As of January, 2020, distributors need to know about the CDTFA's changes to California's cannabis excise tax.
- Distributors will need to pay the excise tax more frequently, and the basis that they calculate the cannabis excise tax on could be lowered, but the markup on that basis has increased.
- The change in tax reporting frequency means that cannabis distributors have many more opportunities to be late on your excise tax payments.
- Dispensaries should check their records to make sure they aren't overcharged for cannabis excise taxes.
Speak to one of our experts for further guidance on the CDTFA's changes.
As of the beginning of this year, there are some changes to how California is calculating the excise tax for cannabis distributors. The CDTFA released guidance changing the calculation of cannabis excise tax, as well as the payment schedule. Here’s what you need to know.
The cannabis excise tax was originally priced at 15% of the average market price of the cannabis product. The average market price is determined depending on the type of transaction between you and the seller. There are two types of transactions:
- Arm’s length transaction: a transaction made between two informed and willing parties. The payment received by the retailer must reflect the fair market value of the cannabis or cannabis products in the open market. In practice, this means the wholesale cost plus a markup.
- Wholesale cost: this is determined by the amount you pay for a cannabis product plus transportation costs and before discounts or trade allowances. For instance, a cannabis product that’s purchased at $150 and shipped for an additional $25 will have a wholesale cost of $175.
- Markup: as of January 1, 2018, the standard markup rate is 60% for cannabis and cannabis products.
- Non-arm’s length transaction: a transaction where the average market price is defined as the retailer’s total gross receipts from the retail sale. If your business operates as both a distributor and retailer, then you likely use a non-arm’s length transaction to sell your goods.
Cannabis Excise Tax 2020 Update
Before January 1, 2020, distributors had to calculate the cannabis excise tax on an undiscounted price. If you sold someone a cannabis product that wholesales for $10, but you gave them a discount so that it’s $8 to them, you still needed to calculate your excise tax markup on the $10. Also, the cannabis excise tax was paid quarterly and the standard markup was 60% on the wholesale price.
The new change from the CDTFA states that as of January 1, 2020, you can calculate the excise tax markup off of the discounted price of $8. Additionally, payments for cannabis excise tax now need to be remitted monthly and not quarterly and standard markup is now 80% of the wholesale price.
What does this mean in practice?
Distributors will need to pay the excise tax more frequently and the basis that the calculate the cannabis excise tax on could be lowered, but the markup on that basis has increased.
It’s a slightly different calculation for cannabis distributors in charge of collecting the excise tax. To calculate cannabis excise tax you must collect from cannabis retailers, you typically markup your wholesale price by 80% then multiply that number by 15% to get the excise tax amount. Or, for a quick calculation, just multiply your wholesale price by 27% (1.8*15%).
Cannabis Excise Tax Tips for Cannabis Distributors and Retailers
Cannabis Distribution Businesses
As a distributor, this really has no material effect on your business operation aside from making sure your calculations are correct.
You still are responsible for collecting and remitting the cannabis excise tax to state tax authorities. But again, the caveat, however, is that you will need to change your calculation. If you continue to calculate excise tax by using the undiscounted price, then you could compromise customer relationships, especially with those big accounts, resulting in thousands of dollars of over-collected taxes. The state tax authorities will not let you know if you are collecting more taxes than necessary.
If you’ve already filed the excise tax and paid for it using the undiscounted price in the previous months, then there’s not much you can do. The state has already taken custody of the money, and our experts don’t foresee them giving any “returns”.
The downside to this mistake is that distributors may be on the hook if a dispensary wants that money back and this is only if you really want to keep that account. As a distributor, you could be held responsible for eating the cost of that additional tax you collected – a big problem for many new operators just getting off the ground.
If you haven’t paid the excise tax yet, work with your internal accounting team or your cannabis CPA to calculate the excess tax that was collected and refund it to your client.
Likewise, the change in tax reporting frequency means that cannabis distributors have many more opportunities to be late on your excise tax payments. As you may know, those penalties start at 50% of the excise tax due. With razor-thin margins, you cannot afford to be late. Make sure you have a tax calendar with reminders to have your excise tax payments submitted on time and with the proper amounts. Reach out to one of our CPAs if you need help.
Cannabis Dispensaries & Delivery Businesses
For cannabis retailers, look back at your January and February 2020 balance sheets. Check your excise tax payment to see if you have been overcharged by a distributor. If you have been overcharged, you may need to increase your prices to offset the excise tax expense for the short term. This depends on if you have sold that inventory already.
Be sure to reach out to your distributor immediately to make them aware of this update in the excise tax calculation so that you don’t lose business due to having to charge higher prices to offset a miscalculated excise tax payment. And, if you have any additional questions or concerns about the cannabis excise tax rate, get in touch with one of our experts.