Distributors, Manufacturers, and Cultivators with Cannabis Businesses

Distributor

A distributor is a person required to be licensed by the Department of Cannabis Control (DCC) to procure, sell, or transport cannabis or cannabis products between licensed cannabis businesses, such as a cultivator, manufacturer, or retailer.

Manufacturer

A manufacturer is a person required to be licensed by DCC to compound, blend, extract, infuse, package cannabis products, label cannabis products, or otherwise make or prepare a cannabis product.

Cultivator

A cultivator is a person required to be licensed by DCC to engage in any activity involving the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis.

Microbusiness

A microbusiness is a person licensed by DCC under one license to engage in commercial cannabis activities as a distributor, manufacturer, cultivator, or retailer. A microbusiness must comply with all the same requirements as a licensed distributor, manufacturer, cultivator, or retailer.

If you are a cannabis distributor, manufacturer, or cultivator, you are required to:

• Register with us for a seller's permit, if you make sales of cannabis, cannabis products, or tangible personal property (items) in California.
• Electronically file your sales and use tax returns online and pay any sales or use tax due to us.

In addition, you must also:

• Obtain the appropriate commercial cannabis license issued by DCC.
• Contact your city and/or county government office for information on local licenses you may be required to obtain.

Industry Topics

Cannabis Excise Tax Beginning January 1, 2023

Distributors are no longer responsible for collecting the cannabis excise tax from cannabis retailers for cannabis or cannabis products sold or transferred on or after January 1, 2023, to cannabis retailers.

Distributors are also no longer responsible for obtaining a cannabis tax permit or reporting and paying the cannabis excise tax due to us for cannabis or cannabis products sold or transferred on or after January 1, 2023, to cannabis retailers.

• Cannabis tax permits issued to distributors are closed with an effective date of December 31, 2022.
• Distributors must file their final cannabis tax return and pay the cannabis excise tax due on or before January 31, 2023 for December 2022 monthly filers and for the fourth quarter of 2022 (October 1, 2022, through December 31, 2022).

Cultivation Tax Ended on July 1, 2022

The cultivation tax is no longer imposed on harvested cannabis entering the commercial market beginning July 1, 2022, even if the distributor or manufacturer received cannabis from a cultivator prior to July 1, 2022.

• Distributors and manufacturers must no longer collect the cultivation tax from cultivators on harvested cannabis entering the commercial market beginning July 1, 2022.
• Cultivators are no longer responsible for paying the cultivation tax to manufacturers or distributors when cultivators sell or transfer cannabis to another licensee.
• Any cultivation tax collected on cannabis that entered the commercial market on and after July 1, 2022, must be returned to the cultivator that originally paid the cultivation tax. If the cultivation tax cannot be returned to the cultivator that paid it, then it must be paid to us as excess cultivation tax collected.

What to Do if Excess Cultivation Tax is Collected

Cultivation tax that cannot be returned to the cultivator who paid it is considered excess cultivation tax collected.

• A manufacturer who has collected cultivation tax and cannot return it to the cultivator who paid it must notify us so we can collect the excess cultivation tax from the manufacturer, unless the excess cultivation tax was transferred to a distributor prior to January 31, 2023.
• A distributor who has collected cultivation tax and cannot return it to the cultivator who paid it must notify us so we can collect the excess cultivation tax from the distributor, unless the excess cultivation tax was paid to CDTFA on or before January 31, 2023.

Keep Accurate Records

Each licensee in a transaction should keep clear records to document when the cultivation tax was collected or not collected, returned to a cultivator, transferred to a distributor, or when excess cultivation tax was paid to us.

California Cannabis Track-and-Trace

As provided in the Industry User's Guide for the California Cannabis Track-and-Trace Metrc system (Metrc User's Guide), a distributor licensed to sell or transfer cannabis or cannabis products to a cannabis retailer is required to use a wholesale manifest transfer in the California Cannabis Track-and-Trace (CCTT) system.

When a wholesale manifest is used, the distributor is required to record the retailer's wholesale cost of each package in the transfer. When a nursery sells or transfers immature plants or seeds to a cannabis retailer, the Metrc User's Guide recommends that the nursery use a wholesale manifest in the CCTT system and record the retailer's wholesale cost of the immature plants or seeds. For clarity, we recommend that you also indicate the unit of measure for each of the items included in the package.

A microbusiness authorized to distribute cannabis or cannabis products, that transfers or sells cannabis or cannabis products to a cannabis retailer or another microbusiness licensee functioning as a cannabis retailer, must follow the same process above.

Donated Medicinal Cannabis

California law provides that a cannabis retailer may provide free medicinal cannabis or medicinal cannabis products (medicinal cannabis) to medicinal cannabis patients or their primary caregivers. The cannabis excise tax and use tax do not apply to medicinal cannabis that is donated to a medicinal cannabis patient or their primary caregivers.

