Those who are thinking about entering the cannabis industry often have questions about how California taxes the production, storage and sale of the popular drug. Fortunately, California Department of Tax and Fee Administration (CDTFA) provides an in-depth guide on what is eligible to be taxed and what the effective tax rates of cannabis and cannabis-based products are. Cultiva Law provides you with this overview of California’s taxation of cannabis, and some helpful tips on understanding how the law may affect you or your cannabis business.
Sales And Use Taxes
As with most businesses in California, you must pay both sales and use taxes on your business revenue. Additionally, all cannabis retailers must register with CDTFA as a seller. In addition to needing a seller’s permit, if you are a distributor or a microbusiness that is licensed to act as a distributor of cannabis or cannabis-based products, then you must register with CDTFA for a cannabis tax permit and must regularly file cannabis tax returns.
California mandates that the sale of all tangible personal property is subject to taxation unless there is a specific exemption. Cannabis has been determined to fall under the definition of tangible personal property since it can be touched, weighed, measured and felt. The sale of tangible personal property is subject to both a sales and use tax. However, certain forms of medical cannabis sales are exempt from this type of taxation.
You pay a use tax when you don’t pay a sales tax on certain items that you purchase out-of-state. For example, you buy something in Oregon that would ordinarily be subject to California sales tax if that same item were purchased in California. Since you don’t pay sales tax at the time of your purchase in Oregon, California requires you to pay a use tax.
Cannabis Excise And Cultivation Taxes
California levies an excise tax on most forms of cannabis. An excise tax is typically a business-based tax on certain goods. Currently, the cannabis excise tax is set at 15 percent of the average market value of cannabis at retail. Cannabis that enters the commercial market is also subject to a cultivation tax based primarily on the weight and type of the cannabis.
There are three categories of cannabis for purposes of the cultivation tax: cannabis flower, fresh cannabis plant, and cannabis leaves. Due to recent legislation (Assembly Bill 1872), the cultivation tax rates for the 2021 calendar year remain unchanged from 2020. CDTFA will adjust the cultivation tax rates annually for inflation beginning with the 2022 calendar year.
It is important to note that cannabis retailers are prohibited from giving away any amount of cannabis or cannabis products unless authorized to do so by Bureau of Cannabis Control (BCC), the agency that administers cannabis licensing activities for retailers and distributors. If you are authorized to give cannabis away free of charge, then the cannabis excise tax does not apply, but you may owe use tax on your purchase price of cannabis or cannabis-based products.
CDTFA provides an online portal for the purpose of filing and paying your cannabis business taxes. This online system requires you to first register your cannabis business by creating a username and password. In addition to paying taxes, all retailers, cultivators, and manufacturers of cannabis are required to obtain a cannabis license. Cultivators can apply for a license with California Department of Food and Agriculture. Manufacturers must apply with California Department of Public Health, while retailers must apply with California Bureau of Cannabis Control.