In the highly regulated cannabis industry much needed tax relief has been passed in California.
Cultivation Tax Eliminated
On June 30, 2022 California enacted Assembly Bill 195 (AB 195) which eliminates the weight-based cannabis cultivation tax. Effective July 1, 2022 distributors and manufacturers are no longer required to collect the cultivation tax from cultivators, resulting in a $161 per-pound-rate savings for licensed growers.
Previously, cultivators had to remit a cultivation tax of $161 per pound to distributors and manufacturers, regardless of the current market value of cannabis. For small scale outdoor cultivators producing lower market value grow, this weight-based cultivation tax created a higher effective tax rate than large cultivators pay who yield a higher value for greenhouse grows.
With the reduction of taxes, industry experts believe the gap will be narrowed for the price paid for legal cannabis versus the legacy market cannabis.
Any cultivation tax collected on harvested cannabis that enter the commercial market on or after July 1, 2022, must be returned to the cultivator that originally paid the cultivation tax, or if unable to be returned to the cultivator, must be paid to the California Department of Tax and Fee Administration (CDTFA) as excess tax.
Excise Tax Collection Shift and Rate Cap
The passing of AB 195 did not reduce the 15% cannabis excise tax, but it did shift the collection of the excise tax from distributors to point of sale retailers beginning January 1, 2023. Language from the bill states “By consolidating the state’s cannabis taxes into a single excise tax imposed at the point of retail sale, the state can tax the entire cannabis supply chain—from cultivation to sale—in a manner that is more efficient and transparent, thereby lowering barriers to entry into the legal, regulated cannabis market.”
Previously the excise tax was remitted to the CDTFA by the distributor once collected from the retailers.
AB 195 requires that the retailer collect the excise tax from the purchaser and remit to the CDTFA quarterly. Each retailer must provide the purchaser with an invoice or receipt that states “The cannabis excise taxes are included in the total amount of this invoice”. This will create an efficient collection process and provide transparency.
In addition, the excise tax rate will remain at 15% for the next three years. The rate could be adjusted after three years to replace the lost revenue from eliminating the cultivation tax. However, the rate cannot be raised to be higher than 19%.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.