This guide is intended to provide general information regarding issues relating to the Sales and Use Tax Laws, Cannabis Tax Law, and other programs administered by the California Department of Tax and Fee Administration (CDTFA) (formerly BOE) which may affect the cannabis industry. It is not intended to provide advice or guidance in relation to other state and local statutes and regulations relating to the cannabis industry. Additionally, for the Federal Government’s guidance regarding marijuana enforcement, see the U.S. Department of Justice website.
Retailer
A cannabis retailer is a person who sells cannabis and/or cannabis products directly to a consumer.
A microbusiness licensed as a retailer must comply with all the same requirements as a retailer.
If you are a cannabis retailer, the CDTFA requires that you:
- Register with the CDTFA for a seller’s permit.
- Charge and collect sales tax on your taxable retail sales of cannabis and/or cannabis products, and other products.
- Electronically file your sales and use tax returns and pay the sales and/or use tax to the CDTFA.
- Charge and collect the cannabis excise tax from your customers who purchase cannabis and/or cannabis products.
- Pay the cannabis excise tax that is due to your distributor. DO NOT remit cannabis excise tax on your sales and use tax return.
- Provide your customer with an invoice, receipt, or other document which includes includes the statement “The cannabis excise taxes are included in the total amount of this invoice.” (Your customers are liable for the cannabis excise tax until it has been paid to the state or you provide them with such an invoice or receipt.)
In addition, you must also:
- Obtain a cannabis retail license issued by the Bureau of Cannabis Control within the Department of Consumer Affairs.
- Contact your city and/or county government office for information on local licenses you may be required to obtain.
Cannabis Excise Tax
Effective January 1, 2018, a 15 percent excise tax is imposed upon retail purchasers of all cannabis and cannabis products, including medicinal cannabis. The 15 percent excise tax is calculated based on the average market price from the retail sale. Please refer to the heading, Average Market Price, below for more information. As a retailer, you are required to pay the cannabis excise tax to your distributor and collect the cannabis excise tax from your customers. No cannabis and/or cannabis products may be sold unless the cannabis excise tax is paid by the purchasers (consumers) at the time of sale.
Industry Topics
Sales
Your sales of cannabis and cannabis products are generally subject to sales tax, unless your customer provides you with a valid Medical Marijuana Identification Card indicating they are a qualified patient or the primary caregiver for a qualified patient, along with a valid government-issued identification card. Please refer to the heading, Proposition 64 Exempts Certain Medicinal Cannabis Sales from Sales and Use Tax, below for more information.
Beginning January 1, 2018, your sales of all cannabis and cannabis products, including medicinal cannabis, will also be subject to the 15 percent excise tax. The 15 percent excise tax amount should be included in the calculation of the total amount subject to sales tax.
Generally, the retail sales of the following cannabis and cannabis products are subject to both the sales tax and the 15 percent excise tax:
- Balms
- Buds and Flowers
- Capsules
- Edibles (cookies, butters, honey, chocolates, candies, sodas, bars)
- Extracts
- Gum
- Hash
- Infused feminine hygiene products
- Lotions
- Oils
- Plants and Clones
- Pre-rolls
- Teas
- Tinctures
- Tonics
- Topicals
- Waxes
The retail sale of cannabis accessories, such as pipes, rolling machines, vape pens (without cannabis), rolling papers, shirts, hats, books, and magazines are subject to sales tax, but not the 15 percent excise tax.
The above list is not comprehensive. If you have questions about a product that is not included here, you may contact our Customer Service Center at 1-800-400-7115.
Delivery charges are generally taxable when retailers make deliveries with their own vehicles. For more information on shipping or delivery charges, see publication 100, Shipping and Delivery Charges.
Sales Tax Reimbursement
A retailer has the option to collect sales tax reimbursement from its customers. It is not mandatory. Regardless of whether or not you collected sales tax reimbursement from your customers, you as the retailer are liable for the sales tax on taxable sales, and you must report and pay the tax to the CDTFA on your sales and use tax return. If sales tax is included in the sales price, you must post a sign notifying your customers that the sales tax is included in the sales price. If signage is not posted on the premises visible to the customer, then sales tax will be based on the sales price and added to the receipt.
