California cannabis tax relief is a big deal. And a real thing. What’s important now is how the California Department of Tax and Fee Administration (“CDTFA”) interprets Assembly Bill 195.
As I previously blogged, California is finally on board with a modicum of cannabis tax relief for cannabis licensees (mainly for the benefit of cultivators). As of July 1, 2022, there is no more cultivation tax. The excise tax will stay at 15%, while the mark-up rate for arm’s-length transactions will drop from 80% to 75% (before recalculation on January 1 of next year).
There is a lot of hoopla and self-congratulating from the state on the passage of AB-195. Arguably, all it really does is move the tax headache and collection burden around between licensees. Still, it shows that the state is somewhat listening to the gripes of the industry. In any event, what matters now is how CDTFA interprets AB-195.
On July 7, 2022, CDTFA published the following PSA for all California cannabis licensees:
Cultivation Tax No Longer Applies
Beginning July 1, 2022, the cultivation tax no longer applies to cannabis or cannabis products that enter the commercial market. Additionally, distributors and manufacturers are no longer required to collect the cultivation tax from cultivators when a cultivator sells or transfers cannabis to a manufacturer or distributor on or after July 1, 2022.
What happens when a cultivator sells cannabis to a distributor or manufacturer on or after July 1, 2022?
The distributor or manufacturer must not collect the cultivation tax from the cultivator. The invoice between the cultivator and distributor or manufacturer should indicate no cultivation tax was due.
What happens when a cultivator sells cannabis to a distributor or manufacturer before July 1, 2022, and the cannabis or cannabis products enter the commercial market on or after July 1, 2022?
The cultivation tax is not due on cannabis or cannabis products that enter the commercial market on or after July 1, 2022, even if a cultivator sold or transferred cannabis prior to July 1, 2022. Any cultivation tax collected on cannabis that entered the commercial market on or after July 1, 2022, must be returned to the cultivator that originally paid the cultivation tax. Cannabis enters the commercial market when the cannabis or cannabis products pass the required testing and quality assurance review.
How does a manufacturer pay excess cultivation tax collected?
A manufacturer who collected cultivation tax and cannot return it to the cultivator who paid it must transfer the excess cultivation tax collected to a distributor for the distributor to pay the excess cultivation tax collected to CDTFA.
How does a distributor pay excess cultivation tax?
A distributor must pay excess cultivation tax collected to CDTFA by reporting and paying the excess cultivation tax collected on their next cannabis tax return.
We encourage you to read our online Tax Guide for Cannabis Businesses at www.cdtfa.ca.gov/industry/cannabis.htm, for more information about the upcoming changes.
For More Information?
For more information, visit our website at www.cdtfa.ca.gov. You may also call our Customer Service Center at 1‑800‑400‑7115 (CRS:711), then select the option for Special Taxes and Fees. Customer service representatives are available Monday through Friday from 7:30 a.m. to 5:00 p.m. (Pacific time), except on state holidays.
The big takeaway from the above is that the cannabis cultivation tax is dead and cultivators will receive a windfall of tax refunds on their cannabis that “entered the commercial” market on or after July 1, 2022. Refunds apply even to cannabis that was sold before July 1 (but then entered the commercial market on or after July 1). The refund process is entirely up to CDTFA to decide and regulate. Cultivators should get their ducks in a row now to ensure they’re getting the refunds to which they’re entitled, because it’s likely that those funds will otherwise go back to the state if it otherwise cannot be refunded.
As the other parts of AB-195 are implemented, we’ll be sure to keep you in the loop on their legal impacts and California cannabis tax in general.