If you are a distributor and you receive medicinal cannabis for donation to a medicinal cannabis patient or their primary caregiver, you should provide written certification to the licensee donating the medicinal cannabis that you will transfer the medicinal cannabis to another licensee for subsequent donation to a medicinal cannabis patient or their primary caregiver.

You should also obtain written certification from the licensee to whom you transfer the medicinal cannabis for subsequent donation to a medicinal cannabis patient or their primary caregiver.

If you are a cultivator or manufacturer and you transfer medicinal cannabis to a distributor for subsequent donation to a medicinal cannabis patient or their primary caregiver, then you should obtain written certification from the distributor that they will transfer the medicinal cannabis to another licensee for subsequent donation to a medicinal cannabis patient or their primary caregiver.

As a distributor, cultivator, or manufacturer, you should maintain records of the written certifications that you provided to or received from other licensees to support transactions where medicinal was transferred for donation to a medicinal cannabis patient or their primary caregiver .

The written certification may be a document, such as a letter, note, purchase order, or a preprinted form. When the written certification is taken in good faith, it relieves you from liability for the use tax when donating the medicinal cannabis. However, if you certify in writing that the medicinal cannabis will be donated and later sell or use the medicinal cannabis in some other manner than for donation, you are liable for the sales or use tax, along with applicable penalties and interest on the medicinal cannabis or medicinal cannabis products sold or used in some other manner than for donation.

Cannabis Trade Samples

Sales and use tax do not apply to the transfer of cannabis trade samples when provided for free. Use tax may apply when a cannabis licensee purchases (not received free from another cannabis licensee) cannabis or cannabis products for resale and then provides the cannabis or cannabis product to another cannabis licensee as a free trade sample.

You should maintain documentation, like an invoice or receipt, when you provide free cannabis trade samples to another cannabis licensee. This documentation should be consistent with the information recorded in the California Cannabis Track-and-Trace system.

Sales Between Cannabis Licensees

When you sell cannabis, cannabis products, or any other tangible personal property (items) to a customer, such as a cannabis retailer, and the customer provides you with a valid and timely resale certificate in good faith, the sale is not subject to sales tax.

It is important that you obtain valid resale certificates from your customers in a timely manner to support your sales for resale. If a valid resale certificate is not provided, it will be presumed that sales tax applies to the sale and you must report and pay the sales tax to us.

There are two ways to verify a seller's permit number on a resale certificate:

• Select Verify a permit, license, or account. You can also use this search tool to verify that a permit, license, or account is valid for many programs administered by us, including a cannabis retailer excise tax permit.
• You can also call our automated toll-free number at 1-888-225-5263, available 24 hours a day, seven days a week. You will need the seller's permit number that you want to verify.

Even if all your sales are for resale and you collect the proper resale certificates, you are still required to file a return and report your activities to us. Simply report the amount of your total sales on line 1 and the same amount as nontaxable sales for resale, indicating that you made no taxable sales.

See publication 103, Sales for Resale for more information regarding resale certificates for sales tax purposes.

A distributor is not making a sale of cannabis or cannabis products when:

• A cannabis retailer contracts directly with a cultivator or manufacturer to purchase cannabis and cannabis products and,
• The distributor only transports the cannabis or cannabis products

In these circumstances, the distributor is not making a sale of cannabis and the transport of the cannabis is not subject to sales tax

Every sale or transport of cannabis or cannabis products from one licensee to another licensee must be recorded on a sales invoice or receipt. Maintaining good books and records will help you keep track of your sales and purchases and assist you when preparing to file your sales and use tax return. See the Record Keeping heading below for more information.

Purchases

When you purchase a product that will be resold, you can purchase it without paying sales tax reimbursement or use tax by providing the seller a valid and timely resale certificate. Sales tax will apply if you sell the product at retail. However, if you purchase a product for resale without paying sales tax but, instead of selling it, you use the product, then you owe use tax based on the purchase price.

For example, if you provide a resale certificate when purchasing a pipe but instead gift it to someone, you owe the use tax based on its purchase price.

The use tax rate is the same as the sales tax rate in effect at the location of use.

To pay the use tax, report the purchase price of the taxable products as "Purchases Subject to Use Tax" on line 2 of 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

When you purchase items for use in your business (signs, fire extinguishers, display cases, weight and measure equipment, computers, etc.) from a seller located in California, the sale is generally subject to sales tax. Your supplier will normally collect tax reimbursement from you and report the tax. However, wrapping and packaging supplies used to wrap merchandise or bags in which you place products sold to your customers may be purchased for resale.

