While prospective California cannabis businesses were notified recently by the Department of Tax and Fee Administration that they need to go ahead and register with the CDTFA for a seller’s permit, there are seven additional things California cannabis businesses need to know about tax rates and registration.
1. Cultivation taxes
All cannabis harvested commercially incurs a cultivation tax of $9.25 per dry-weight ounce of cannabis flowers or a cultivation tax of $2.75 per dry-weight ounce of cannabis leaves.
Cultivators have to cover the cultivation tax on cannabis transferred to distributors or on unprocessed cannabis sold to manufacturers, at which point manufacturers pay the cultivation tax on products transferred to distributors. Distributors are responsible for reporting and paying the cultivation tax to the CDTFA.
2. Cannabis excise taxes
A cannabis retailer must collect a 15% tax on each retail cannabis transaction and then pay that tax to the distributor, who is then responsible for reporting and paying that tax to the CDTFA.
3. Average market price
When the sale to the retailer is an arm’s length transaction, reflecting a fair market value between two parties, the average market price is the wholesale cannabis cost plus CDTFA’s pre-determined markup.
According to the CDTFA, “The wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including transportation charges and adding back in any discounts or trade allowances. In an arm’s length transaction, the excise tax is not based on the retailer’s gross receipts … . When the sale or transaction is not at arm’s length, the average market price is the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.”
4. CDTFA’s mark-up rate
For all cannabis and cannabis-derived products, the CDTFA has set an initial mark-up rate of 60% and will revisit the rate at six-month intervals.
5. Distributor tax reporting and payment
After registering for a cannabis tax permit with the CDTFA, a distributor is then able to report and pay both the cultivation and cannabis excise taxes directly to the CDTFA.
Considering licensed microbusinesses can act as cannabis distributors, such licensees have to adhere to the same rules as regular distributors.
6. Application of sales and use tax
Minus medicinal cannabis and medical cannabis products purchased by registered patients, the sales and use tax applies to the sale of cannabis and products derived from cannabis.
Due to the sales and use tax, California cannabis businesses must account for the excise tax in gross cannabis sales receipts.
According to the CDTFA, “Cannabis retailers, cultivators, manufacturers, and distributors making sales must register with the CDTFA for a seller’s permit to report and pay any sales and use tax due to the CDTFA. If you already have a seller’s permit that was issued by the Board of Equalization (BOE), it is not necessary to re-register for a seller’s permit with the CDTFA.”
7. Registration Date
California cannabis businesses can register for tax permits starting Nov. 20 on the CFDTFA’s website.