Calculations – California Cannabis Taxes – Retail
The Calculation – California Cannabis Taxes – Retail is certainly NOT the most exciting discussion topic among the cannabis industry. However, while everyone may think that it is a simple task, nothing could be further from reality. The nightmare comes when a small retailer has been doing the calculations improperly for a period of time and the authorities conduct an audit and present them with a HUGE bill for taxes that are properly due, which they will NEVER be able to recover from long disappeared customers. So, even if you don’t appreciate the topic, its something to think about.
Sales and Excise Tax on Non-Medical Cannabis
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.
Calculation Based Upon Average Market Price
Effective January 1, 2018, a 15 percent cannabis excise tax applies to the average market price of the retail sale. The average market price is determined by the type of transaction (either “arm’s length” or “non-arms’ length”) that occurred when the seller (cultivator, manufacturer or distributor) sold the product to you.
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 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.
The markup will be determined by the CDTFA on a biannual basis in six-month intervals. A special notice will be mailed to cannabis businesses informing them of the markup rate. The markup rate will also be posted on the Special Taxes and Fees Rate Page.
Calculating Cannabis Excise Tax and Required Language on Receipts
When reselling the cannabis flowers purchased from your distributor in this transaction, you must collect the cannabis excise tax from your customer. You may not sell cannabis or cannabis products unless your customer pays the excise tax.
You are not required to itemize the cannabis excise tax on your receipt or invoice you provide to your customer, but you must include the following statement, “The cannabis excise taxes are included in the total amount of this invoice.”
Calculating The Sales Tax On Cannabis
The sales tax due on your taxable cannabis sales at retail must be computed on your selling price of cannabis, plus the cannabis excise tax. This example assumes an 8.5 percent sales tax rate, but your actual rate may differ. You must use the rates in effect at the time of sale. Current rates can be found on our website. If you sell an eighth of an ounce of cannabis for $38.00, including the cannabis excise tax, assuming an 8.5 percent sales tax rate, you will be responsible for $3.23 in sales tax on your sale of an eighth of an ounce of cannabis:
Selling price of cannabis, including excise tax $38.00
Sales tax due ($38 x 8.5%) . $3.23
Total due ($38 + $3.23) . $41.23
When you report this sale on your sales and use tax return, the measure of tax (that is, the amount that is subject to sales tax) is $38, the selling price plus the cannabis excise tax.
If you do not separately state an amount of sales tax on the invoice or receipt you provide to your customer, you must post on your premises, or include on the price tag, in an advertisement, or other printed material, a notice to the effect: “All prices of taxable items include sales tax reimbursement computed to the nearest mill.”
Local or County Taxes
Some cities have enacted measures requiring that cannabis businesses located in their jurisdictions pay a cannabis business tax. If you add a separate amount to your customers’ invoices or receipts to cover your cannabis business tax, sales tax applies to the business tax amount.
Generally, whenever an expense of the retailer is separately added to any taxable sale, the expense is also subject to sales tax.
Calculating Sales Tax on Medicinal Cannabis Sold to a Qualified Patient
You sell an eighth of an ounce of cannabis for $38.00, which includes the cannabis excise tax, to a customer who has a valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government-issued identification card (ID).
Since the customer has a valid MMIC and ID, the sale is exempt from sales tax. There is no exemption from the cannabis excise tax.
Sales tax calculation:
Selling price of cannabis, including excise tax $38.00
Sales tax $0.00
The customer must provide you with a valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government-issued identification card (ID). A physician’s note is not sufficient to support the exemption from sales tax. For more information, see the below heading Prop 64 Exempts Certain Sales of Medicinal Cannabis from Sales and Use Taxes
More on Prop. 64 – Medicinal Cannabis
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.
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.
If you have further questions, please feel free to contact us.
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