New Regulations for Cannabis Excise and Cultivation Taxes
By Lauren Mendelsohn, October 14, 2019
Recently, the Office of Administrative Law (OAL) approved proposed regulations (Cal. Code of Regs., tit. 18, div. 2, §3700) from the California Department of Tax and Fee Administration (CDTFA) related to cannabis excise and cultivation taxes in California. On September 4, 2019 the new regulations were filed with the Secretary of State’s office and became effective immediately. These regulations replaced the existing §3700, which was adopted via an emergency regulation in late 2017.
California Code of Regulations, Title 18, Section 3700 (PDF)
The new regulations lay out new rules for cultivation tax invoicing requirements; providing receipts for cannabis excise taxes paid to cannabis retailers (including requiring the use of specific language in receipts or invoices stating “The cannabis excise taxes are included in the total amount of this invoice”); what to do if a cannabis retailer has collected more excise taxes than should have been collected (refund to customers or forward to the state via distributors); how to tax items containing cannabis accessories; how distributors should report the cannabis excise tax that they’ve collected; and what the penalties are for unpaid taxes, among other things.
Like the preceding emergency regulations, these regulations set forth a narrow definition of “fresh cannabis plant” which requires weighing within two hours of harvest and prohibits artificial drying techniques, such as increasing the ambient temperature of the room:
“Fresh cannabis plant” means the flowers, leaves, or a combination of adjoined flowers, leaves, stems, and stalk from the plant Cannabis sativa L. that is either cut off just above the roots, or otherwise removed from the plant. To be considered “fresh cannabis plant,” the flowers, leaves, or combination of adjoined flowers, leaves, stems, and stalk must be weighed within two hours of the plant being harvested and without any artificial drying such as increasing the ambient temperature of the room or any other form of drying, or curing and must be entered into the California Cannabis Track-and-Trace system, manifested, and invoiced as “fresh cannabis plant.” If the California Cannabis Track-and-Trace system is not available, or a licensee is not required to record activity, the paper manifest or invoice shall indicate “fresh cannabis plant” is being sold or transferred.
Given the drastically different tax rates imposed on cultivators ($9.25 per dry-weight ounce of cannabis flowers, $2.75 per dry-weight ounce of cannabis leaves, and $1.29 per ounce of fresh cannabis plant), this narrow definition of “fresh cannabis plant” is significant.
The new regulations also add a new subdivision (i), which addresses the issue of how to compute the excise tax on pre-filled vape cartridges. The issue arises because not every component of a filled vape cartridge is necessarily subject to a 15% excise tax on cannabis or cannabis products. Technically, the vape cartridge hardware itself (without any cannabis or cannabis product) is considered a cannabis accessory which is not subject to a 15% excise tax. Yet, the cannabis or cannabis products contained within the vape cartridge hardware are subject to a 15% excise tax.
The regulations state that a distributor may make a sales price segregation so that the price of the cannabis accessories is stated separately from the price of cannabis or cannabis products. If such a sales price segregation is computed at the time vape cartridges are transferred or sold to a cannabis retailer, and such charges are separately stated in the receipt issued to the purchaser at the time of sale, then the cannabis excise tax does not apply to the separately stated charge for the vape cartridge hardware:
(i) Cannabis or Cannabis Products Sold with Cannabis Accessories. A cannabis excise tax shall be imposed upon purchasers of cannabis or cannabis products sold in this state at the rate of 15 percent of the average market price of any retail sale by a cannabis retailer. Unless as otherwise provided below, the cannabis excise tax does not apply to cannabis accessories.
(1) When cannabis or cannabis products are sold or transferred with cannabis accessories (e.g., vape cartridges) to a cannabis retailer, and a distributor separately states the price of the cannabis or cannabis products from the cannabis accessories, the cannabis excise tax applies to the average market price of the cannabis or cannabis products, and not to the separately stated charge for the cannabis accessories.
(A) A distributor that makes a sales price segregation must maintain supporting documentation used to establish the individual cost of the cannabis or cannabis products and the cannabis accessories.
(B) Charges will be regarded as separately stated only if they are separately set forth in the invoice, receipt, or other document issued to the purchaser contemporaneously with the sale. The fact that the charges can be computed from other records will not suffice as a separate statement.
(2) When cannabis or cannabis products are sold or transferred with cannabis accessories (e.g., vape cartridges) to a cannabis retailer, and a distributor does not separately state the sales price of the cannabis or cannabis products from the cannabis accessories, the cost of the cannabis accessories shall be included in the average market price to which the cannabis excise tax applies.
In practical terms, this means that purchasers of pre-filled vape cartridges may start seeing separately stated charges by retailers for: (1) cannabis or cannabis products, which are subject to the 15% excise tax, and (2) cannabis accessories, which are not subject to the 15% excise tax. Going up the supply chain, distributors who desire to engage in such a “sales price segregation” are required to “maintain supporting documentation used to establish the individual cost of the cannabis or cannabis products and the cannabis accessories,” which means that manufacturers will be also be incentivized to keep track of those costs in order to help distributors maintain the requisite “supporting documentation.”
More information about cannabis taxes in California can be found on the CDTFA’s website here.
This information is provided as an informational and educational service and is not intended as legal advice. For more information about cannabis taxes in California, contact the Law Offices of Omar Figueroa at 707-829-0215 or info@omarfigueroa.com to schedule a confidential legal consultation.