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California Cannabis Sales Tax: A Guide for Accountants Who Want to Go Green

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 - and their accountants - 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 help your budding business partners register their marijuana business, calculate and remit taxes, and stay sales tax compliant. We put together this handy guide with info on everything accountants need to know about California cannabis sales tax.

Looking for something specific? Use the links below to jump to a topic.

Business Registration
Business Licensing

Current Tax Rates + Excise Tax 101
Tax Rules and Compliance Laws
Marijuana Sales Tax Legislation
When to Remit - State Filing Schedule
Common Compliance Mistakes to Avoid
Helpful Resources Links
Penalties and Fines


BUSINESS REGISTRATION

Who do my clients need to register with and what permits do they need?
This graphic, provided by the California Department of Tax and Fee Administration (CDTFA), breaks it down by business type:

Use this chart to determine what licenses and sales permits your client needs to legally do business in the state of California.

In addition to registering for the required CDFTA permit(s) outlined above, marijuana-based businesses also need to obtain the appropriate cannabis license(s) for their business. More on that below...

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BUSINESS LICENSING

In addition to registering with the state, your clients must also apply for the appropriate licenses to legally run their cannabis business.

California state cannabis business license eligibility
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 your clients need to license their business through, based on what type of establishment they operate or plan to operate.

1). Bureau of Cannabis Control

License Types Offered

  • Testing Laboratory:
    Facilities involved in the comprehensive testing of cannabis will typically test cannabis for residual solvents, physical and microbial contamination, potency, and terpenes.

  • Dispensary:
    Government regulated retail location where people can purchase cannabis and cannabis related items for medical or recreational (aka adult) use.

  • Distribution:
    The middleman between growers, and dispensaries. Services may vary, but distributors often handle packaging, labeling, and cannabis order fulfillment for retailers.

  • Transportation:
    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.

  • Microbusiness:
    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)

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2). CalCannabis Cultivation Licensing

License Types Offered

  • Cultivation:
    Any activity involving planting, growing, harvesting, drying, curing, grading, or trimming cannabis.

  • Licensing Fees:
    $1,000 nonrefundable application fee per category.

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3). California Department of Public Health

License Types Offered

  • Manufacturing:
    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.

Licensing Fees
Surety bond certificate in the amount of $5,000 made payable to the State of California.

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CURRENT TAX RATES

California has two basic categories of tax rates; one for growers and one for distributors.

Cultivators:

  • $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.

Retailers:

  • 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)

KNOWLEDGE NUGGET:
Business owners are not required to itemize the amount of cannabis excise tax collected from their customers on receipts. However, they must include the following statement on their invoices or receipts: "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 your clients with cannabis or cannabis products are required to calculate and collect the 15% cannabis excise tax. When your clients sell items at retail, they're required to collect cannabis excise tax from their customers.

When your clients collect excise tax from their customers, they must apply a 15% 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)

Two examples from the CDTFA

  1. Retail sale to a customer
  2. 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 client's customers gets passed on to their licensed distributor.
  • Sales tax is calculated on gross receipt totals (after excise tax has been factored in).
  • Your clients must report and pay the $9.20 in sales tax on 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 your clients 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

  • Your clients must pay the 15% excise tax collected from their customers to a licensed distributor with whom they 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.

Questions? Check out this post for more detailed explanations and excise tax examples.

KNOWLEDGE NUGGET:
If California follows the trend of other legal states, marijuana prices will begin to fall as production and supply increase.

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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 your clients are registered with the state and that they'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, your clients 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 client's cannabis tax account is separate from other accounts they may have with the CDTFA.

Make Compliance Profitable for Your Firm
Instantly become a sales tax expert with the help of LumaTax and focus on growing your profits.

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LEGISLATION

Current law:
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:

  • cultivation
  • distribution
  • transport
  • storage
  • manufacturing
  • processing
  • sale

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.

Legal Links

  • Cannabis Regulations:
    California’s three state cannabis licensing authorities put new regulations, effective immediately, in place on January 16th, 2019. These regulations replace previous Emergency Cannabis Regulations
    which were in place briefly while regulatory beauraus worked to approve permanent legislation.

  • Cannabis Legislation:
    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.

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STATE TAX FILING SCHEDULE

Your client's filing frequency will be determined based on their expected taxable annual sales. The CDTFA assigns a filing frequency (quarterly prepay, quarterly, monthly, fiscal yearly, yearly) based on reported sales tax or anticipated taxable sales at the time of registration. General quarterly due dates are as follows:

IMPORTANT:
Always verify your client's filing deadlines with local tax jurisdiction(s) and be sure to file on time. Doing so will allow you to avoid costly penalties, fees, and interest charges.

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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 deadline. If a filing due date falls on a weekend or state holiday, the due date extends to the next business day.

  • Do not plan to file by mail:
    THE CDTFA requires that business owners file both cannabis tax and sales and use tax returns electronically. Your clients can register for an account here.

  • Do not forget about excise tax:
    If your client is a cannabis distributor, make sure they collect excise tax from retailers they supply and collect cultivation tax from growers, suppliers, and manufacturers that send or transfer cannabis and cannabis products to them.

  • Do not forget about medical marijuana exemptions:
    Make sure your clients are aware that buyers with a state-issued medical marijuana ID are exempt from paying state tax, but still have to pay excise tax.

Retail sales and wholesale transactions are handled differently when it comes to collecting and remitting excise tax. Make sure you and your clients know the rules to avoid penalties and fees.

SALES TAX COMPLIANCE TIP:
Even if none of your client's sales are subject to sales tax, they are still required to file a return and report their activities on their return to the CDTFA.

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HELPFUL RESOURCE LINKS

Use 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.

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CALIFORNIA SALES TAX PENALTIES

According to the State of California Board of Equalization, the following issues can result in interest and penalty charges:

  • Filing a late return and/or make a late payment
  • Neglecting to include payment (or sufficient payment) with a balance-due return
  • Neglecting to report tax on a taxable transaction
  • Calculating tax at the incorrect rate
  • Neglecting to file a return
  • Operating a business without required BOE-issued permits or licenses
  • Misusing a resale certificate or making sales without a valid permit
  • Knowingly collecting sales tax reimbursement or use tax (tax) and failing to pay state tax

Penalty Summary:

  • 10% penalty if your clients don't file your tax return by its due date.
  • 10% penalty if your client's 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 your client files a late return and makes a late payment, their penalty will not exceed 10% of the amount of tax due for the reporting period

KNOWLEDGE NUGGET:
Learn more about penalties and fees (and how to avoid them) here.

CALIFORNIA TAX PENALTY FAQ

What should my client do if they miss a filing deadline?
File their 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 my clients avoid penalties and fees?
Follow these simple steps:

  • Make sure you understand your client's 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 yor client has enough cash to cover their payment to avoid insufficient funds fees and interest.

  • Verify routing and account numbers and double check your client's tax rates and math before you send in their return.

  • Outsource the complicated stuff!Hire sales tax experts to file returns and manage compliance on your client's behalf and boost your breadth of services (and profits!).

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Leaving the complicated legal stuff to the experts is a no-brainer if for cannabis business owners, but there are few accountants stepping up to the plate to assist. Market your firm to cannabis business owners and earn some of your own green by cashing in on this niche market. Stand out as an expert in an underserved space, explain how you can simplify the path to California sales tax compliance, and watch your accounting business flourish.