There are many different types of taxes in the cannabis industry. Cannabis distributors play a big role in the collection and remittance of cannabis sales taxes, excise taxes, cultivation taxes, and distributor taxes. These responsibilities are on top of the licensing fees and restrictions around hours of operation – meaning cannabis distributors face some of the toughest, most restrictive sets of regulations in the cannabis market.
If you’re a cannabis distributor, you will likely be under increased scrutiny from the California tax collectors.
It’s imperative to know how to file your taxes, how much to collect from your cannabis partners, and how to handle sales tax. Here’s how a distributor collects and pays taxes in California.
Getting Started as a Cannabis Distributor in California
Distributors are responsible for collecting cannabis tax from the cultivators and manufacturers with whom they work. But, before you can enter the cannabis market as a distributor, you must get licensed by your local municipality and by the state.
A cannabis distributor is a cannabis operator who is involved in one of the following business activities:
- The purchase of cannabis flower and other products from other licensees
- The secure transportation of these products to and from licensed premises.
- Separating testing samples to their own dedicated storage for transportation to independent, licensed labs.
- Quality assurance on product and packaging in compliance with safety regulations.
- The storage, tracking, and delivery of cannabis products to licensed retailers
- Recording all transactions in the state’s Track and Trace system.
By some counts, there are around 350 licensed cannabis distributors in California. If you’re starting to think about joining the cannabis market as a distributor, you will start by getting a distributor license from your local city council.
Distributor licenses are a little tricky due to variable zoning regulations and permit caps. Each city and county has strict zoning ordinances that can make it complicated for distributors to operate.
As one legal analyst describes, “just because the City or County has designated an area as a cannabis-friendly ‘green-zone’ or a certain property is zoned appropriately, your parcel may still be in conflict with a school, park, church, daycare or drug treatment setback. You may also be subject to an ‘over concentration’ issue if too many cannabis businesses beat you to the area.”
Once you receive the appropriate local license, you will need a state license for cannabis distribution. Register with the CDTFA for a cannabis tax permit. This permit will be completely separate from any other permit you may have with the CDTFA. This permit grants you the ability to distribute cannabis to retailers all over the state of California, not just in the local jurisdiction that you have been granted approval.
Because the California state license is relatively open, you may want to consider opening multiple hubs for distribution – especially since there are limited hours during which a cannabis operator may distribute product. Those hours (6AM to 9PM) often make it difficult to make a full trip to every cannabis partner; and distributors are not permitted to store product in a vehicle overnight. You must have a licensed facility to store cannabis as a distributor.
Once you have the necessary state and local licenses, distributors must register with the CDTFA for a cannabis tax permit. This is not the same as a seller’s permit, and will require filing Sales and Use Tax Returns. Speak to one of our experts to find out more about this process.
The Role of Cannabis Distributor in Tax Collection
Once you have your licenses and permits, you will be ready to distribute cannabis. Since growers cannot sell directly to retailers, distributors play an integral role in getting fresh product to the retailers as quickly and as safely as possible. You are also responsible for collecting taxes throughout the process.
Let’s walk through an example of how a distributor will collect taxes while transporting cannabis.
In this scenario, ABC Cali Cannabis Grower sells cannabis flower to your distribution company. At the time of sale, they pay cultivation tax to you, the distributor. In return, you give a receipt back to the grower showing the cultivation tax was paid. You will then pass this cultivation tax through to the CDTFA.
The cultivation tax rates are based on dry weight oz as follows:
- $9.25/dry weight oz of flower
- $2.75/oz of dry leaves (trim)
- $1.29/oz of fresh flower*
*To qualify as fresh flower, the harvested cannabis must be weighed within two hours of harvesting.
We usually see dry flower and trim compose the bulk of biomass sold to distributor. There is barely any fresh flower in the market, so as a distributor, it’s likely you’ll be working with the first two tax rates.
Below are two flowcharts that detail California Cannabis Taxes with and without a cannabis manufacturer in the process.
Note: These flowcharts are a basic representation for cannabis taxes and does not include all the tax obligations cannabis businesses may have. Cannabis distributors are required to hold a cannabis tax permit, file returns, and pay any cultivation tax and cannabis excise tax due to the CDTFA. All persons who sell cannabis or cannabis products, and/or other items, are required to hold a seller’s permit, file returns, and pay any sales or use tax due to the CDTFA. For more information, see the Getting Started section of the Tax Guide for Cannabis Businesses at http://www.cdtfa.ca.gov/industry/cannabis.htm.
Distributors are also responsible for filing the cannabis taxes after collecting excise tax from retailers, and for keeping resale certificates on file from retailers. Distributors collect cannabis excise tax (15% of the average market price) from retailers and send it to the CDTFA. Unless you’re operating as a cannabis microbusiness, your sales as a cannabis distributor are likely to be all resale – meaning you won’t be responsible for paying sales tax. That means you need to familiarize yourself with resale certificates.
Resale certificates allow you to buy resale inventory without paying sales tax reimbursement to the seller. You must provide a timely resale certificate to your supplier, with your seller’s permit information at the time you are making your purchases. Use Form CDTFA-230 as your resale certificate.
Don’t use a resale certificate for any personal property – you may be penalized. Also, when you sell products to retailers, those retailers will give you a resale certificate that you should keep for your records.
If you think it may be helpful to get some help with setting up a tax system for your cannabis distribution company or vertically integrated business, then you can get in touch GreenGrowth CPAs today.