Taxation of Cannabis and Cannabis Products in California
February 27th, 2018
On November 8, 2016, Proposition 64 was approved in California, legalizing the commercial use cannabis by adults. Later, Proposition 64 was amended by Senate Bill 94 in order to standardize the licensing and regulation of medicinal and commercial cannabis. The new provisions created by this amendment are called the Medicinal and Adult-Use of Cannabis Regulation and Safety Act (MAUCRSA).
Within the new legislative scheme, two new taxes were created that directly affect all cannabis sold in California and took effect on January 1, 2018. The first is a 15% excise tax imposed upon purchasers and the second is a cultivation tax imposed on cannabis cultivators for all harvested cannabis that enters the commercial market. The rate of the cultivation tax is as follows:
- $9.25 per dry-weight ounce of cannabis flowers that enter the commercial market,
- $2.75 per dry-weight ounce of cannabis leaves that enter the commercial market
- $1.29 per ounce of fresh cannabis plant (“fresh” meaning all combination of flowers, leaves, stems, and stalk weighed within two hours of being harvested and without any further processing)
The 15% excise tax must be collected by retailers from their customers and remitted to their distributors for reporting and final remittance to the California Department of Tax and Fee Administration (CDTFA). This excise tax is collected by the distributor from the retailer, however, at the time of sale or transfer of cannabis or cannabis product to a retailer based on the average market price at the time of the sale or transfer. This rule creates a timing lag between when the retailer must pay the excise tax to their distributor and when they collect it from their customers when the cannabis is eventually sold the end consumer. Effectively, the excise tax is paid by the retailer before the cannabis is sold to the consumer, and then later collected from the consumer at point of sale. Because of this timing lag, the retailer bares
the ultimate risk of any fluctuation in average market price for all cannabis and cannabis products held in stock.
Additionally, while retailers are not required to separately state the excise tax on the sales invoice, they are required to make the following statement: “The cannabis excise taxes are included in the total amount of this invoice.” On the other hand, the burden of reporting both excise tax and cultivation tax, as well as providing and maintaining proper documentation for the collection of said taxes, lies fully with the distributors.
Upon collecting the excise tax from a retailer, a distributor must provide the retailer with a document containing all of the following:
- Date of execution of the document
- Name of the distributor
- Amount of the excise tax
- Number of the seller’s permit held by the retailer, and
- Number of the seller’s permit held by the distributor (or a statement that distributor is not required to have such a permit because it makes no sales)
For cultivators, the main risk is that California will presume that all cannabis removed from the cultivator’s premises, except for plant waste, is sold and thereby taxable. Proper records must, therefore, be strictly kept documenting when, why, by whom, and how much cannabis is removed for the cultivator’s premises in order to avoid over taxation.
On a Federal level, cannabis is still classified as Schedule 1 narcotic by the DEA and any business conducted with respect to cannabis is, therefore, illegal. Nonetheless, taxes must still be paid to the IRS on all income from the business; however, pursuant to Internal Revenue Code section 280E, no deductions or credits can be claimed for any expense related to the business. Because California uses the federal Adjusted Gross Income as a starting point for its returns, businesses and accountants will have to be careful to remember to make adjustments on for California tax purposes for all the expenses that cannot be claimed at the Federal level.