If you purchase equipment or supplies for use in your business from an out-of-state seller, whether in person, online, or through other methods, your purchase will generally be subject to use tax.

If the out-of-state seller does not collect California use tax, you should report the purchase price on your sales and use tax return. To pay 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.

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 and determine how much tax is due.

Additionally, maintaining good books and records will help you keep track of your sales and purchases and assist you when preparing to file your sales and use tax returns. Tax laws require that records must be kept for at least four years unless we direct you otherwise. If you do not maintain records, we may consider it evidence of negligence or intent to evade the tax and we may assess 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
• Electronic California Cannabis Track-and-Trace records that include transactional data

For more detailed information on record keeping, please see our Keeping Records webpage, publication 76, Audits, and Regulations 1698 and 4901 Records.

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:

• The name and address of the seller.
• The name and address of the purchaser.
• The date of sale and invoice number.
• The 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.

Manufacturing and Research & Development Partial Exemption

Manufacturers, research developers, and electric power generators and distributors may qualify for a partial exemption from sales and use tax on the purchase or lease of qualified machinery and equipment primarily used in manufacturing, research and development, and electric power generation or production, storage or distribution.

The three basic elements of the partial exemption are:

• Qualified person,
• Qualified machinery or equipment, and
• Use machinery or equipment in a qualified manner.

Distributors, manufacturers, and cultivators of cannabis may qualify for a partial manufacturing exemption. Please visit our Tax Guide for Manufacturing and Research & Development Equipment Exemption for more specific information on the partial manufacturing exemption.

Cannabis Processor

A processor license is a type of cultivation license issued by the Department of Cannabis Control. A processor is a cultivation site that conducts only trimming, drying, curing, grading, packaging, and labeling of cannabis and non-manufactured cannabis products.

As a processor license, any trimming, drying, curing, grading, and packaging activities are considered fabrication labor and are subject to sales tax. A cultivator may provide you with a valid and timely resale certificate to support that the fabrication labor is being performed in order to allow the cannabis to be sold for resale. If no timely valid resale certificate is provided, it will be presumed that sales tax applies to the fabrication labor charges and you must report and pay the sales tax to us. Even if all your sales are not subject to sales tax and proper resale certificates are collected, you are still required to file a sales tax return and report your activities to us; you would then indicate on the sales tax return that no taxable sales were made. See publication 108, Labor Charges, for more information.

Partial Exemption for Farm Equipment and Machinery

In general, the sale of farm equipment and machinery is subject to sales and use tax. However, certain sales and purchases of farm equipment and machinery are partially exempt from sales and use tax. As a cultivator, you may be able to take advantage of this partial exemption.

The partial exemption applies only to the state general fund portion of the sales tax, currently 5.00 percent.
You should provide a farm equipment and machinery partial farm exemption certificate to your vendor when you purchase qualifying items.

Three requirements must be met for the partial exemption from sales and use tax to apply. The item must be:

1. Sold to a qualified person.
2. Used exclusively or primarily (depending on the type of item) in producing and harvesting agricultural products. Primarily means 50 percent or more of the time.
3. Defined as farm equipment and machinery which includes, but is not limited to, any tool, machine, equipment, appliance, device, or apparatus used while conducting agricultural operations.

If any of these three requirements is not met, the partial exemption from sales and use tax will not apply.

Examples of equipment and machinery that may qualify:

• Planting equipment
• Trimming tools
• Drying racks and trays
• Grow tents and lights
• Environmental controls
• Greenhouses
• Hydroponic equipment
• Solar equipment (see below for more information)
• Irrigation equipment

If you lease, rather than purchase farm equipment or machinery, you may still qualify for the partial sales and use tax exemption. For more information about leases, please see publication 46, Leasing Tangible Personal Property.

Mobile transportation equipment generally does not qualify for the partial exemption from sales and use tax.

For more detailed information about equipment and machinery used in farming, see Regulation 1533.1, Farm Equipment and Machinery and publication 66, Agricultural Industry.

Buildings for Raising Plants

Certain buildings may meet the definition of farm equipment for purposes of qualifying for the partial sales and use tax exemption for farm equipment. The building must be a single-purpose building to house plants, such as a greenhouse.
To be considered farm equipment, a horticulture building must meet these two requirements:

• Specifically designed for commercially raising plants.
• Used exclusively for that purpose.

Solar Power Facilities

If you qualify for the partial exemption from sales and use tax for farm equipment, your purchase of a solar power facility may also qualify.

How does a system qualify?

