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. Additionally, given this new responsibility for cannabis retailers, CDTFA is offering a 20% vendor compensation to those qualified cannabis retailers who apply.
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.
Retailers Need to Apply to CDTFA for Entitlement to the 20% Vendor Compensation
Regulation 3705 was issued by the CDTFA effective January 1, 2023 whereby a qualified licensed cannabis retailer may retain vendor compensation in an amount equal to 20% of the cannabis excise taxes imposed on their retail sales of cannabis or cannabis products authorized under their retailer license for one licensed retail premises provided that a completed Vendor Compensation Application is filed and approved by CDTFA.
Considering that the California State Cannabis Excise Tax Rate is 15%, a retailer who takes advantage of this provision will effectively gain a 3% increase profit by virtue of retaining 20% of the cannabis tax collected.
A licensed cannabis retailer must request approval to retain vendor compensation by submitting a completed Vendor Compensation Application to the CDTFA through the CDTFA’s online services portal via its website at www.cdtfa.ca.gov.
Every Vendor Compensation Application shall include the following:
- The addresses of each licensed premises at which the licensed cannabis retailer is authorized to engage in retail sales of cannabis or cannabis products and indicate the licensed premises where commercial cannabis activities are authorized to be conducted under the retailer license for which the DCC approved the licensed cannabis retailer’s fee waiver. Click here for the application for the DCC Equity Fee Waiver.
- The issuance and expiration dates and number of the retailer license of the licensed cannabis retailer for which the DCC approved the licensed cannabis retailer’s fee waiver;
- The date the DCC approved the licensed cannabis retailer’s fee waiver;
- The number of the licensed cannabis retailer’s seller’s permit issued pursuant to part 1 (commencing with section 6001) of division 2 of the Revenue and Taxation Code; and
- The contact information for the individual completing the application. Such information shall include the individual’s first and last name, telephone number, and email address.
- A copy of the DCC fee waiver approval notice issued to the licensed cannabis retailer; and
- A copy of the retailer license of the licensed cannabis retailer for which the DCC approved the licensed cannabis retailer’s fee waiver.
The CDTFA will notify the licensed cannabis retailer in writing as to whether they are approved to retain vendor compensation. If they are approved, the CDTFA will also specify the quarterly periods for which they are approved to retain vendor compensation from the cannabis excise taxes imposed on their retail sales of cannabis or cannabis products authorized under their retailer license.
Since this benefit is available starting with the 1st quarter of 2023, retailers should not hesitate in applying especially if the retailer has yet to secure the prerequisite fee waiver from DCC.
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.