You may look up the current sales and use tax rate by visiting the Find a Sales and Use Tax Rate webpage.
Cannabis Excise Tax Collection
The cannabis excise tax is imposed on the purchaser of cannabis and/or cannabis products. As a retailer, you are required to collect the cannabis excise tax from your customers and pay the tax to your distributor. Cannabis and/or cannabis products may not be sold unless the cannabis excise tax is paid by the purchaser at the time of sale.
Average Market Price
Effective January 1, 2018, a 15 percent cannabis excise tax applies to the average market price of the retail sale. The average market price is determined by the type of transaction (either “arm’s length” or “nonarms’ length”) that occurred when the seller (cultivator, manufacturer or distributor) sold the product to you.
An “arm’s length transaction” is a sale that reflects the fair market price in the open market between two informed and willing parties.
In an arm’s length transaction, the average market price means the average retail price determined by the wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a mark-up. The wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including transportation charges and adding back in any discounts or trade allowances.
The mark-up will be determined by the CDTFA on a biannual basis in six month intervals. A special notice will be mailed to cannabis businesses informing them of the mark-up rate. The mark-up rate will also be posted on the Special Taxes and Fees Rate Page.
In a nonarm’s length transaction, the average market price means the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.
Cannabis Excise Tax and Sales Tax Computation
The cannabis excise tax is 15 percent of the average market price of the retail sale and the sales tax is based on your gross receipts. The examples below provide sample scenarios and guidance on how the cannabis excise tax and sales tax due are computed.
The examples assume a mark-up rate of 60 percent (0.60). You must use the rate in effect at the time of sale. The current rate can be found on our website.
Example #1 – Cannabis – from purchase to resale
This example explains:
- How the distributor computes and charges you (the retailer) the cannabis excise tax due on cannabis that you purchase for resale,
- How to collect the cannabis excise tax due from your customer, and
- How to compute the sales tax due on your sales of cannabis.
1. How the distributor computes the cannabis excise tax due
You purchase one pound of cannabis flowers from your distributor for resale in your store. Your purchase from the distributor is an “arm’s length” transaction, that is, your purchase price from your distributor reflects the fair market price in the open market.
Your distributor charges you $1,200 for the cannabis and an additional $300 as a transportation fee. The distributor is required to collect the cannabis excise tax from you, which is computed as 15 percent of the “average market price” of the retail sale. In an arm’s length transaction, the distributor determines the average market price by adding the 60 percent mark-up to your wholesale cost as follows:
The distributor computes the cannabis excise tax due of $360 on the average market price as follows:
Total amount due to distributor ($1,500 + $360) $1,860
The distributor must provide you with an invoice, receipt or other similar document that identifies you (the licensee receiving the product), the distributor from which the product originates, the associated unique identifier, and the amount of cannabis excise tax paid.
2. How to collect the cannabis excise tax due on your retail sales of cannabis
When reselling the cannabis flowers purchased from your distributor in this transaction, you must collect the cannabis excise tax from your customer. You may not sell cannabis or cannabis products unless your customer pays the excise tax.
You are not required to itemize the cannabis excise tax on your receipt or invoice you provide to your customer, but you must include the following statement, “The cannabis excise taxes are included in the total amount of this invoice.”
3. How to compute the sales tax due on your retail sales of cannabis
The sales tax due on your taxable cannabis sales at retail must be computed on your selling price of cannabis, plus the cannabis excise tax. This example assumes an 8.5 percent sales tax rate, but your actual rate may differ. You must use the rates in effect at the time of sale. Current rates can be found on our website. If you sell an eighth of an ounce of cannabis for $38.00, including the cannabis excise tax, assuming an 8.5 percent sales tax rate, you will be responsible for $3.23 in sales tax on your sale of an eighth of an ounce of cannabis:
When you report this sale on your sales and use tax return, the measure of tax (that is, the amount that is subject to sales tax) is $38, the selling price plus the cannabis excise tax.
If you do not separately state an amount for sales tax on the invoice or receipt you provide to your customer, you must post on your premises, or include on the price tag, in an advertisement, or other printed material, a notice to the effect: “All prices of taxable items include sales tax reimbursement computed to the nearest mill.”
