New cannabis taxes have been in effect in California starting January 1, 2018. Beginning January 1, 2018, licensed distributors who supply you with cannabis or cannabis products are required to calculate and collect the 15% cannabis excise tax from you. When you sell those items at retail you are required to collect the cannabis excise tax from your customer. But what are your excise tax obligations for cannabis acquired before January 1, 2018 and sold after December 31, 2017?
The administration and enforcement of the cannabis taxes is under the authority of California Department Of Tax And Fee Administration (“CDTFA”).
For sales of cannabis from your inventory acquired prior to January 1, 2018… you are required to collect the 15% cannabis excise tax from your customer when you sell those items and then pay that amount to a licensed distributor with whom you have established a business relationship.
To collect the excise tax from your customers, apply the 15% excise tax to the “average market price”.
The average market price can be calculated as either:
- Your gross receipts, which is the retail selling price to your customer, or
- Your wholesale cost plus a markup determined by CDTFA.
The examples below illustrate the two methods to calculate the average market price and apply the 15% excise tax on your sale to your customer. Both examples assume that your retail selling price to your customer is $100 and the sales tax rate is 8% (your actual sales tax rate may be different):
Option #1 Based on your gross receipts.
|Retail selling price||
|15% excise tax ($100 x 15%)||
|Total gross receipts ($100 + $15)||
|8% sales tax ($115 x 8%)||
|Total amount due ($115 + $9.20)||
You must pay the $15.00 excise tax collected from your customer to a licensed distributor with whom you have a business relationship. The sales tax is due on your total gross receipts, which includes the excise tax. You must report and pay the $9.20 in sales tax on the quarterly sales and use tax return you file with the CDTFA.
Option # 2 Based on your wholesale cost plus a markup predetermined by the CDTFA.
The markup rate percentage is currently set at 60% and is not meant to be used to determine the markup on your product that you sell to your customers. This markup rate is determined by the CDTFA every six months.
|Your wholesale cost||
|60% current markup ($75 x 60%)||
|Average market price ($75 + $45)||
|15% Excise tax due ($120 x 15%)||
You must pay the $18.00 excise tax collected from your customer to a licensed distributor with whom you have a business relationship.
The sales tax is a separate computation as follows:
|Retail selling price, including excise tax ($100 + $18)||
|8% sales tax ($118 x 8%)||
|Total amount due||
The sales tax is due on your total gross receipts, which includes the excise tax. You must report and pay the $9.44 in sales tax on your quarterly sales and use tax return you file with the CDTFA.
Required Statement To Include When Invoicing Your Customers.
When invoicing your customer, you are required to add the following statement on the invoice or receipt to your customer: “The excise taxes are included in the total amount of this invoice”.
Payment Of The Excise Tax Must Be To A Licensed Cannabis Distributor.
Regardless of which option you choose, you must pay the excise tax you collect to a licensed cannabis distributor by the 15th day of the month following the calendar month you collected the excise tax from your customer. Make sure you receive a receipt from the licensed distributor showing the amount of excise tax you collected and paid to the licensed distributor.
What Should You Do?
It is enough that cannabis businesses have to deal with the uncertainty of the Federal government in enforcing the Federal law that makes it a crime to possess and sell cannabis. Make sure that your cannabis business is in compliance with California Cannabis Taxes by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Inland Empire (Ontario) and other California locations. We can come up with solutions and strategies to these challenges and protect you and your business to maximize your net profits.
On June 15, 2017, the California Legislature passed Assembly Bill 102, which transfers nearly all tax administration and appeal functions from the BOE to two new tax departments: the Department Of Tax And Fee Administration (“DTFA”) and the Office Of Tax Appeals (“OTA”).
