The 2022 year has been a very big year for changes in the taxation of cannabis in California that will affect what happens in 2023. Please reach out to me if you have any questions about the material.

For Cultivators

California stopped collecting any cultivation excise tax on June 30, 2022. Since then, the cultivation excise tax has been removed from the cannabis terminology.

Cultivators are still responsible for filing sales and use tax reports. Many times, for cultivators, the reporting period is annual. If all the sales were to resellers or manufacturers, there would be no sales tax due, but the reports still have to be filed.

For Distributors

Cannabis Excise Tax

Distributors will continue to collect and remit excise tax through the end of the fourth quarter, December 31, 2022, to the CDTFA. After the fourth quarter, the CDTFA will terminate the cannabis excise tax licenses held by distributors. It is expected that the CDTFA will do the terminations after the filing date for the fourth quarter, which is January 31, 2023.

It is important that any distributor reviews their accounting records to see if there are any excise tax adjustments that need to be made. These adjustments can be made through the filing of the fourth quarter cannabis tax return. If not done by the fourth quarter, the distributor may not have a good way to use the adjustment in later quarters.

Wow, how great is this?  The distributor used to be the hub for collecting and remitting cannabis excise tax. Effective January 1, 2023, the distributor is out of the “tax reporting business” with the CDTFA.

State Sales Tax

Each distributor will retain their state sales and use tax license. As in prior periods, the distributor will continue to report sales to the state on a quarterly basis. And, as in prior periods, generally, there will be no sales tax due. Each operator should discuss exceptions to the rule with their tax advisor.

For Retailers

Cannabis Excise Tax

This is brand new for retailers in 2023. The retailer will be calculating the state excise tax at fifteen percent of the price of the cannabis product being sold to the consumer. On a quarterly basis, the retailer will prepare a quarterly cannabis tax return and remit the taxes collected to the state. The state may require monthly prepayments to be paid.

Please note that the excise tax is only applicable to cannabis products. Non-cannabis sales are not subject to this tax.

For the scenario above, a prepayment may be required for month one and month two. Then the third month, the quarterly cannabis excise tax return will be filed, and any tax due will be paid with the tax return.

The state will be automatically issuing cannabis tax licenses to retailers. The retailers are not supposed to be requesting a license from the state. It will be the retailer’s responsibility to be sure that they have a license issued. The license goes into effect on January 1, 2023. The license will be needed by the retailer for prepayment filing in February.

IF THE RETAILER DOES NOT HAVE THEIR LICENSE BY MID-JANUARY, THEY SHOULD BE CONTACTING THE CDTFA AT THAT TIME.

Many operators have tax advisors who help them file taxes. It is not clear if the CDTFA has made provisions for tax advisors to have access to their cannabis clients.

There is a concern about cutoff issues. A claim for a credit should be made on the excise tax return for any excise tax paid to a distributor for cannabis products purchased before January 1, 2023, for the sale of such cannabis products sold at retail on or after January 1, 2023.

There is a new provision for which additional information is needed. It is the Vendor Compensation program. The retailer must apply through the CDTFA. If approved, the retailer can retail 20% of the cannabis excise tax due per quarter. More information will be published when it is available.

Sales tax

The retailer continues to report sales and use taxes on a quarterly basis. This is based on gross receipts. Gross receipts are defined as cost of the product sold, plus the excise tax paid, plus a local tax paid plus and delivery fees paid.

Questions?

I can be reached at Bruce@CannabisCPA.Tax or 818-225-8022.