Cannabis excise tax | Nesteggg Accounting

It’s… Complicated but the CDTFA Will Help.

The rate changed beginning January 1, 2020, and it may have been years since you visited the concept of “wholesale cost”. But the CDTFA endeavors to help both taxpayers and consummers understand.

Retailers collect it, customers pay it, distributors remit it.

By definition the “wholesale cost” is the amount paid by the cannabis retailer (retailer) for cannabis or cannabis products, including transportation charges and after any discounts are provided.

Cannabis distributors are required to collect the cannabis excise tax from retailers they supply with cannabis and then remit the 15% excise tax on the sale price. Except they don’t know what the retailer, in the end, will really charge the customer. So the tax agency came up with the average wholesale cost to make calculations easier.

Example
Below are the CDTFA’s examples on how to calculate the wholesale cost and then how to calculate the tax they must remit on those sales.

Cost of the Cannabis Product	$1,500.00
Less 25% Discount	$375.00
Subtotal	$1,125.00
Transportation Charge	$100.00
Retailer’s Wholesale Cost	$1,225.00

The average market price and the cannabis excise tax due are calculated as follows:

Retailer’s Wholesale Cost	$1,225.00
Plus, the current mark-up ($1,225 x 80%*)	$980.00
Average Market Price	$2,205.00
15% Cannabis Excise Tax Due ($2,205 x 15%)	$330.75

If you still need more explanation see the Special Taxes and Fees rate page at www.cdtfa.ca.gov/taxes-and-fees/tax-rates-stfd.htm, under Cannabis Taxes.

Samples of Cannabis – How Does Tax Apply?

As a distributor, manufacturer, or cultivator, you may sell samples or promotional items to a cannabis retailer. How the cannabis excise tax and the sales and use tax apply depends on whether the samples are sold to the retailer for marketing purposes for the retailer’s use, or whether the samples are sold to the retailer for resale to the retailer’s customers.

Samples not sold for resale to a retailer

Cannabis Excise Tax
If the samples or promotional items are sold to the retailer for marketing purposes (that is, the retailer does not resell the samples to their customers), the retailer is the consumer of the items. Samples or promotional items not sold for resale should be labeled as “not for resale.” The cannabis excise tax applies when cannabis or cannabis products are sold by a cannabis retailer to their retail customer. Therefore, the distributor is not required to collect the cannabis excise tax on sales of samples to a cannabis retailer when the retailer is the consumer of the samples and does not resell them. [Read more…]

Cannabis Distributors: Information on Collecting and Paying the Cannabis Excise Tax

Cannabis Distributors: Information on Collecting and Paying the Cannabis
Excise Tax

As a licensed cannabis distributor, you are required to collect the cannabis excise tax from retailers you supply with cannabis or cannabis products (cannabis). There may be instances when there are multiple distributors involved in the transaction. You are responsible for collecting the excise tax if you are the distributor that does the following:

Sells and/or invoices cannabis to the retailer; or
Transfers cannabis to the retailer on behalf of a manufacturer or cultivator.

You must provide the retailer an invoice or receipt indicating, among other requirements, the amount of cannabis excise tax collected. You are required to report (based on the average market price) and pay the cannabis excise tax to the California Department of Tax and Fee Administration (CDTFA) in the reporting period in which you sell or transfer the cannabis to the retailer.

The Bureau of Cannabis Control (Bureau) is the state agency that regulates the requirements for all licensed distributors. A Distributor-Transport Only licensee (Type 13) may transport cannabis goods between licensees; however, they shall not transport any cannabis goods, except for immature cannabis plants and seeds, to a licensed retailer or licensed microbusiness authorized to engage in retail sale. If you are a Distributor licensee (Type 11) that provides transportation services for another licensed distributor and transport cannabis to a retailer on behalf of the distributor that sells and/or invoices the cannabis to the retailer, you are not responsible for the collection or payment of the cannabis excise tax. You should maintain documentation, such as a shipping manifest or invoice between the two distributors that indicates that the transaction between the distributors is for transportation services only and the cannabis excise tax was not collected.

