Calculating the California Cannabis Excise Tax

by Miod and Company

Because cannabis is a federally labeled class one drug, cannabis retailers must pay several taxes to be able to sell their products. For customers, this can create sticker shock as the price at the register can be 20% to 40% higher than the cost on the sticker. 

In California, there are several types of taxes compounded onto a transaction, so it’s imperative to properly calculate the tax of the purchase. One of the taxes to be aware of is the excise tax. 

Today, we’ll review what the excise tax is and how to calculate it. 

California Cannabis Excise Tax

The excise tax is for cannabis products being sold to customers. Distributors charge cannabis retailers this tax. The excise tax is 15% for retail purchases of cannabis goods. The excise tax is calculated based on the average market price of cannabis in retail. The distribution part of a cannabis business is required to report and pay the cannabis excise tax to the CDTFA on the cannabis tax return. 

How to Calculate Excise Tax 

Any authorized cannabis distributors must collect the 15% cannabis excise tax from retailers when selling cannabis products to the retailers. 

Arm’s Length Transaction 

For an arm’s length transaction, or one between two informed and willing parties, the payment the retailer collects must be equal to the fair market value of cannabis/cannabis products in the open market. Essentially, this means the wholesale price plus a markup. 

The wholesale price is the cost of cannabis plus transportation, before any trade allowances. Cannabis purchased at $125 and shipped for $20 will have a wholesale cost of $145. According to the California Department of Tax and Fee Administration, the mark-up rate is set at 80%

Nonarm’s Length Transaction 

If the cannabis retailer is also the distributor, this is known as a “nonarm’s length transaction.” for nonarm’s length transactions, the average market price of cannabis is calculated with gross receipts. The 15% cannabis excise tax is applied to the gross receipts. 

The “gross receipts” include all charges for the sale of cannabis including:

  • Selling price of cannabis product 
  • Labor
  • Services
  • Transportation/Delivery 
  • Business tax

For example, a delivery charge is included in the gross receipts used to calculate the cannabis excise tax. If you add an amount to cover the cannabis business tax to your customer’s invoice/receipts, then that amount is also included in the gross receipts. 

Staying on top of your excise tax is essential for smooth operations. All cannabis businesses should ensure they comply with the calculations above. 

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