Tax-on-Tax “Tax Stacking” to Continue

Governor Gavin Newsom signed Senate Bill 1059 into law on September 28, 2024, halting the double taxation that has plague the state’s cannabis industry since adult-use legalization.

“This bill would prohibit a city or county from including in the definition of gross receipts, for purposes of any local tax or fee on a licensed cannabis retailer, the amount of any cannabis excise tax imposed under the Cannabis Tax Law or any sales and use taxes.”

California requires that cannabis retailers collect a 15% excise tax on the gross receipts of the retail sale. California’s definition of gross receipts also includes other ancillary charges like delivery charges and any local tax that is charged.

State Halts “Catch-22” Tax Situation

Cities like Los Angeles have required that retailers include the 15% excise tax collected from customers as part of gross receipts for the purpose of their local cannabis tax. This has resulted in a bizarre situation where the retailer has had to pay the state 15% of the city tax they collect from customers, but then turn around and pay the city 15% of the tax they’ve collected for the state (which already includes the city tax), forcing a situation of double taxation.

This has created a further “Catch-22” where the state has told the business that they are to be treated as being “first in line” for tax collection purposes, while the cities have stated that they are to be treated as “first in line”. For many retailers, this has meant they are out of compliance with either one government agency or the other, risking fines and penalties.

The state has now stepped in and told the cities they must take a secondary position.

Most States Don’t Charge Tax on Other Taxes

Most states (except California) do not include in gross receipts any taxes which a cannabis business collects. Rather, these states take the sales price of the cannabis products and services (such as delivery) and calculate all taxes, including sales tax, excise tax, even municipal tax, off of this base price, remitting the taxes they collect to the various agencies. This means all taxes are at the same level. No tax is never calculated on any other tax.

Tax Stacking Continues in California and Other States

California and some other states are still charging its retailers tax-on-tax. This is called tax stacking. California requires retailers to pay the 15% excise tax on the city tax they collect. They also require that retailers calculate sales tax on both the excise tax and the city tax they collect (essentially tax-on-tax-on-tax!) This creates an unfair tax burden on cannabis retailers and the consumers they serve.

It’s an excellent decision to clarify the priority of excise tax over city tax and to prevent double taxation. However, California needs to take further steps to eliminate the tax-on-tax tax stacking that continues to occur.