How the Cannabis Excise Tax and Sales and Use Tax Apply to Samples

How the Cannabis Excise Tax and Sales and Use Tax
Apply to Samples

Distributors, manufacturers, and cultivators may sell samples or promotional items to a retailer. How cannabis excise tax and the sales and use tax applies depends on whether the samples are sold to the retailer for marketing purposes; that is, the retailer will consume and not resell the items, or whether the samples are sold to the retailer for resale to the retailer’s customers.

Samples Not for Resale by Retailer

Excise Tax – If the sample or promotional items are sold to the retailer for marketing purposes, that is, the retailer does not resell the samples to their customers, the retailer is the consumer of the items. Samples or promotional items not sold for resale should be labeled accordingly; for example, “not for resale.” The cannabis excise tax only applies to retail sales from a retailer to the retail purchaser. Therefore, you are not required to collect the cannabis excise tax on sales of samples to a cannabis retailer when the retailer is the consumer.

Sales and Use Tax – Generally, you owe sales tax on the sale of samples or promotional items sold to cannabis retailers when the retailer is not purchasing these for resale, and the sales tax is calculated based on the sales price. However, if the sample or promotional items are sold for less than 50 percent of your cost when the value of the merchandise is not obsolete or about to expire, you do not owe sales tax but you do owe use tax based on your cost of the product sold.

For example, you sell a cannabis sample to a retailer for $1.00, which you originally purchased from the cultivator or manufacturer for $10.00. Since your selling price is less than 50 percent of your cost to purchase the item, you owe use tax based on your purchase price of $10.00. If your sales and use tax rate is 9.5 percent, you owe use tax of $0.95 ($10.00 x 9.5 percent).

To pay use tax, report your cost (which is generally your purchase price) of the cannabis as “Purchases Subject to Use Tax” on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

Samples for Resale by Retailer:

Excise Tax – If the sample or promotional items are sold to the retailer and the retailer will be selling the samples to consumers in a retail sale, the cannabis excise tax applies and you are required to collect the excise tax from the retailer based on the average market price of the cannabis or cannabis products.

In an arm’s length transaction, you will calculate the average market price by applying the CDTFA’s predetermined mark-up to the retailer’s wholesale cost (currently 60%). The wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including any transportation charges. In addition, if you give any price reductions (stated or unstated), such as discounts or trade allowances off your supplier’s list price, you must add these reductions back when determining the retailer’s wholesale cost.

Therefore, if you sell or promote regular, full-sized products at a discounted price, you must calculate the average market price using the regular wholesale price, before the discount or price reduction is given. However, when you sell samples or promotional items that are single-serve, or low cost, or formerly free samples, and the wholesale cost represents your supplier’s list price, no discount is given. The amount the retailer paid for the cannabis or cannabis products is the amount you should use as the retailer’s wholesale cost when calculating the average market price to determine the amount of excise tax that is due, even if the wholesale cost is very low or nominal. In a nonarm’s length transaction, the average market price of the cannabis or cannabis products is equal to the retail selling price of the cannabis or cannabis products. As the distributor, you will apply the 15 percent cannabis excise tax to the retail selling price of the samples or promotional items, even when the retail selling price is very low or nominal.

Sales and Use Tax – When you sell cannabis samples or promotional items to a cannabis retailer for resale and the retailer provides you with a valid and timely resale certificate, the sale is not subject to sales tax.

Cannabis Retailers: Cannabis Excise Tax Paid to Your Distributor Must be Collected on Your Discounted Retail Sales

As a retailer, when you sell cannabis or cannabis products, the law requires the purchaser to pay the excise tax at the time of the sale. Therefore, you must collect from your customer the same amount of cannabis excise tax that you paid to your distributor.

Discounted cannabis – arm’s length transaction
For example, you purchase two items of cannabis products for $100 ($50 each) and your distributor calculates the average market price of these two items as $160 (your wholesale cost of $100 plus the current predetermined CDTFA markup of 60 percent*). The distributor collects $24 in cannabis excise tax from you on this purchase ($160 x 15 percent).

