California cannabis operators are facing yet another financial stress test. Starting Q3 2025, the California cannabis excise tax rate will increase from 15% to 19%.
If you’re not planning now, your margins are at risk.
This guide breaks down what cannabis businesses need to know, what the California Department of Tax and Fee Administration (CDTFA) is expecting, and what strategic steps operators can take to stay ahead.
Why the Excise Tax Increase Matters
The 4% hike may seem small, but its impact is massive—especially when paired with:
- Local tax increases (like LA’s additional 0.25% sales tax)
- Ongoing 280E tax restrictions
- Growing competition from unlicensed sellers who don’t pay taxes at all
The result? Regulators and the illicit market are squeezing legal cannabis operators from both sides.
Understanding California Cannabis Excise Tax
Retailers must apply the cannabis excise tax to sales of cannabis and cannabis products. As of Q3 2025, the rate will rise to 19%, collected at the point of sale by retailers.
Who Must Comply?
- Licensed cannabis retailers
- Licensed microbusinesses that conduct retail
How Is It Calculated?
The excise tax is calculated on the gross receipts from the retail sale, including:
- Product price
- Delivery fees
- Any other charges the customer pays
Key Compliance Responsibilities
- Accurately collect and remit tax to the CDTFA
- Report sales and tax payments on required returns
- Maintain detailed financial and sales records for audit purposes
5 Steps Cannabis Operators Must Take Before Q3 2025
1. Reassess Your Pricing Strategy
The 4% increase will either:
- Be absorbed by your business (lowering your margins)
- Be passed on to customers (potentially reducing sales)
Action: Run scenario forecasts to determine the financial impact and adjust pricing or packaging accordingly.
2. Conduct a Full Financial Health Check
Use Q2 2025 to:
- Reconcile your books
- Ensure your chart of accounts aligns with CDTFA reporting categories
- Confirm your excise tax reporting is accurate
Tip: This is a good time to bring in a cannabis CPA to perform a financial audit before Q3 hits.
3. Review COGS and 280E Strategy
You can’t write off excise taxes under 280E. That means you’ll be taxed on the tax.
Action: Ensure your cost of goods sold (COGS) strategy is optimized to reduce overall tax burden, especially for inventory-heavy businesses.
4. Strengthen Recordkeeping and Audit Readiness
The CDTFA has increased enforcement efforts in 2025.
You need:
- Clear, organized ledgers
- Documentation of every retail transaction
- Consistent reconciliations between POS and accounting software
Tip: Invest in cannabis-compliant accounting platforms like QuickBooks Online with integrations or seed-to-sale platforms with financial modules.
5. Forecast Cash Flow and Tax Liability
Don’t let Q3 catch you off guard.
Action: Build out tax liability forecasts that include:
- Higher excise tax obligations
- Local sales taxes
- Estimated federal tax impact under 280E
Use these insights to adjust spending, pricing, and procurement.
The Bigger Picture: What Smart Operators Are Doing
Top-performing cannabis businesses in California are using this tax increase as a strategic pivot point. Here’s how:
- Consolidating vendors to reduce procurement costs
- Improving inventory controls to reduce losses
- Shifting more revenue to COGS-eligible activities (where possible)
- Creating investor-ready financials for future funding rounds
FAQs: California Cannabis Excise Tax
What is the cannabis excise tax in California for 2025?
Starting Q3 2025, the excise tax will increase to 19% on gross receipts of cannabis retail sales.
Do cannabis retailers need to pay excise tax?
Yes. All licensed retailers and microbusinesses conducting retail sales are required to collect and remit the excise tax to the CDTFA.
Can I deduct cannabis excise taxes under 280E?
No. Federal 280E tax law does not allow excise tax deductions, which increases your effective tax burden.
How can I prepare my cannabis business for the excise tax increase?
Update your pricing strategy, forecast cash flow, and ensure your financial systems are audit-ready. Consider working with a cannabis CPA.
Don’t Let Taxes Crush Your Q3
California’s tax landscape isn’t getting easier. But with the right strategy, you can stay compliant, protect your margins, and turn a tax hike into a growth opportunity.
At GreenGrowth CPAs, we help California cannabis operators:
- Stay ahead of excise tax changes
- Optimize for 280E compliance
- Structure operations for profitability
- Create investor-ready reporting
Want to stress-test your tax strategy before Q3? Let’s schedule a call and walk through what the top operators are doing now to stay profitable.