• Solar Power Facility Directly Attached to Farm Equipment and Machinery
  When a solar power facility is directly attached to, and primarily provides power to qualifying farm equipment and machinery, the solar power facility generally qualifies as farm equipment and machinery. As such, the purchase of this type of solar power facility generally qualifies for the partial exemption as long as the other requirements for the partial exemption are met.
• Solar Power Facility Not Directly Attached to Farm Equipment and Machinery
  A solar power facility may also qualify as farm equipment and machinery when the solar power facility is not directly attached to qualifying farm equipment and machinery but is instead tied to the regional power grid and subject to a net metering agreement between the taxpayer and the electric cooperative. In such cases, you need to demonstrate that the solar facility was specifically purchased to provide power primarily to qualifying farm equipment and machinery.

Exemptions for Diesel Fuel Used in Farming Activities

Most sales or purchases of diesel fuel are subject to sales and use tax. However, there is a partial sales and use tax exemption for certain sales and purchases of diesel fuel used in farming activities.

For example, the sale of diesel fuel to a grower may qualify for the partial exemption from sales and use tax when the grower uses diesel fuel in their tractor to cultivate the land in preparation for planting cannabis. For more information on when the partial exemption applies to the sale or purchase of diesel fuel used in farming activities, please see our Tax Guide for the Agricultural Industry, under the Farming Exemptions section, and then go to the Diesel Fuel Used in Farming or Food Processing topic.

In addition to the partial sales and use tax exemption, there is an exemption from the diesel fuel tax for fuel sold to a farmer for farming purposes and for sale of dyed diesel fuel. For more information on the diesel fuel tax exemptions, please see our Tax Guide for Motor Fuel Taxes and select the Diesel Fuel option under the Industry Topics section.

Exemption for Liquefied Petroleum Gas (LPG) Used in Farming Activities

Generally, sales of LPG for agricultural use are not subject to sales and use tax or use fuel tax when purchased by a qualified person.

The exemption from sales and use tax applies to the sale or purchase of LPG only if it is used in commercial crop production or harvesting.

You should provide a timely LPG exemption certificate to your vendor.

Nonagricultural use does not qualify for the exemption, even if it is used on a ranch or farm. For more information, see Regulation 1533, Liquefied Petroleum Gas.

The exemption from the use fuel tax applies to fuel used in agricultural equipment. For more information, see the Use Fuel Tax Guide and select the Fuel Exemptions option under the Industry Topics section.

Exemption Certificates

When you make a purchase that qualifies for an exemption, you must provide an exemption certificate to your supplier.

In order for the certificate to be valid, you must:

• Furnish the certificate in a timely manner to the seller.
• Provide all relevant information:
  Your name and address.
  The type of property being purchased.
  You or your company's name, title, telephone number, address, and the seller's permit number.
• Sign and date the document.

An exemption certificate will be considered timely if it is given at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser.

Listed below are the types of exemption certificates you may need:

• Qualified Sales and Purchases of Farm Equipment and Machinery
• Qualified Sales and Purchases of Diesel
• Certificate of Farming Use
• LPG Exemption Certificate

Historical Industry Topics

The following industry topics apply to transactions that occurred prior to January 1, 2023.

Average Market Price (January 1, 2018 – December 31, 2022)

Through December 31, 2022, a 15 percent cannabis excise tax applies to the average market price of the cannabis or cannabis products sold at retail. The average market price is determined by the type of transaction (either "arm's length" or "nonarm's length") that occurred when the seller (cultivator, manufacturer, or distributor) sold the cannabis or cannabis product to the retailer.

Arm's Length Transaction

An "arm's length transaction" is a sale entered into in good faith for a price that reflects the fair market value in the open market between two informed and willing parties, neither required to participate in the transaction.

In an arm's length transaction, the average market price is the retailer's wholesale cost of the cannabis or cannabis products sold or transferred by a cultivator, manufacturer, or distributor to a cannabis retailer, plus a mark-up.

We determine the mark-up rate every six months through the reporting period ending December 31, 2022. Prior mark-up rates are posted on our Special Taxes and Fees Rate Page, under Cannabis Taxes.

The mark-up rate is not intended to be used to determine each party's retail selling price; it is only used to calculate the amount of excise tax due in an arm's length transaction. Each party in the supply chain can use any mark-up they would like to establish their selling price.

Nonarm's Length Transaction

A nonarm's length transaction is a transaction that does not meet the definition of an arm's length transaction, meaning there is no good faith sale to a cannabis retailer at a price reflecting fair market value.

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. Gross receipts include all charges related to the retailer's sales, such as labor, service, certain transportation charges, and any local business tax. For more information on gross receipts, see Revenue and Taxation Code section 6012 and the Nonarm's Length Transaction heading on this page.

