Written by Abraham Finberg, CPA
On January 01, 2018, California cannabis purchasers will need to pay a 15% excise tax on their purchases of adult use and medical cannabis. That seems simple and we wish it was. Here are some of the weird permutations of this tax.
15% Tax on Retail Purchases – Arms Length Transactions
Purchasers will pay a 15% tax on their marijuana purchases. So if you, as a consumer, pay $2.00 you have to pay an extra $0.30. Right? Not exactly. The 15% tax is on the average market price of a retail sale. But what's the average market price? And how do you figure it out? Well that depends on how a retailer buys cannabis for its patients and customers. If the purchase was an arms-length transaction (a regular price as opposed to a price inflated or deflated due to a pre-existing relationship between the retailer and the wholesaler), the price is the wholesale price plus a markup. How much is the markup? Don't worry - the California Department of Taxes and Fees Administration (CDFTA) will figure it out for you and update the rate every six months. The CDFTA will post it on a special taxes and fees rate page on thier website: http://www.boe.ca.gov/sptaxprog/tax_rates_stfd.htm .
Lets do some math - That means that if the retailer buys a pound (454 grams) of cannabis flowers for $454 and California says the markup is 100%, the wholesale price per gram is $1, the average market price is $2 and the excise tax is $0.30. What if a retailer sells the product for $1.25 to get rid of slow moving inventory? The excise tax is still $0.30. What if a strain is very popular and the retailer sells it for $3.00? Exise tax remains at $0.30.
15% Exise Tax Based on Consumer Sales Price
Ok, no problem, what if you can control the wholesale price to make it lower, because you control the retailer and the distributor? Does that mean you can get a lower excise tax? Unfortunately, then the transaction would not be an arms-length transaction. In that situation you would use the price sold to the consumer.
How is the consumer going to know the amount of excise tax they have to pay? Retailers will need to list the excise tax as a separate item on their receipt. This is probably an operations nightmare. Let's say the retailer has three strains from two different vendors with different prices per gram from each vendor. They will have to calculate six different excise taxes. A retailer may decide to opt out of using the arms‑length transaction rule and just use the retail price of the product to avoid the headache of figuring out a per gram excise tax.
So you're the retailer and you figured out how much excise tax to pay. Now you're ready to pay with your sales tax return. Not so fast. A retailer doesn't pay the excise tax directly to the CDFTA. It pays the excise tax to the distributor within 90 days of buying product. We don't know yet who is responsible if the distributor does not pay the excise tax to the CDFTA. Chances are, both the retailer and the distributor will be assessed the tax.
What about sales tax? Sales tax will be dealt with in another article but there is one final wrinkle regarding excise taxes; the retailer will have to pay sales tax on the excise tax. For example, the consumer buys $20 worth of cannabis and the market price is $15. The consumer would pay $20 + $3 for the excise tax for a total $23. The sales tax would be on $23, not $20. If sales tax is 9.25% that would be $2.13 on $23 rather than $1.85 on $20.
Final thoughts: Retail excise taxes are unusual, but it could be worse. We could be dealing with cultivation excise taxes, which will be dealt with in the next article. Stay tuned for next month!!