If your regular selling price of these items is $100 each, when you offer your customers a “two for one promotion” on these items, that is, get two for the price of one, you are required to collect from your customer the $24 in cannabis excise tax paid to your distributor on these two items. Therefore, you should factor the excise tax you paid to your distributor into your discounted or promotional price.

You are not required to separately state the amount of cannabis excise tax collected from your customer on the receipt, but the receipt must state, “The cannabis excise taxes are included in the total amount of this invoice.”

* This example assumes a mark-up rate of 60 percent (0.60). Your distributor will use the rate in effect at the time of sale. The current rate can be found on our website.

Discounted cannabis – nonarm’s length transaction
The cannabis excise tax due in a nonarm’s length transaction is based on the retail selling price of the cannabis or cannabis products. For example, if you sell cannabis for a discounted price of $100 to your retail customer, the cannabis excise tax due is $15 ($100 x 15%), regardless of your wholesale cost.

This email is intended to give you an overview of some of the requirements for cannabis retailers and does not address all requirements for the cannabis industry. For more information, we encourage you to read our online Tax Guide for Cannabis Businesses, or contact us.

How the Cannabis Excise Tax and Sales and Use Tax Apply to Samples of Cannabis or Cannabis Products Sold to Retailers

Samples not sold for resale to a retailer

Cannabis Excise Tax
If the samples or promotional items are sold to the retailer for marketing purposes, that is, the retailer does not resell the samples to their customers, the retailer is the consumer of the items. Samples or promotional items not sold for resale should be labeled as “not for resale.” The cannabis excise tax applies when cannabis or cannabis products are sold by a cannabis retailer to their retail customer. Therefore, the distributor is not required to collect the cannabis excise tax on sales of samples to a cannabis retailer when the retailer is the consumer of the samples and does not resell them.

Sales and Use Tax
Generally, the seller owes sales tax on the sale of samples or promotional items sold to cannabis retailers when the retailer is not purchasing these for resale. The sales tax is based on the seller’s selling price. However, if the sample or promotional items are sold for less than 50 percent of cost when the value of the merchandise is not obsolete or about to expire, the seller does not owe sales tax, but instead owes use tax based on the cost of the product sold.

Samples sold for resale to a retailer

Cannabis Excise Tax
If the sample or promotional items are sold to the retailer for resale, the cannabis excise tax applies. The distributor is required to collect the excise tax from the retailer based on the average market price of the cannabis or cannabis products.

In an arm’s length transaction, the distributor calculates the average market price by applying the CDTFA’s predetermined mark-up* to the retailer’s wholesale cost. The wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including any transportation charges. In addition, if any price reductions (stated or unstated) are given to the retailer, such as discounts or trade allowances off the supplier’s list price, the amount of the reduction must be added back to the sales price when determining the retailer’s wholesale cost.

Therefore, if the seller promotes regular, full-sized cannabis products at a discounted price to a retailer, the distributor must calculate the average market price of the cannabis by using the regular wholesale price, before the discount or trade allowance is given.

However, if a seller sells samples or promotional items to a retailer, and the cost paid by the retailer represents the list price, the distributor should use the amount paid by the retailer as the wholesale cost in order to calculate the average market price, even if the amount paid by the retailer is low or nominal. In the instances where the amount paid by the retailer is the same as the supplier’s list price, no discount has been given.

* The current mark-up rate can be found on our website.

Sales and Use Tax
When cannabis samples or promotional items are sold to a cannabis retailer who resells the items in their business, the sale to the cannabis retailer is not subject to sales tax. The seller should obtain and keep a valid and timely resale certificate from the purchaser as support that the sale was for resale. For information on sales for resale and resale certificates, see publication 103, Sales for Resale.

Please note: The Bureau of Cannabis Control is responsible for the licensing and regulations of the cannabis activities for distributors and retailers. For information on whether distributors are allowed to provide samples to retailers for free or for a nominal amount, please contact the Bureau of Cannabis Control .