Example 2 – Cannabis sold with a cannabis accessory
You sell an eighth of an ounce of cannabis for $38.00, which includes the cannabis excise tax, along with rolling papers. The selling price of the cannabis, including the cannabis excise tax, and the rolling papers are subject to sales tax.
Sales tax calculation:
Example 3 – Medicinal cannabis sold to a qualified patient
You sell an eighth of an ounce of cannabis for $38.00, which includes the cannabis excise tax, to a customer who has a valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government issued identification card (ID).
Since the customer has a valid MMIC and ID, the sale is exempt from sales tax. There is no exemption from the cannabis excise tax.
Sales tax calculation:
Example 4 – Medicinal cannabis sold with a cannabis accessory
You sell an eighth of an ounce of cannabis for $38.00, which includes the cannabis excise tax, along with rolling papers to a customer who has a valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government issued identification card (ID).
Since the customer has a valid MMIC and ID, the sale of cannabis is exempt from sales tax; however, sales tax does apply to the selling price of the rolling papers. There is no exemption from the cannabis excise tax.
Sales tax calculation:
Example 5 – Medicinal cannabis sold to a customer with only a physician’s note
You sell cannabis infused lotion for $40.00, which includes the cannabis excise tax, to a customer that provides you with a physician’s note prescribing the product for medicinal use. The sales tax applies to the selling price of the lotion, including the cannabis excise tax. In order for the exemption from sales and use tax to apply, the customer must provide you with a valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government issued identification card (ID). A physician’s note is not sufficient to support the exemption from sales tax. For more information, see the below heading Prop 64 Exempts Certain Sales of Medicinal Cannabis from Sales and Use Taxes.
Sales tax calculation:
Local Government Cannabis Business Taxes
Some cities have enacted measures requiring that cannabis businesses located in their jurisdictions pay a cannabis business tax. If you add a separate amount to your customers’ invoices or receipts to cover your cannabis business tax, sales tax applies to the business tax amount.
Generally, whenever an expense of the retailer is separately added to any taxable sale, the expense is also subject to sales tax.
In the example below, the computation of sales tax on a taxable sale includes a cannabis business tax. Sales tax is applied to the total selling price including the cannabis excise tax and business tax. This example assumes an 8.5 percent sales tax rate and a 10 percent business tax, but your actual rates may differ. You must use the rates in effect at the time of sale. Current sales tax rates can be found on our website.
Sales tax calculation:
Mark-up Rate
Distributors use a mark-up rate to compute the average market price of cannabis and cannabis products sold or transferred in an arm’s length transaction. The mark-up rate is not intended to be used to determine the amount for which you sell your cannabis and cannabis products. You may use any mark-up you would like to establish your selling price.
The mark-up will be determined by the CDTFA on a biannual basis in six month intervals. A special notice will be mailed to cannabis businesses informing them of the mark-up rate. The mark-up rate will also be posted on the Special Taxes and Fees Rate Page.
Proposition 64 Exempts Certain Medicinal Cannabis Sales from Sales and Use Tax
Effective November 9, 2016, certain sales of medicinal cannabis are exempt from sales and use tax.
The sales and use tax exemption applies to the retail sales of medicinal cannabis, medicinal cannabis concentrate, edible medicinal cannabis products, or topical cannabis as those terms are defined in the Business and Professions code section 26001. To obtain the exemption, qualified patients or their primary caregiver must furnish their valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government issued identification card (ID) at the time of purchase.
To properly claim the sales and use tax exemption, you should not collect sales tax reimbursement on the qualifying exempt sales of medicinal cannabis. In addition, you should claim a deduction on your sales and use tax return for the qualifying exempt medicinal cannabis sales. To claim the exempt sales, you must verify that purchasers have the proper identification (a valid MMIC and a valid government issued ID) and maintain specific information for your records as explained below under the Record Keeping section.
Record Keeping
Medicinal cannabis retailers that make qualifying exempt sales and claim the deduction on their sales and use tax return, should maintain the following records (either physical or electronic) for each transaction:
- The purchaser’s nine-digit ID number and expiration date, as shown on the qualified patient’s or primary caregiver’s unexpired Medical Marijuana Identification Card (MMIC) (see below for example of a patient MMIC); and
- The related sales invoice or other original record of sale.
