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California’s Cannabis Excise and Cultivation Taxes (and Penalties)

Posted by hderekdavis on Dec 11, 2017 10:31:52 AM

Questions about cannabis excise and cultivation taxes in California? Read this complete guide for everything you need to know.

  • Retailers are responsible for collecting the cannabis excise tax and then for paying the tax to the distributor.
  • Excise tax is set at 15% of average market price. 
  • Cultivators pay the cultivation tax to manufacturers who then pay the tax to the distributor in a similar process to the excise tax collection.

Speak to one of our experts for more information about California's cannabis excise and cultivation taxes. 

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January 1 is fast approaching, and as we get closer to the start date for full cannabis legalization in California, the Department of Tax and Fee Administration continues to release regulations and guidelines for cannabis cultivation. GreenGrowth CPAs will continue to provide updates and explainers as we swing into 2018, starting with the latest emergency action: Title 18, Section 3700, Cannabis Excise and Cultivation Taxes.

What is it?

On December 1, 2017, the California DTFA adopted Title 18, Section 3700 Cannabis Excise and Cultivation Taxes to administer and collect excise and cultivation taxes on canna-businesses.

What do you need to know?

First, some background. When California voted to legalize the sale of cannabis, the regulations drafted in 2017 decreed the following:

I. Excise Tax

This tax applies to both cannabis and cannabis products. Retailers are responsible for collecting the cannabis excise tax and then for paying the tax to the distributor. The distributor then pays the cannabis excise tax to the CDTFA (and we'll have more on what that process entails in a later post!). The current excise tax is set at a rate of 15% of the “average market price” when purchased at retail.

What’s the average market price? It’s determined as the the wholesale cost of the cannabis or cannabis products sold or transferred to the retailer, plus some markup as predetermined by the CDTFA-- this markup is currently set at 60% and will be reviewed for revision ever 6 months.

II. Cultivation Tax

Under the cultivation tax, cannabis cultivators are responsible for paying a tax on all harvested cannabis entering the commercial market. Cultivators pay this tax to manufacturers who then pay the tax to the distributor in a similar process to the excise tax collection. The distributor reports and pays the cultivation tax to the CDTFA. Current cultivation tax rates are $9.25 per dry-weight ounce of cannabis flowers, as well as a tax of $2.75 per dry-weight ounce of cannabis leaves.

Exempt from the cultivation tax are businesses that cultivate cannabis for personal use or by a qualified patient or primary caregiver -- i.e., medical cannabis cultivators.

So what’s new and different as a result of Title 18 Section 3700? First, the emergency regulation clarifies and defines issues surrounding the imposition and collection of the cultivation tax. It also addresses the penalties that result from a canna-business not paying their taxes.

  • Cultivation tax updates: under the California Tax Law’s cultivation tax, there are considered two categories of cannabis: cannabis flowers and cannabis leaves. Flowers are considered to be “dried flowers.” However, there’s another form of cannabis -- flowers which are not dry. Regulation 3700 defines fresh cannabis plant to mean “the flowers, leaves, or a combination of adjoined flowers, leaves, stems, and stalk from the plant Cannabis satavia L. that is either cut off just above the roots, or otherwise removed from the plant,” which is “weighed within two hours of the plant being harvested and without any further processing.” Regulation 3700 also sets the rate of the cultivation tax on fresh cannabis plant at $1.29 per ounce based on the Department’s internal research and analysis.
  • Penalties update: Section 3700 regulates that distributors must file sales and use tax returns to report their sales of cannabis and cannabis products in the quarters that the sales occur. Furthermore, anyone who fails to pay the cannabis excise tax or the cultivation tax shall be subject to a penalty of at least one-half the amount of the taxes not paid, with some exceptions made for reasonable cause.

How can you prepare your business?

In summary, Section 3700 makes a few key changes that affect your business’s tax compliance. These are the cultivation tax rates you need to know:

  1. Nine dollars and twenty-five cents ($9.25) per dry-weight ounce of cannabis flowers, and at a proportionate rate for any other quantity.
  2. Two dollars and seventy-five cents ($2.75) per dry-weight ounce of cannabis leaves, and at a proportionate rate for any other quantity.
  3. One dollar and twenty-nine cents ($1.29) per ounce of fresh cannabis plant, and at a proportionate rate for any other quantity.

Should you fail to heed any of the excise or cultivation tax regulations, the penalties are as follows:

  1. Late Payments: if you pay your taxes late, a penalty of 50% of the amount of the unpaid cannabis excise tax or cannabis cultivation tax shall be added to the cannabis excise tax and cultivation tax not paid in whole or in part before the tax deadline.
  2. Relief from Late Payment Penalty due to Reasonable Cause: if your business fails to make a timely payment due to reasonable cause, you may be relieved of the tax penalty. Reasonable cause can only be determined by the CDTFA, which considers reasonable cause to be “circumstances beyond the person’s control.” To qualify for this penalty exception, you must file with the Department a claim for relief.

Any questions about these new updates, or about any part of the California Cannabis Tax Law? Get in touch with the experts at GreenGrowth CPAs. We’re happy to help.

Topics: Compliance, Taxes

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