Cannabis Excise Tax – Arm's Length or Nonarm's Length Transactions (January 1, 2018 – December 31, 2022)

To properly calculate and collect the 15 percent cannabis excise tax imposed on retail sales made by a cannabis retailer before January 1, 2023, cannabis distributors must determine whether the sale or transfer to the cannabis retailer is considered an arm's length transaction or a nonarm's length transaction.

What is an Arm's Length Transaction?

An arm's length transaction is defined as a sale, entered into in good faith, between the cannabis retailer and its supplier at a sales price that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction.

What is a Nonarm's Length Transaction?

A non-arm's length transaction is a transaction that does not meet the definition of an arm's length transaction, meaning there is no good faith sale to a cannabis retailer at a fair market price.

Wholesale Cost (January 1, 2018 – December 31, 2022)

On and after January 1, 2020, the "wholesale cost" is the amount paid by the cannabis retailer (retailer) for cannabis or cannabis products, including transportation charges and after any discounts are provided.

Distributors were required to collect the cannabis excise tax from retailers whom they sold or transferred cannabis or cannabis products before January 1, 2023, based on the average market price of the cannabis sold in a retail sale. In an arm's length transaction, the average market price is calculated by using the retailer's wholesale cost of the cannabis or cannabis products plus our predetermined mark-up.

Example – As a distributor, you sell cannabis products to a retailer in an arm's length transaction before January 1, 2023, for $1,500 plus a $100 transportation charge. You allow the retailer a 25 percent discount if the retailer pays you when the cannabis products are delivered. The retailer earns the 25 percent discount of $375 ($1,500 × 25%), reducing the cost to $1,125 ($1,500 - $375).

The retailer's wholesale cost used to calculate the average market price in an arm's length transaction is $1,225, calculated as follows:

The average market price and the cannabis excise tax due are calculated as follows:

For this transaction, you collect $321.56 in cannabis excise tax from the retailer plus the wholesale cost of $1,225.00 for the cannabis products and transportation charge.

Effective January 1, 2020, the wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including any transportation charges. Prior to January 1, 2020, wholesale cost is the amount paid by the retailer, including transportation charges, and adding back in any discounts or trade allowances.

*This example assumes a mark-up rate of 75 percent. The applicable rate is the rate in effect at the time of the transaction. The historical mark-up rates can be found on our website located on the Special Taxes and Fees Rates Page, under Cannabis Taxes.

Cannabis Mark-up Rate (January 1, 2018 – December 31, 2022)

CDTFA was responsible for determining a mark-up rate every six months through the reporting period ending December 31, 2022. 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 retailer in an arm's length transaction through December 31, 2022. Historical cannabis mark-up rates are posted on our Special Taxes and Fees Rate webpage under Cannabis Taxes.

In determining the mark-up, we examine transactions recorded in the California Cannabis Track-and-Trace (CCTT) system. Wholesale costs and retail selling prices listed in the CCTT from over 15 million individual transactions are used to calculate the mark-up. Transactions with data errors and from vertically integrated businesses (i.e., nonarm’s length transactions) were removed from the calculation. Retail selling prices are assumed to include the cannabis excise tax and are adjusted accordingly. To calculate the mark-up, we use the following formula:

Below is an example of how the mark-up calculation works when the actual sales data shows that the average mark-up between wholesale and retail prices is 75 percent. A cannabis retailer purchases cannabis from a distributor for $50. In this example, the distributor will calculate the 15% cannabis excise tax due from the retailer as follows:

The distributor will collect $13.13 in cannabis excise tax from the cannabis retailer and remit that tax payment to us.

Arm's Length Transaction (January 1, 2018 – December 31, 2022)

An "arm's length transaction" is a sale entered into in good faith, between the cannabis retailer and its supplier at a sales price that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction. In an arm's length transaction, the average market price means the average retail price determined by the retailer's wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a mark-up determined by us. As a distributor, you are required to calculate and collect the amount of cannabis excise tax due on the cannabis or cannabis products you sell or transfer to retailers in an arm's length transaction before January 1, 2023.

The example below provides a sample scenario and guidance on how to determine the average market price in an arm's length transaction:

Example – You are a distributor and you sell before January 1, 2023, one pound of cannabis flowers for $1, 000 to a retailer and charge a $300 transportation fee. The wholesale cost paid by the retailer to you is $1,300 ($1, 000 + $300).

To determine the average market price, take the wholesale cost and add the mark-up. This example assumes a 75 percent mark-up. You must use the mark-up rate in effect at the time of sale. Historical mark-up rates can be found on our Special Taxes and Fees Rates Page, under Cannabis Taxes.

The cannabis excise tax due from the retailer to the distributor on this transaction is $341.25 (15% × $2,275). See the Excise Tax Computation topic below for more information.

