California Sales, Gross Receipts, Excise Taxes

Cannabis – Sales, Excise Gross Receipts Taxes

Cannabis Excise Tax and Cultivation Tax

Effective January 1, 2018, two new cannabis taxes apply as follows:

  • A 15 percent excise tax is imposed upon all purchasers of cannabis and cannabis products, including medicinal cannabis and adult-use cannabis.
  • A tax on the cultivation of cannabis is imposed on cultivators at a rate of:
    • $9.25 per dry-weight ounce of cannabis flowers, and
    • $2.75 per dry-weight ounce of cannabis leaves.

The cultivation tax applies to all harvested cannabis that enters the commercial market. Cannabis has “entered the commercial market” when the cannabis or cannabis product has completed and comply with all quality assurance, inspection, and testing requirements. Beginning January 1, 2020, the CDTFA is required to annually adjust the cultivation tax rates to account for inflation.

The cannabis excise tax is based on the “average market price.” The average market price is determined by the type of transaction that occurred when the seller (cultivator, manufacturer or distributor) sold the product to the retailer. An “arm’s length transaction” is a sale that reflects the fair market price in the open market between two informed and willing parties. In an arm’s length transaction, the average market price means the average retail price determined by the wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a markup.

  • The markup is to be determined by the CDTFA on a biannual basis in six-month intervals.
  • In a non-arm’s length transaction, the average market price means the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.
  • A special notice will be mailed to cannabis businesses informing them of the markup rate. The cultivation tax rates and markup rate will also be posted on the Special Taxes and Fees Rate Page.

Sales Tax

See Definitions of:

Your sales of cannabis and cannabis products are generally subject to sales tax unless your customer provides you with a valid Medical Marijuana Identification Card indicating they are a qualified patient or the primary caregiver for a qualified patient, along with a valid government-issued identification card. Please refer to the heading, Proposition 64 Exempts Certain Medicinal Cannabis Sales from Sales and Use Tax, below for more information.

Beginning January 1, 2018, your sales of all cannabis and cannabis products, including medicinal cannabis, will also be subject to the 15 percent excise tax.  The 15 percent excise tax amount should be included in the calculation of the total amount subject to sales tax. Generally, the retail sales of the following cannabis and cannabis products are subject to both the sales tax and the 15 percent excise tax:

  • Balms, Buds, and Flowers, Capsules, Edibles (cookies, butter, honey, chocolates, candies, sodas, bars), Extracts, Gum, Hash, Infused feminine hygiene products, Lotions, Oils, Plants and Clones, Pre-rolls, Teas, Tinctures, Tonics, Topicals, and Waxes

The retail sale of cannabis accessories, such as pipes, rolling machines, vape pens (without cannabis), rolling papers, shirts, hats, books, and magazines are subject to sales tax, but not the 15 percent excise tax.

Delivery charges are generally taxable when retailers make deliveries with their own vehicles. However, delivery–related charges may be nontaxable, or partially taxable, when you ship using a common or contract carrier. 

Proposition 64 Exempts Certain Medicinal Cannabis Sales from Sales and Use Tax

Effective November 9, 2016, certain sales of medicinal cannabis are exempt from sales and use tax.

The sales and use tax exemption applies to the retail sales of medicinal cannabis, medicinal cannabis concentrate, edible medicinal cannabis products, or topical cannabis as those terms are defined in the Business and Professions code section 26001. To obtain the exemption, qualified patients or their primary caregiver must furnish their valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government-issued identification card (ID) at the time of purchase.

To properly claim the sales and use tax exemption, you should not collect sales tax reimbursement on the qualifying exempt sales of medicinal cannabis. In addition, you should claim a deduction on your sales and use tax return for the qualifying exempt medicinal cannabis sales. To claim the exempt sales, you must verify that purchasers have the proper identification (a valid MMIC and a valid government issued ID) and maintain specific information for your records as explained below under the Record Keeping section.

