Cannabis retailers must collect a 15% excise tax from customers – here’s how to do it.
- Excise tax is charged differently in an arm’s length and non-arm’s-length transaction.
- In an arm’s length transaction, you should factor the excise tax into any discounts or promotional pricing you wish to offer your customers.
- In a non-arm’s-length transaction, excise tax is charged at the same rate as you would on a non-discounted price (15%).
Speak to our experts if you have questions about how to collect excise tax when using discounts and promos.
As a cannabis retailer, you probably are aware that you are responsible for collecting the excise tax and paying that money to your distributor. This post goes a little more in-depth into how the process of collecting and disbursing the cannabis excise tax works on discount retail sales in California.
Refresher: California Cannabis Excise Tax Rates
Retailers and microbusinesses are responsible for collecting the excise tax from their customers. The excise tax is included in the price of the product: everything from cannabis to edibles, oils, lotions, and waxes must have the excise added into the price tag.
The excise tax is priced at 15% of the average market price of the cannabis product. The aggregate market price is based on the type of transaction between you and the seller. There are two types of transactions:
- Arm’s length transaction: a transaction made between two informed and willing parties. The payment received by the retailer must reflect the fair market value of the cannabis or cannabis products in the open market. In practice, this means the wholesale cost plus a markup.
- How do you know the wholesale cost? This is the amount you pay for the cannabis products, including transportation costs and adding back in discounts or trade allowances. For example, if you purchase a cannabis product at $100, and pay $50 to have the product shipped to you, the wholesale cost will be $150.
- How do you know the markup rate? As of January 1, 2018, the standard markup rate is 60% for cannabis and cannabis products. This rate is only relevant during an arm’s length transaction (between a retailer and supplier), and retailers may put any markup they like on a retail selling price.
- Non-arm’s length transaction: a transaction where the average market price is defined as the retailer’s total gross receipts from the retail sale. If your business operates as both a distributor and retailer, you likely use a non-arm’s length transaction to sell your goods.
Check with your local municipality for your local excise tax rate, and if you have specific questions, reach out to one of the experts at Green Growth CPAs.
You might be asking yourself: what if I offer discounts or promotions on cannabis products? How can I determine what tax rate to pass through to my customers? The CDTFA recently issued the following clarification.
Excise Tax and Discounted Cannabis: Arm’s Length Transaction
In an arm’s length transaction, you should factor the excise tax you paid to your distributor into any discounts or promotional pricing you wish to offer your customers.
For example, you purchase two cannabis products for $50 each. Your distributor calculates the average market price of these two items at $160 (the wholesale cost, $100, plus the CDTFA markup of 60%). The cannabis excise tax rate of 15% charged to $160 means the distributor will collect $24 in excise tax from you, the retailer.
When you determine the promotional pricing on these two cannabis products, you are required to collect $24 from your customer. If you offer a two-for-one promotion, for example, you must factor this excise tax into the promotional price. You do not need to separately state the amount of excise tax collected on the receipt, but instead include the language, “The cannabis excise taxes are included in the total amount of this invoice.”
Excise Tax and Discounted Cannabis: Non-Arm’s Length Transaction
In a non-arm’s length transaction, the excise tax collection is a bit more straightforward when offering a discount. Because the tax is based on the retail selling price of the cannabis, you charge the same rate as you would on a non-discounted price (15%). For example, if you’re selling a cannabis product for a discounted price of $100 to your retail customer, the excise tax due is $15 (100 x 15%). As in the arm’s length transaction, you are not required to state the amount of cannabis excise tax on the receipt. The receipt must include the language, “The cannabis excise taxes are included in the total amount of this invoice.”
For more on your tax responsibilities as a cannabis retailer, check out our beginner post for cannabis retailers in California or get in touch with one of our Green Growth CPAs today!