This email is intended to give you an overview of the tax application of cannabis samples or promotional items and does not address all requirements for the cannabis industry. For additional information, we encourage you to read our online Tax Guide for Cannabis Businesses, or contact us.

California’s Cannabis Distributors

Close-up of four medical marijuana prescription containers. One opened container is in the foreground with cannabis bud falling out.

Important Information for Cannabis Distributors

As a cannabis distributor, you must electronically file your cannabis tax returns and pay the cultivation tax and cannabis excise tax due to the California Department of Tax and Fee Administration (CDTFA). Below is an overview of the reporting and invoicing requirements for cannabis distributors as well as information on how to avoid substantial penalties for failure to pay the cannabis taxes due.

Cannabis tax return

As a cannabis distributor, you are required to electronically report and pay both the cultivation tax and cannabis excise tax on your cannabis tax return. The cannabis tax return filing and payment of the cannabis taxes are due April 30, 2018, for the first quarter reporting period (January 1, 2018, through March 31, 2018).

You may request to file your returns and pay the cannabis taxes on a monthly basis instead of quarterly beginning

April 1, 2018. To request a monthly reporting period, call our Customer Service Center at 1-800-400-7115 (TTY:711) and select Special Taxes and Fees from the menu. If your request for a monthly reporting period is approved, please remember that the return and payment of the cannabis taxes are due on the last day of the month following each reporting period.

Reporting the cultivation tax

The cultivation tax must be reported:

For the reporting period in which the cannabis or cannabis products enter the commercial market.
In ounces, including partial ounces rounded to the nearest hundredth, based on the category of dried flowers, dried leaves, or fresh cannabis plant as listed on the invoice from the original cultivator, less any cannabis that was used for
- You are required to enter adult-use ounces separately from medicinal ounces for each
- You will need to obtain additional information from manufacturers on the category and ounces of cannabis used to manufacture the cannabis products to report the cultivation tax

Reporting the cannabis excise tax

The cannabis excise tax must be reported:

For the reporting period in which you sell or transfer the cannabis or cannabis products to the cannabis retailer.
- For example, the total average market price of your sales or transfers within the first quarter of 2018 (January 1, 2018, through March 31, 2018) must be reported on the first quarter 2018
Based on the average market price of the cannabis or cannabis products.
- When you calculate the average market price in an arm’s length transaction (retailer’s wholesale cost plus the mark-up determined by the CDTFA, currently 60 percent), you are not required to reconcile the average market price you calculate with the retailer’s actual retail selling
As “excess excise tax collected” on your cannabis tax return if the tax is collected from retailers for any inventory they purchased prior to January 1, 2018, and sold at retail on or after January 1,
- For these types of transactions, the retailer will collect the cannabis excise tax from their customers and pay the amount collected to you, a cannabis
- For specific invoice requirements related to these types of transactions, please see our Tax Guide for Cannabis Businesses at cdtfa.ca.gov/industry/cannabis.htm.

Invoicing requirements for the cannabis taxes

As a cannabis distributor, you must properly document the amount of the cultivation tax and the cannabis excise tax you collect. When collecting the cultivation tax from cultivators or manufacturers, or the cannabis excise tax from retailers, you must provide an invoice, receipt, or other similar document that contains the following:

Your name, as the
The name of the other licensee (that is, the cultivator, manufacturer, retailer).
The associated unique identifier for the cannabis or cannabis product.
The amount of cannabis tax collected.
The date of the sale or transfer.

These invoices or receipts serve as verification to cultivators, manufacturers, and retailers that the cannabis taxes were paid to a distributor and relieves them of their cannabis taxes liability.

50 percent penalty for failure to pay the cannabis taxes due

In general, the law imposes a 10 percent penalty on taxpayers and feepayers for failure to timely pay the tax or fee due, or for filing a late return. In addition to these 10 percent penalties, the cannabis tax law imposes a mandatory 50 percent penalty for failure to pay the cultivation tax or cannabis excise tax due. Therefore, it is very important that you report and pay the cannabis taxes on or before the due date for each reporting period.

