The Mechanics of the Cannabis Cultivation Tax in California
By Andrew Gradman Esq and AB FinWright Partners Abraham Finberg & Rachel Wright
In addition to the sales and use tax, California cannabis businesses pay two unique taxes: The cannabis excise tax, and the cannabis cultivation tax. This article discusses the cultivation tax, described at RTC 34012 and 18 CCR 3700.
The cultivation tax is imposed on “all harvested cannabis that enters the commercial market.”
- For dry cannabis flowers, the rate is $9.65/ounce in 2020 (i.e., $9.25/ounce in 2018 and 19, adjusted for inflation).
- For dry cannabis leaves, the rate is $2.87/ounce in 2020 (i.e. $2.75/ounce in 2018 and 19, adjusted for inflation; this rate is also subject to adjustment to reflect fluctuations in the relative price of flowers to leaves).
- Finally, fresh cannabis is currently taxed at $1.35/ounce (i.e. $1.29/ounce in 2018 and 19)
See RTC 34012(a); 18 CCR 3700(c); https://www.cdtfa.ca.gov/industry/cannabis.htm#Manufacturers.
So what does “enters the commercial market” mean? Once the product passes through the quality assurance and review testing as required in the Medicinal and Adult-Use Cannabis Regulation and Safety Act, it is considered to enter the commercial market. If the cultivator removes the product from their premises, whether or not the product has passed the quality assurance and review process, it is presumed to be sold and the cultivator will owe the cultivation tax. That means, don’t move your product off your premises unless you are ready to sell it.
For example, if you are both a cultivator and a distributor sending product to a manufacturer and you did not test the product, at this point the product has entered the commercial market and the cultivation tax is passed on to the licensed manufacturer. If the final distributor is the last to perform the quality assurance and review, they would then owe the cultivation tax to the CDTFA.
What if you have cannabis that’s damaged (spoiled, diseased, etc.)? You can remove it off the premises using the CDFA required waste management plan. You can also avoid paying the tax if you donate medicinal cannabis designated for donation. RTC 34012(i). In either case, make sure to report it correctly in the METRC track and trace system so you won’t have mismatches in your audits.
By default, the cultivator is responsible to remit the tax. RTC 34012(h). Based on this, one might think that the cultivator ought to incorporate the amount of the tax into their sales price. In fact, cultivators rarely need to do this. That’s because the tax code contains a procedure by which this tax liability can be collected by the buyer from the cultivator. If these requirements are met, the tax liability “shall follow the cannabis product from one party to the next until it reaches a distributor for quality assurance review,” at which point it becomes the distributor’s responsibility to pay the tax before the cannabis is sold to a retailer. 18 CCR 3700(d)(3); see also RTC 34012(h), https://www.cdtfa.ca.gov/industry/cannabis.htm#Distributors. At each link in this chain, the CDTFA misleadingly states that the buyer has the obligation to “collect” the tax from the seller, and that the seller has the obligation to “pay” the tax to the buyer. This is just a fancy way of saying that the seller should not incorporate the amount of the cultivation tax into the stated sales price, because the liability for the tax is being transferred to the buyer.
All sellers—whether cultivators, manufacturers, or distributors—follow an identical procedure to pass the tax liability to their buyer (until the final distributor who conducts the quality assurance review):
- The sale must be to a “manufacturer” or a “distributor.” These are defined terms.
- A “manufacturer” holds a Type 6 or 7 license. 18 CCR 3700(a)(8). The term refers to a licensee that conducts the production, preparation, propagation, or compounding of cannabis, or that packages or labels the product.
- A “distributor” is a holder of a Type 11 license and who meets the associated requirements under the Business and Professions Code. 18 CCR 3700(a)(6). Distribution refers to “the procurement, sale, and transport of cannabis and cannabis products between licensees. BPC 26001.
- The seller must obtain an invoice or receipt from the distributor or manufacturer which contains:
- The distributor or manufacturer’s name, as the licensee receiving the product.
- The seller’s own name.
- The associated unique identifier for the cannabis.
- The amount of cultivation tax.
- The weight and category of the cannabis. The weight and category on the invoice or receipt shall be equal to the weight and category recorded in the California Cannabis Track-and-Trace system. (Even if the weight of the product changes due to processing, the weight on the invoice, and the amount of tax passed down the chain, does not change.)
- The date of sale or transfer.
https://www.cdtfa.ca.gov/industry/cannabis.htm#Manufacturers; see also RTC 34012(h)(3); 18 CCR 3700(d)(1) and (2).
The tax is payable quarterly, RTC 34015(a), along with a cannabis tax return available at https://onlineservices.cdtfa.ca.gov/directory/. Late payments incur a penalty of 50% of the amount of the unpaid tax, unless the taxpayer shows reasonable cause. 18 CCR 3700(k)(1). That being said, be sure to pay your cannabis tax liability on time. There are procedures for a penalty abatement, but they can take a long time and may be frustrating.