Nonarm's Length Transaction (January 1, 2018 – December 31, 2022)

A "nonarm's length transaction" is a transaction that does not meet the definition of an "arm's length transaction." In other words, the transaction is not a sale to a cannabis retailer that is entered into in good faith and that reflects fair market value in the open market. One example of a nonarm's length transaction would be when a distributor sells cannabis to a cannabis retailer at a sales price that is lower than what the same distributor offers to other cannabis retailers, and which does not reflect the fair market value.

When a microbusiness, authorized to cultivate and/or manufacture, also sells cannabis or cannabis products at retail, there is no sale that reflects the fair market price in the open market from the cultivation and/or manufacturing part of the business to the retail part of the business. As such, the transaction would be a nonarm's length transaction.

In a nonarm's length transaction, the average market price is the cannabis retailer's gross receipts from the retail sale of the cannabis or cannabis products.

The cannabis excise tax should be reported and paid based on 15 percent of the cannabis retailer's gross receipts from the retail sale. Gross receipts include all charges related to the retailer's sales, such as labor, service, certain transportation charges, and any local business taxes listed on the receipt to the retailer's customer. For example, when the retailer delivers cannabis or cannabis products to its customers using its own vehicles and there is no explicit written agreement executed prior to the delivery that passes title to the purchaser before delivery, the charge for that delivery is included in the gross receipts subject to the cannabis excise tax. Additionally, if the retailer adds a separate amount to its customers' invoices or receipts to cover a cannabis business tax required by its city, that amount is included in the gross receipts subject to the cannabis excise tax. For more information on gross receipts, see Revenue and Taxation Code section 6012.

The example below provides a sample scenario and guidance on how to determine the average market price and calculate the cannabis excise tax and sales tax due in a nonarm's length transaction:

Example – A microbusiness (which is licensed to be a cultivator, distributor, manufacturer, and retailer) grows cannabis flowers and sells the flowers at retail to their customers for $35.00 per eighth of an ounce. The microbusiness also charges $5.00 for delivery. 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 retail sale. Current sales tax rates can be found on our website.

The average market price is determined by the type of transaction (either arm's length or nonarm's length) that occurred when the seller (cultivator, manufacturer, or distributor) sold or transferred the product to the retailer.

Excise tax calculation:

Sales tax calculation:

The microbusiness is responsible for reporting and paying the cannabis excise tax of $6.53 ($43.50 × 15%) to us on their cannabis tax return. The microbusiness is also responsible for reporting and paying the sales tax of $4.25 ($50.03 × 8.5%) to us on their sales and use tax return.

*Please check with your local jurisdiction for guidance on how the local business tax must be calculated and for the current rate.

Cannabis Excise Tax Collection (January 1, 2018 – December 31, 2022)

As a cannabis distributor, you are responsible for collecting the cannabis excise tax from the cannabis retailers on cannabis or cannabis products that you sell or transfer before January 1, 2023, to the cannabis retailers.

You must provide an invoice, receipt, or other similar document to the cannabis retailer that identifies:

• The retailer's name, as the licensee receiving the product.
• Your name.
• The associated unique identifier for the cannabis or cannabis product.
• The amount of cannabis excise tax.
• The date of sale or transfer.

Cannabis Sold or Transferred to Another Distributor (January 1, 2018 – December 31, 2022)

A distributor that sells or transfers cannabis or cannabis products before January 1, 2023, to a cannabis retailer is responsible for collecting the cannabis excise tax from the that retailer and for reporting and remitting the cannabis excise tax to us through reporting periods ending December 31, 2022.

If you sell or transfer cannabis or cannabis products to another distributor, before January 1, 2023, you are not required to collect the cannabis excise tax from the distributor. You should document the transaction with an invoice or other similar documentation that identifies that the sale or transfer is from one licensed distributor to another and includes:

• The selling or transferring distributor's name and license number,
• The purchasing or receiving distributor's name and license number, and
• A statement that no cannabis excise tax was collected.

If the transaction is between a distributor and a microbusiness acting as a distributor, the documentation shall indicate that the microbusiness is acting as a distributor.

If you, as a distributor, sell cannabis or cannabis products before January 1, 2023, to a cannbis retailer and transfer the cannabis or cannabis products to another distributor for transportation to that retailer, or if you receive cannabis or cannabis products from another distributor for transportation to a cannabis retailer, you should document the transaction such as with a shipping manifest or invoice, and include:

• The transferring distributor's name and license number,
• The receiving distributor's name and license number,
• A statement indicating that the transaction between the distributors is for transportation services only and
• A statement indicating which distributor has collected or who will collect the cannabis excise tax from the cannabis retailer, and report and pay it to us.

