As 2023 begins, the responsibility for paying California’s cannabis excise tax shifts from industry distributors to retailers. The tax rate, which will remain at 15 percent until mid-2025, when it is subject to change, is based on “gross receipts from the retail sale of cannabis or cannabis products,” according to the California Department of Tax and Fee Administration (CDTFA).

CDTFA has published a Tax Guide for cannabis businesses that includes individual sections for distributors, cultivators, retailers, and manufacturers. Retailers “must file cannabis retailer excise tax returns online and pay the cannabis excise tax collected from purchasers…beginning with the first quarter of 2023 reporting period. The first cannabis retailer excise tax return is due May 1, 2023.”

The definition of “gross receipts” for the purposes of calculating the excise tax is defined as follows:

• Gross receipts include the sales price of the cannabis or cannabis products, after discounts, and all charges related to the sale, such as delivery fees and any local cannabis business tax listed separately on the invoice or receipt provided to the purchaser.
• Gross receipts do not include sales tax or the gross receipts from the retail sale of any non-cannabis item.

Cannabis retailers are responsible for collecting the cannabis excise tax from purchasers at the time of the retail sale of cannabis or cannabis products. The cannabis excise tax must be listed separately on the receipt or invoice provided to the purchaser. The cannabis excise tax is included in gross receipts subject to sales tax.

The Tax Guide also includes an example of how to calculate cannabis excise taxes for retail sales after January 1, 2023, and how sales taxes are calculated:

The following is an example of how the cannabis excise tax is calculated for retail sales transactions that occur on or after January 1, 2023, along with how sales tax is calculated.

For this example, the selling price for of a cannabis product is $35.00. You deliver the item to the purchaser with your own vehicle and charge a $5.00 delivery fee. This example also assumes an 8.5 percent sales tax rate and a 10 percent business tax which you separately state on the receipt to the purchaser. Both the cannabis business tax and delivery fee in this example are subject to the cannabis excise tax and sales tax.

Excise tax calculation:

Selling price of cannabis        $35.00

Cannabis business tax              $3.50

Delivery                                       $5.00

Cannabis excise tax rate           x 15%

Excise tax ($43.50 x 15%)          $6.53

The cannabis excise tax applies to the subtotal of $43.50, making the excise tax of $6.53 due for this example.

Taking this example a step further, we can now calculate the sales tax for this transaction. Gross receipts for purposes of calculating the sales tax include the cannabis excise tax. Therefore, the subtotal of $43.50 and the cannabis excise tax due of $6.53 are added to calculate the gross receipts subject to sales tax.

Sales tax computation:

Subtotal ($43.50 + $6.53)      $50.03

Sales tax ($50.03 x 8.5%)         $4.25

Total due ($50.03 + $4.25)    $54.28

The sales tax applies to the subtotal of $50.03, making the sales tax of $4.25 due for this example, and the total amount due from the purchaser is $54.28.

This is just a sample scenario. Different sales tax and cannabis business tax rates may apply to your transactions, and you must use the rates in effect at the time of sale.

According to this example, it would appear that the cannabis business tax of $3.50 is itself taxed not once but twice; once to calculate the excise tax and again to calculate the sales tax, creating a tax-on-tax-on-tax situation that is applied to the total paid by the consumer.

Cannabis Excise Tax Mark-up Rate Decrease

CDTFA also reported that there will be a decrease in the cannabis excise tax mark-up rates used in arm’s length transactions, as follows:

CDTFA determined the cannabis mark-up rate for the cannabis excise tax will be 75 percent for the period beginning July 1, 2022, through at least December 31, 2022, which is a decrease from the previous mark-up rate. We are responsible for calculating the mark-up rate every six months. The mark-up rate must be used by distributors to compute the average market price of cannabis or cannabis products sold or transferred to a cannabis retailer in an arm’s length transaction.

For more information on the cannabis excise tax mark-up rate, please see our Special Notice, Cannabis Mark-Up Rate Decreases to 75 Percent on July 1, 2022.

For current cannabis excise tax mark-up and cannabis tax rates, please see the Cannabis Taxes section of our Special Taxes and Fees rate page.