You may be relieved of the penalties assessed, including the 50 percent penalty, if the CDTFA finds that your failure to timely pay the tax was due to reasonable cause and circumstances beyond your control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect. In order to be relieved of the mandatory penalties assessed, including the 50 percent penalty for failure to pay the cannabis taxes, you, as the cannabis distributor, must file an online request for relief of the penalty by filing a statement with the CDTFA, signed under penalty of perjury, which states the facts upon which the request for penalty relief is based. You may request relief of penalty by visiting our Online Services page at www.cdtfa.ca.gov/services/, and following the directions under the Request Relief tab.

Sales and use tax return

If you make sales of tangible personal property, you are required to hold a seller’s permit. As a cannabis distributor, you are responsible for electronically filing both your sales and use tax return and your cannabis tax return by the filing due dates. You must still file a sales and use tax return by the due date even if you do not make taxable sales (for example, all your sales are for resale). If you sell cannabis or cannabis products for resale to other licensees, make sure the purchaser gives you a timely and valid resale certificate. For more information regarding sales for resale, please see our publication 103, Sales for Resale, at www.cdtfa.ca.gov/formspubs/pub103/.

The CDTFA’s online guide, Tax Guide for Cannabis Businesses, is your best resource

Not all requirements for the cannabis industry can be addressed within one single special notice. For more comprehensive information, we encourage you to read our Tax Guide for Cannabis Businesses at www.cdtfa.ca.gov/ industry/cannabis.htm which has separate tabs with important information, including videos, for distributors, retailers, cultivators, and manufacturers. If you have additional questions, you may call our Customer Service Center at 1-800- 400-7115 (TTY:711) Monday through Friday, 8:00 a.m. to 5:00 p.m. (Pacific time), except state holidays.

California’s Cannabis Distributors

Important Information for Cannabis Distributors

Cannabis tax return

You may request to file your returns and pay the cannabis taxes on a monthly basis instead of quarterly beginning

Reporting the cultivation tax

The cultivation tax must be reported:

For the reporting period in which the cannabis or cannabis products enter the commercial market.
In ounces, including partial ounces rounded to the nearest hundredth, based on the category of dried flowers, dried leaves, or fresh cannabis plant as listed on the invoice from the original cultivator, less any cannabis that was used for
- You are required to enter adult-use ounces separately from medicinal ounces for each
- You will need to obtain additional information from manufacturers on the category and ounces of cannabis used to manufacture the cannabis products to report the cultivation tax

Reporting the cannabis excise tax

The cannabis excise tax must be reported:

For the reporting period in which you sell or transfer the cannabis or cannabis products to the cannabis retailer.
- For example, the total average market price of your sales or transfers within the first quarter of 2018 (January 1, 2018, through March 31, 2018) must be reported on the first quarter 2018
Based on the average market price of the cannabis or cannabis products.
- When you calculate the average market price in an arm’s length transaction (retailer’s wholesale cost plus the mark-up determined by the CDTFA, currently 60 percent), you are not required to reconcile the average market price you calculate with the retailer’s actual retail selling
As “excess excise tax collected” on your cannabis tax return if the tax is collected from retailers for any inventory they purchased prior to January 1, 2018, and sold at retail on or after January 1,
- For these types of transactions, the retailer will collect the cannabis excise tax from their customers and pay the amount collected to you, a cannabis
- For specific invoice requirements related to these types of transactions, please see our Tax Guide for Cannabis Businesses at cdtfa.ca.gov/industry/cannabis.htm.

Invoicing requirements for the cannabis taxes

Your name, as the
The name of the other licensee (that is, the cultivator, manufacturer, retailer).
The associated unique identifier for the cannabis or cannabis product.
The amount of cannabis tax collected.
The date of the sale or transfer.

These invoices or receipts serve as verification to cultivators, manufacturers, and retailers that the cannabis taxes were paid to a distributor and relieves them of their cannabis taxes liability.