A valid MMIC is issued by the California Department of Public Health (CDPH). The card (sample pictured below) includes the following:
- Issued by the “State of California” with the state seal
- States either “Patient” or “Caregiver”
- Patient’s or primary caregiver’s photo
- Nine-digit ID number
- CDPH website to verify ID number
- Expiration date
- County that issued card with phone number
Retailers may verify the validity of the nine-digit ID number on the CDPH website.
Consignment Sales
You are responsible for obtaining a seller’s permit and reporting and paying the sales tax on the retail selling price of consignment sales.
When you have possession or control of the item you are selling, and can transfer ownership or use of the item to the buyer without further action on the part of the owner, you are considered the retailer of the item.
For example, your store accepts pipes and accessories to sell on consignment. You agree to sell the products, but will not pay for the product unless it sells. Your agreement authorizes you to sell the products and transfer ownership to the buyer. You are considered the retailer of the accessories you sell in this way and must pay sales tax based on your retail selling price.
For more information, please see publication 114, Consignment Sales.
Purchases
When you purchase a product that will be resold, you can purchase it without paying sales or use tax by providing the seller a valid and timely resale certificate. Sales tax will apply when you sell the product at retail. However, when you purchase a product for resale without paying sales tax but, instead of selling it, you consume or use the product, then you owe the use tax based upon the amount of the purchase price.
For example, if you issue a resale certificate when purchasing a pipe but instead gift it to someone, you owe use tax based upon its purchase price.
The use tax rate is the same as the sales tax rate in effect at the location of use.
To pay use tax, report the purchase price of the taxable items as “Purchases Subject to Use Tax” on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.
For more information about issuing resale certificates, see publication 103, Sales for Resale.
For more information on use tax, visit our use tax webpage.
Supplies, Equipment, and other Business Expenses
Products you purchase for use in your business (signs, fire extinguishers, display cases, weight and measure equipment, computers, etc.) are subject to sales tax at the time of purchase. Your supplier will normally collect and report the sales tax. However, if you purchase equipment or supplies for use in your business online or from an out-of-state seller, the sale may be subject to use tax.
If the out-of-state seller does not charge California use tax, you should report the purchase price on your sales and use tax return. To pay the use tax, report the purchase price of the taxable products under Purchases Subject to Use Tax on your sales and use tax return. Those purchases become part of the total amount subject to tax.
Please note: In general, wrapping and packaging supplies, used to wrap merchandise or bags in which you place products sold to your customers, may be purchased for resale (see Regulation 1589 for more details). All other purchases of supplies are generally subject to tax.
To find out more about use tax, please visit our use tax webpage.
Record Keeping
You are required by law to keep business records so that we may verify the accuracy of your sales and use tax return and determine how much tax is due, when a return has not been filed.
Additionally, maintaining good books and records will help you keep track of your sales and purchases and assist you when preparing your sales and use tax return. Records must be kept for at least four (4) years, unless otherwise directed by the CDTFA. If you do not maintain records, it may be considered evidence of negligence or intent to evade the tax and may result in penalties.
Examples of records you must keep include:
- Sales Invoices
- Cash Register Tapes
- Sales Journals
- Resale Certificates
- Shipping Documents
- Purchase Invoices
- Bank Records
- Purchase Orders
- Purchase Journals
- Tax Returns
For more detailed information on sales and use tax recordkeeping, please see our Keeping Records webpage.
Please note, the Medicinal and Adult-Use Cannabis Regulation and Safety Act requires a licensee to keep accurate records of commercial cannabis activity for a minimum of seven years. For example, every sale or transport of cannabis or cannabis products from one licensee to another must be recorded on a sales invoice or receipt. Sales invoices and receipts may be maintained electronically and must be available for review. Each sales invoice or receipt must include:
- Name and address of the seller.
- Name and address of the purchaser.
- Date of sale and invoice number.
- Kind, quantity, size, and capacity of packages of cannabis or cannabis products sold.
- The cost to the purchaser, including any discount applied to the price shown on the invoice.
- The location of transport of the cannabis or cannabis product unless the transport was from the licensee’s location.
- Any other information specified by the licensing authority.