In the absence of such documentation, both distributors may be jointly liable for any unpaid cannabis excise tax they were required to collect from the cannabis retailer on the retail sale of the cannabis or cannabis products.

Excise Tax Computation (January 1, 2018 – December 31, 2022)

The cannabis excise tax is 15-percent of the average market price of cannabis or cannabis products sold in a retail sale before January 1, 2023. To properly calculate the cannabis excise tax due, it is important to know whether the retailer's purchase of the cannabis or cannabis product was at arm's length or not. For more information, see the heading Average Market Price above. The examples below provide sample scenarios and guidance on how to compute the amount of cannabis excise tax duethrough December 31, 2022.

Example 1 – The retailer purchased five pounds of cannabis flowers for $7,500 and 50 cannabis candy bars for $300 in an arm's length transaction occurring before January 1, 2023, and sells the cannabis flowers and cannabis candy bars at retail before January 1, 2023. The average market price in the case of an arm's length transaction is the wholesale cost of the cannabis plus a mark-up. This example assumes a 75 percent mark-up. You must use the mark-up rate in effect at the time of sale. The current mark-up can be found on our Special Taxes and Fees Rates Page, under Cannabis Taxes.

The distributor is responsible for reporting and paying the $2,106 cannabis excise tax to us on their cannabis tax return. The distributor is not responsible for verifying the retail selling price of the cannabis. For retail sales of cannabis or cannabis products before January 1, 2023, the cannabis excise tax is based on the average market price. In an arm's length transaction, the average market price is not based on the retailer's gross receipts from the retail sale.

Example 2 – The cannabis retailer, which is part of a microbusiness that also holds a distributor license, sells four pounds of cannabis flowers for $9,600 and 25 cannabis candy bars for $500 to their customers (the consumer) before January 1, 2023. This is considered a nonarm's length transaction because the microbusiness supplied its own cannabis and cannabis products for retail sale. The average market price in the case of a nonarm's length transaction is the cannabis retailer's gross receipts from the retail sale.

The microbusiness is responsible for reporting and paying the $1,515 cannabis excise tax to us on their cannabis tax return.

Cannabis Trade Samples (January 1, 2018 – December 31, 2022)

California law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act, allows certain cannabis licensees to provide and receive cannabis and cannabis product trade samples (cannabis trade samples). As a distributor, you can provide cannabis trade samples to and from other licensees except cannabis event organizers, transport only distributors, and testing laboratories, and you can receive trade samples from cultivators, manufacturers, distributors, and microbusinesses authorized to engage in cultivation, manufacturing, or distribution. The cannabis excise tax does not apply to cannabis trade samples.

As the distributor:

• You should not collect the cannabis excise tax on cannabis trade samples you provided to a cannabis retailer.
• You should provide documentation to cannabis retailers which you provide cannabis trade samples indicating that no cannabis excise tax was collected and maintain copies for your records.
• You should maintain records to document the cannabis trade samples provided to retailers without collection the cannabis excise tax, but you are not required to report trade samples provided to cannabis retailers to CDTFA on its cannabis tax return.
• You should provide or use the cannabis trade samples as required by Department of Cannabis Control (DCC). Please visit DCC's website for additional information regarding cannabis trade sample requirements.

Documenting receipt or transfer of cannabis trade samples:

• The following information should be included on documentation, such as a letter, invoice, note, or preprinted form, between you and the licensee providing cannabis trade samples to you or receiving cannabis trade samples from you:
  1. A statement indicating that cultivation tax or cannabis excise tax, as applicable, was not collected on cannabis trade samples.
  2. The date the cannabis trade samples were provided or received,
  3. Your business name,
  4. Your CDTFA seller's permit number and cannabis tax account number (if applicable),
  5. Your DCC cannabis license number,
  6. The name, license type, and DCC cannabis license number of the licensee providing or receiving the cannabis trade samples,
  7. The description and unique identifier of the cannabis trade samples, and
  8. The name and license number of the transporting distributor, if it was not you or the licensee providing or receiving the trade samples.
• The documentation should be consistent with the information recorded in the CCTT system regarding the transfer of trade samples to or from you.
• A cannabis licensee may use a written certification that the cannabis or cannabis products were provided or received for use as trade samples.

Taxes may be due for cannabis trade samples when:

• A cannabis licensee who receives cannabis or cannabis products as trade samples and later sells the cannabis or cannabis products is liable for cannabis excise tax and, if applicable, cultivation tax along with applicable penalties and interest on the cannabis or cannabis products sold.
• A cannabis licensee who sells cannabis or cannabis products designated as trade samples in a retail sale is liable for sales tax due on the cannabis or cannabis products sold.