50 percent penalty for failure to pay the cannabis taxes due

Sales and use tax return

The CDTFA’s online guide, Tax Guide for Cannabis Businesses, is your best resource

How Taxes Apply to Cannabis Inventory Beginning January 1, 2018

Guidance on How Taxes Apply to Cannabis Inventory Beginning January 1, 2018

Beginning January 1, 2018, cannabis retailers must collect the cannabis excise tax from their customers on each retail sale of cannabis or cannabis products. The cannabis excise tax applies to all retail sales, including sales of cannabis or cannabis products the retailer purchased prior to January 1, 2018. Cannabis retailers are required to pay the cannabis excise tax to a cannabis distributor. Cannabis cultivators owe the cultivation tax on all harvested cannabis that enters the commercial market on or after January 1, 2018. The cultivation tax does not apply to harvested cannabis a cultivator transferred or sold prior to January 1, 2018. Cultivators are required to pay the cultivation tax to a distributor or manufacturer.

Cannabis excise tax must be paid to cannabis distributors

On and after January 1, 2018, distributors who sell or transfer cannabis or cannabis products to a cannabis retailer are required to collect the cannabis excise tax from the retailer. In addition, cannabis retailers, who acquired cannabis or cannabis products prior to January 1, 2018, upon which they did not pay the cannabis excise tax to a distributor, must collect the 15 percent cannabis excise tax from their customers. Retailers must pay the excise tax on those sales by the 15th of the following month in which they collected the tax to a licensed cannabis distributor with whom they have a business relationship (that is, a distributor that they purchase or acquire cannabis or cannabis products from on or after January 1, 2018).

Cannabis retailer – collecting and invoicing requirements

As a cannabis retailer, you are not required to separately state the cannabis excise tax on your receipt or invoice to your customer, but you must include the following statement, “The cannabis excise taxes are included in the total amount of the invoice.” The cannabis excise tax is imposed on the purchaser as 15 percent of the average market price.

To calculate the cannabis excise tax due on your retail sales of cannabis or cannabis products that you acquired prior to January 1, 2018, you must multiply the average market price by the 15 percent excise tax rate. For information on how to determine the average market price, please see our Tax Guide for Cannabis Businesses at www.cdtfa.ca.gov/industry/cannabis.htm.

Your sales of cannabis and cannabis products are generally subject to sales tax. The sales tax is due on the retail selling price of cannabis or cannabis products, including the cannabis excise tax.

Cultivation tax not due on cannabis transferred or sold prior to January 1, 2018

As a reminder, cannabis cultivators are required to pay the cultivation tax to a distributor or manufacturer on all harvested cannabis that enters the commercial market beginning January 1, 2018. However, the cultivation tax is not due on harvested cannabis transferred or sold to distributors or manufacturers prior to January 1, 2018, even if entry into the commercial market (completes testing and complies with quality assurance review) occurs after that date. Manufacturers and distributors must maintain documentation to support that the cannabis was transferred or sold from a cultivator prior to January 1, 2018.

It’s… Complicated but the CDTFA Will Help.

Samples of Cannabis – How Does Tax Apply?

Cannabis Distributors: Information on Collecting and Paying the Cannabis Excise Tax

Cannabis Distributors: Information on Collecting and Paying the Cannabis
Excise Tax

How the Cannabis Excise Tax and Sales and Use Tax Apply to Samples

How the Cannabis Excise Tax and Sales and Use Tax
Apply to Samples

Cannabis Retailers: Cannabis Excise Tax Paid to Your Distributor Must be Collected on Your Discounted Retail Sales

Cannabis Retailers: Cannabis Excise Tax Paid to Your Distributor Must be Collected on Your Discounted Retail Sales

How the Cannabis Excise Tax and Sales and Use Tax Apply to Samples of Cannabis or Cannabis Products Sold to Retailers

How the Cannabis Excise Tax and Sales and Use Tax Apply to Samples of Cannabis or Cannabis Products Sold to Retailers

Samples not sold for resale to a retailer

Samples sold for resale to a retailer

California’s Cannabis Distributors

California’s Cannabis Distributors

How Taxes Apply to Cannabis Inventory Beginning January 1, 2018

Stay Connected

Get in Touch

constant contact