Proposition 64: Official Title and Summary, and more.
Cannabis Regulations by County:
A searchable list of all current county policies and regulations regarding the use and sale of cannabis.
STATE TAX FILING SCHEDULEYour filing frequency will be determined based on your expected taxable annual sales. The CDTFA assigns a filing frequency (quarterly prepay, quarterly, monthly, fiscal yearly, yearly) based on your reported sales tax or your anticipated taxable sales at the time of registration. General quarterly due dates are as follows:
Always verify your filing deadlines with your local tax jurisdiction(s) and be sure to set reminders to file on time. Doing so will allow you to avoid costly penalties, fees, and interest charges.
COMMON SALES TAX COMPLIANCE MISTAKES TO AVOID
Do not file late or neglect to file:
File sales tax returns and pay any sales and use tax to the CDTFA by the filing deadlines provided to you. If your filing due date falls on a weekend or state holiday, the due date is extended to the next business day.
Do not plan to file by mail:
THE CDTFA requires that you file both your cannabis tax and sales and use tax returns electronically. You can register for an account here.
Do not forget about excise tax:
If you're a cannabis distributor, collect excise tax from retailers you supply and collect the cultivation tax from growers, suppliers, and manufacturers that send or transfer cannabis and cannabis products to you.
Do not forget about medical marijuana exemptions:
Buyers with a state-issued medical marijuana ID are exempt from paying state tax, but still have to pay excise tax.
SALES TAX COMPLIANCE TIP:
Even if none of your sales are subject to sales tax, you are still required to file a return and report your activities on your return to the CDTFA.
HELPFUL RESOURCE LINKSUse these resources to learn more about filing schedules, how to file, how to notify the state of business changes, and how to request a free educational sales tax consultation from a CDTFA representative.
- State Sales Tax Return Filing Deadlines
- File a Tax Return Online
- Notice of Business Change
- Free Educational State Sales Tax Consultation
CALIFORNIA SALES TAX PENALTIES
According to the State of California Board of Equalization, the following issues can result in interest and penalty charges:
- File a late return and/or make a late payment
- Don't include a payment or sufficient payment with your balance-due return
- Don't report tax on a taxable transaction
- Calculate tax at the incorrect rate
- Don't file a return
- Operate a business without the required BOE-issued permits or licenses
- Misuse a resale certificate or make sales without a valid permit
- Knowingly collect sales tax reimbursement or use tax (tax) and fail to pay state tax
- 10% penalty if you don't file your tax return by its due date.
- 10% penalty if your tax payment is late + interest charges. Interest is due for each month or fraction of a month the tax payment is overdue.
MORE INFORMATION ON LATE AND NONFILING PENALTIES
The CDTFA calculates interest and penalty charges on late returns. However, it's important to note that if you file a late return and make a late payment, your penalty will not exceed 10% of the amount of tax due for the reporting period
Learn more about penalties and fees (and how to avoid them) here.
CALIFORNIA TAX PENALTY FAQ
What should I do if I miss a filing deadline?
If you miss a deadline, file your return as soon as possible! Interest is accrued on a compounding basis, so time is of the essence.
What can I do to make sure I avoid penalties and fees?
Follow these simple steps to avoid facing costly penalties:
Make sure you understand your filing schedule and set reminders so you don’t miss any filing deadlines.
Watch out for holiday weekends and schedule early payment reminders accordingly.
Always double-check that you have enough cash to cover your payment to avoid insufficient funds fees and interest.
Verify routing and account numbers and double check your tax rates and math before you send in your return.
Hire sales tax experts to file returns and manage compliance on your behalf.
This may seem like a lot of information to keep straight - because it is. If you don't have time to sort it all out or if you need reassurance that you're doing everything right, consider hiring help.
Leaving the complicated legal stuff to the experts is a no-brainer if you’re new to compliance, or even if you just want to focus on growing your green - both by way of building your business and increasing your profits.
Ultimately, you have three choices. You can manage sales tax compliance yourself, hire a small business accountant, or bring in sales tax experts to tackle compliance for you. No matter which path you choose, you now have the knowledge you need to make sure your cannabis business is California sales tax compliant.