Beginning January 1, 2023, the responsibility for collecting and paying the cannabis excise tax to the California Department of Tax and Fee Administration (CDTFA) shifts from distributors to cannabis retailers.
What Must California Retailers Do Before January 1, 2023
In December 2022, CDTFA will automatically register cannabis retailers and microbusinesses that sell cannabis or cannabis products at retail with a cannabis retailer excise tax account based on their licensing information with the Department of Cannabis Control (DCC). Retailers should then receive notice from CDTFA if registration is automatic. If you do not receive notice, then you must register with CDTFA for a cannabis retailer excise tax account which can be done by clicking here, which will be available in late December 2022.
The cannabis retailer excise tax account is required in addition to the retailer’s sales and use tax account.
What Must California Retailers Do Starting January 1, 2023
Beginning January 1, 2023, cannabis retailers are responsible for collecting the 15% cannabis excise tax from purchasers based on gross receipts from the retail sale of cannabis or cannabis products.
- Gross receipts include the sales price of the cannabis or cannabis products and all charges related to the sale, such as delivery fees and any local cannabis taxes listed separately on the invoice or receipt provided to the purchaser.
- Gross receipts for cannabis excise tax purposes do not include sales tax or the gross receipts from the retail sale of any noncannabis item.
- The cannabis excise tax must be listed separately on the receipt or invoice provided to the retail purchaser and included in gross receipts subject to sales and use tax.
Cannabis retailers must file cannabis retailer excise tax returns online and pay the cannabis excise tax collected from purchasers to CDTFA. New cannabis retailer excise tax accounts will be assigned to a quarterly reporting basis, due and payable on or before the last day of the month following each quarterly period.
- The first cannabis retailer excise tax return will be due May 1, 2023, for the January 1, 2023, through March 31, 2023, quarterly reporting period.
- Cannabis retailers may claim a credit on their cannabis retailer excise tax return for any cannabis excise tax paid to a distributor for cannabis or cannabis products purchased before January 1, 2023, and sold at retail on and after January 1, 2023. Any amount of cannabis excise tax due to a distributor for purchases made prior to January 1, 2023, must be paid to the distributor no later than April 1, 2023.
- Cannabis retailers must keep documentation to support any credits reported on their cannabis retailer excise tax return. Without proper documentation, the claimed credit may be disallowed. CDTFA may hold the cannabis retailer liable for any unpaid cannabis excise tax. Documentation may include, but is not limited to:
- Sales invoice or receipt indicating cannabis or cannabis products sold in a retail sale on or after January 1, 2023.
- Purchase invoice or manifest indicating the cannabis or cannabis products that were sold in a retail sale on or after January 1, 2023, were sold or transferred by a distributor to the cannabis retailer prior to January 1, 2023.
- Other information supporting the payment of the cannabis excise tax to a distributor for cannabis or cannabis products purchased from the distributor prior to January 1, 2023, and sold at retail on and after January 1, 2023.
- Certain retailers who are already approved for a license fee waiver with DCC, can apply with CDTFA to retain 20% of the cannabis excise tax due as vendor compensation.
Cannabis Excise Tax
The 15% cannabis excise tax is based on the average market price of the cannabis or cannabis products sold in a retail sale. The mark-up rate is used when calculating the average market price to determine the cannabis excise tax due in an arm’s length transaction. In an arm’s length transaction, the average market price is the retailer’s wholesale cost of the cannabis or cannabis products plus, the mark-up rate determined by the CDTFA. In a non-arm’s length transaction, the average market price is the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.
Retailers are required to provide purchasers with a receipt or other similar document that includes the following statement – “The cannabis excise taxes are included in the total amount of this invoice.”
Every sale or transport of cannabis or cannabis products must be recorded on an invoice or receipt. Cannabis licensees are required to keep invoices for a minimum of seven years. These invoices serve as verification that the appropriate tax was paid.
How This Impacts The Black Market
Legal California cannabis businesses have been complaining about taxes, which in parts of the state are among the highest in the nation. Many believe that these taxes on compliant cannabis operators while still mandating compliance with State and local regulations will widen the price disparity gap between cannabis products sold in the black market vs. cannabis products sold in the legal market. But with the State stepping up its enforcement efforts to uncover and prosecute illegal cannabis operators, the State is hoping to eliminate this discrepancy by eradicating non-compliant operators.
What Should You Do?
Start your cannabis business on the right track. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.