Beginning January 1, 2023, cannabis retailers will be responsible for collecting and paying the cannabis excise tax to the California Department of Tax and Fee Administration (CDTFA).   The new application of tax is a departure from the previous application of tax in which the distributor was responsible for remitting both the cultivator and the distributor excise taxes.  Under the new law, a 15% cannabis excise tax will be applied to the gross receipts of the retail sale of cannabis and retailers will now be required to obtain a cannabis retailer’s license which will create a requirement for them to report and remit excise tax on the retail sales of cannabis.  excise tax will no longer be collected on the wholesale sale of cannabis products.

Aside from changing the burden of who must report and remit the excise tax, the new law also effectively removes the cultivation tax entirely.  The 15% cannabis excise tax rate on the gross receipts of cannabis products is an overall reduction to the excise taxes collected on cannabis products because the previous excise tax on a distribution or wholesale sale of cannabis was either a 15% tax on the gross receipts of the retail sale or a 15% tax on the wholesale cost plus a markup, in addition to the cultivation tax.  The cultivation tax was previously computed based on the total weight of the cannabis sold from the cultivator to the distributor and since there is no longer a tax on the cultivator and the tax rate is essentially the same as it was previously for distributors, the effective overall excise tax on cannabis products is less.

While most believe more needs to be done to stabilize the legal market, the new law was is considered a step in the right direction by many in the cannabis industry.  There is a universal belief that higher taxes are stifling the legal market and driving consumers to the illegal market.  By lowering the tax, the new law should help level the playing field for legal cannabis businesses and make their products a little more competitive with illegal offerings.  The legal cannabis businesses should be careful to make certain it properly complies with the new collection and remittance requirements, because a failure to comply will result in substantial tax liabilities and penalties if the retailer fails to correctly collect and remit the tax.  Retailers are already tasked with correctly collecting and remitting sales tax, as well as any local tax imposed by the various county and city jurisdictions.  Retailers should be aware that the new excise tax on retail sales is also subject to sales tax, which means it should be included in the tax base on which the sales tax is computed.

If you have any questions about how your business should charge sales or excise tax, or if you have any questions about the cannabis licensure requirements of your business, please feel free to schedule a free consultation with one of our experts by contacting taxhelp@salestaxhelp.com.

Mitchell Stradford

Mitchell Stradford

Mitchell Stradford is a former senior sales and use tax auditor with the California State Board of Equalization. Mitch leads McClellan Davis’ efforts to advocate on behalf of the cigarette and tobacco industry. He graduated from California State University Sacramento with a B.S. in Business Administration with a concentration in accountancy. Email Mitchell

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