Starting January 1, 2018, California State tax appeals will be heard by the Office Of Tax Appeals (“OTA”). Created by the Taxpayer Transparency And Fairness Act Of 2017, the OTA will replace the appellate process once handled by the State Board of Equalization (“BOE”). The BOE handles the enforcement of various types of state taxes – most notably Property Taxes and California Sales & Use Taxes. The OTA will hear and determine all appeals that involve corporate income tax, corporate franchise tax, personal income tax, sales tax, and use tax. If a taxpayer disagrees with the audit findings involving any of these taxes which are reflected on a Notice Of Action or a Notice Of Determination, the taxpayer may file an appeal with the new OTA by the “appeal date” listed on said notice. As of October 1, 2017, any such notice that gets issued will include an insert containing information about appeal rights and the OTA’s contact information. As of October 1, 2017 all appeals need to be filed with OTA, and beginning January 1, 2018, OTA’s three-member panels will hear and determine all appeals. The BOE will cease hearing these appeals after December 31, 2017.
Old System Was “Politically Connected”
The BOE was constitutionally created in 1879 with a mandate that property taxes would be fairly assessed and collected across California. Since that time, the BOE’s statutory authority has been expanded to administer the state’s sales and use tax and numerous other state taxes and fees. In addition, the Board, comprising four members elected from districts and the statewide-elected State Controller, also hears and decides tax disputes. Until the change in the law, California was the only state in the United States where administrative tax disputes were heard by elected representatives. Not only was it allowed but also it was encouraged that taxpayers (or when represented, their attorneys) contact each government official sitting on the five-member BOE panel in ex-parte communications to promote the taxpayer’s position in advance of the hearing.
Designed To Promoted Fairness
On June 15, 2017, the California Legislature passed Assembly Bill 102, which transfers nearly all tax administration and appeal functions from the BOE to two new tax departments: the DTFA and the OTA. The BOE still retains its constitutional duties which going back to its historical roots is the oversight of property taxes and assessment of state-assessed properties. Both the DTFA and OTA would be under the control of respective directors, each appointed by the governor and subject to confirmation by the California Senate.
The DTFA will be based in Sacramento and will administer state and local sales and use taxes, fuel and tobacco excise taxes, and a variety of other taxes and fees. The new law has no impact on State income tax audits which will still be conducted by the Franchise Tax Board (“FTB”) or employment tax audits which will still be conducted by the Employment Development Department (“EDD”). OTA would hear sales and use tax appeals from the DTFA and personal and corporate income tax appeals from the FTB.
The OTA was designed by the State Legislature to operate independent of any other State tax office and provides a venue where disagreements concerning the application of California State tax law can be resolved on a fair and impartial basis for both the taxpayer and the government. The OTA is supposed to take a fresh look at a taxpayer’s case and consider the strengths and weaknesses of the issues in the taxpayer’s case. The advantage of appealing a California State tax audit to this level provides the taxpayer with the opportunity to reach a mutually acceptable settlement without expensive and time-consuming court trials. This approach follows what the IRS and over half the State Tax Agencies have been doing for many years.
Within the OTA, there will be tax appeals panels consisting of three administrative law judges (ALJ’s). These ALJ’s must have state tax experience and each be a member of the California bar. OTA headquarters will be in Sacramento, with hearing offices in Sacramento, Fresno, and Los Angeles. The ALJ’s must issue written opinions for each appeal.
Although the OTA is not a judicial body or a tax court, it is now a step in California Tax Procedure for taxpayers to challenge tax audit decisions. Furthermore, decisions of the OTA can be appealed to California Superior Court for a “de novo review”. “De novo” is a form of appeal in which the court holds a trial as if no prior trial had been held.
Looking To Appeal A California State Tax Audit Report To The Office Of Appeals?
When taxpayers disagree with the findings of their California State tax audits, they may usually appeal to the OTA. The auditor agent will issue a Notice Of Determination to a taxpayer, which essentially provides the taxpayer with the opportunity to file a Tax Protest requesting his or her case be heard by the OTA. Hiring an experienced tax attorney should make a difference in getting the best possible result. The attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. with locations in Orange County, San Francisco and elsewhere in California know how best to communicate directly to tax appellate bodies including the OTA and build a persuasive case on your behalf because we know how to present your case with legal argument and tax authority.
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