Record Keeping

Medicinal cannabis retailers that make qualifying exempt sales and claim the deduction on their sales and use tax return should maintain the following records (either physical or electronic) for each transaction:

  • The purchaser’s nine-digit ID number and expiration date, as shown on the qualified patient’s or primary caregiver’s unexpired Medical Marijuana Identification Card (MMIC) (see below for example of a patient MMIC); and
  • The related sales invoice or other original records of sale.

A valid MMIC is issued by the California Department of Public Health (CDPH).  The card (sample pictured below) includes the following:

Sample Patient Medical Marijuana Identification Card

  • Issued by the “State of California” with the state seal
  • States either “Patient” or “Caregiver”
  • Patient’s or primary caregiver’s photo
  • Nine-digit ID number
  • CDPH website to verify ID number
  • Expiration date
  • County that issued card with phone number

Retailers may verify the validity of the nine-digit ID number on the CDPH website.

Consignment Sales

You are responsible for obtaining a seller’s permit and reporting and paying the sales tax on the retail selling price of consignment sales. When you have possession or control of the item you are selling and can transfer ownership or use of the item to the buyer without further action on the part of the owner, you are considered the retailer of the item.

For example, your store accepts pipes and accessories to sell on consignment. You agree to sell the products but will not pay for the product unless it sells. Your agreement authorizes you to sell the products and transfer ownership to the buyer. You are considered the retailer of the accessories you sell in this way and must pay sales tax based on your retail selling price.

Purchases

When you purchase a product that will be resold, you can purchase it without paying sales or use tax by providing the seller a valid and timely resale certificate. Sales tax will apply when you sell the product at retail. However, when you purchase a product for resale without paying sales tax but, instead of selling it, you consume or use the product, then you owe the use tax based upon the amount of the purchase price.

For example, if you issue a resale certificate when purchasing a pipe but instead gift it to someone, you owe use tax based upon its purchase price. The use tax rate is the same as the sales tax rate in effect at the location of use. To pay use tax, report the purchase price of the taxable items 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.

Supplies, Equipment, and other Business Expenses

Products you purchase for use in your business (signs, fire extinguishers, display cases, weight and measurement equipment, computers, etc.) are subject to sales tax at the time of purchase. Your supplier will normally collect and report the sales tax. However, if you purchase equipment or supplies for use in your business online or from an out-of-state seller, the sale may be subject to use tax.

If the out-of-state seller does not charge California use tax, you should report the purchase price on your sales and use tax return. To pay the use tax, report the purchase price of the taxable products under Purchases Subject to Use Tax on your sales and use tax return. Those purchases become part of the total amount subject to tax.

Record Keeping

You are required by law to keep business records so that we may verify the accuracy of your sales and use tax return and determine how much tax is due, when a return has not been filed.

Additionally, maintaining good books and records will help you keep track of your sales and purchases and assist you when preparing your sales and use tax return. Records must be kept for at least four (4) years, unless otherwise directed by the CDTFA. If you do not maintain records, it may be considered evidence of negligence or intent to evade the tax and may result in penalties.

Examples of records you must keep include:

  • Sales Invoices
  • Cash Register Tapes
  • Sales Journals
  • Resale Certificates
  • Shipping Documents
  • Purchase Invoices
  • Bank Records
  • Purchase Orders
  • Purchase Journals
  • Tax Returns

For more detailed information on sales and use tax recordkeeping, please see our Keeping Records webpage.

Please note, the Medicinal and Adult-Use Cannabis Regulation and Safety Act requires a licensee to keep accurate records of commercial cannabis activity for a minimum of seven years. For example, every sale or transport of cannabis or cannabis products from one licensee to another must be recorded on a sales invoice or receipt. Sales invoices and receipts may be maintained electronically and must be available for review. Each sales invoice or receipt must include:

  • Name and address of the seller.
  • Name and address of the purchaser.
  • Date of sale and invoice number.
  • Kind, quantity, size, and capacity of packages of cannabis or cannabis products sold.
  • The cost to the purchaser, including any discount, applied to the price shown on the invoice.
  • The location of transport of the cannabis or cannabis product unless the transport was from the licensee’s location.
  • Any other information specified by the licensing authority.

 

 

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