Reporting and Paying the Cannabis Taxes (January 1, 2018 – December 31, 2022)

As a distributor (or microbusiness operating as a distributor), you are required to file a cannabis tax return to report and pay any cultivation tax on harvested cannabis that entered the commercial market before July 1, 2022, and cannabis excise tax on any cannabis or cannabis product you sell or transfer before January 1, 2023, to a cannabis retailer. Even if you are a distributor that is not responsible for collecting the cultivation tax or the cannabis excise tax, and you have no transaction to report, through the reporting period ending December 31, 2022, you are still required to file a cannabis tax return and report your activities to us.

You must report the cultivation tax due for any cannabis or cannabis product that entered the commercial market during your reporting period prior to July 1, 2022, and pay the amount due. You must separately report the total weight in ounces of medicinal and adult-use harvested cannabis that entered the commercial market by category (flowers, leaves, or fresh cannabis plant) on your cannabis tax return.

Additionally, you must report the cannabis excise tax due for any cannabis or cannabis products sold or transferred to a cannabis retailer during your reporting period, through the reporting period ending December 31, 2022, and pay the amount due. This is required whether or not the cannabis retailer has already sold the cannabis or cannabis products at retail, or whether or not you have collected full payment from the retailer. For assistance filing your cannabis tax return, please view or Online Filing Instructions.

Excess Cannabis Excise Tax Collected (January 1, 2018 – December 31, 2022)

When a cannabis retailer collects cannabis excise tax from the purchaser in a retail sale (customer) on an amount that is in excess of the taxable amount, the retailer has collected excess tax. Excess tax is charged when tax is computed on a transaction that is not subject to tax, when tax is computed on an amount in excess of the amount subject to tax, when tax is computed using a tax rate higher than the rate imposed by law, or when a mathematical error results in an overstatement of the tax on an invoice, receipt or similar document. When this occurs, the retailer shall return the excess cannabis excise tax collected back to its customer. In the event the cannabis retailer cannot or does not return the excess cannabis excise tax collected back to its customer, the cannabis retailer is required to pay the excess cannabis excise tax collected to a distributor, if the retail sale occurred on or before December 31, 2022.

When you, the distributor, collect excess cannabis excise tax from a cannabis retailer that collected the excess tax from the customer, an invoice, receipt, or other similar document must be provided to the retailer with the following information:

1. Date of the invoice, receipt, or similar document,
2. Name of distributor,
3. Name of cannabis retailer,
4. The seller's permit number of the retailer,
5. The amount of excess cannabis excise tax collected, and
6. The seller's permit number held by the distributor or a statement that the distributor does not have a seller's permit.

The distributor must report the excess cannabis excise tax that a cannabis retailer paid to the distributor on the first return after receiving the excess cannabis excise tax from the retailer. The amount of excess cannabis excise tax collected from the retailer is reported on the electronic cannabis tax return in the box that is designated for excess cannabis excise tax collected. This box is for use only when a cannabis retailer collects excess cannabis excise tax from its customer, cannot return the excess amount back to its customer, and pays the excess amount to the distributor.

Excess Excise Tax Remitted, Later Returned to Retailer (January 1, 2018 – December 31, 2022)

If you paid excess cannabis excise tax to us that was later returned to the cannabis retailer, you can claim this credit on your cannabis tax return. This line is for use only when you previously reported and paid excess cannabis excise tax on a previous return and then you subsequently returned this amount back to the retailer because the retailer was able to return the excess amount back to its customer.

When you report a credit on this line, we may request that you provide documentation that supports this credit. Documentation may include but is not limited to invoices that show excess cannabis excise tax was collected from the retailer and credit invoices that list the excess cannabis excise tax as being returned to the retailer because the retailer returned the excess amount back to its customer. This line is not to be used to correct reporting errors on prior cannabis tax returns. When you have any reporting errors, please amend the return that contains the reporting error.

Losses due to Theft

The cannabis excise tax is imposed on cannabis or cannabis products sold at retail. Therefore, if cannabis or cannabis products are stolen from a cannabis retailer, the cannabis excise tax may not be owed.

Cannabis Excise Tax (January 1, 2018 – December 31, 2022)

As a distributor, you are required to collect the 15 percent cannabis excise tax from cannabis retailers on cannabis or cannabis products that you sell or transfer before January 1, 2023, to the cannabis retailer. The cannabis excise tax does not apply to cannabis or cannabis products that you sell or transfer to a cannabis retailer that are subsequently stolen from the retailer. If the retailer paid you the cannabis excise tax and the associated cannabis or cannabis products are subsequently stolen from the retailer, the retailer can request a refund from you for the cannabis excise tax paid to you. For your records and for any claim for refund you file, you should obtain documentation from the retailer that supports loss due to theft. Acceptable forms of documentation may include police reports and/or insurance claims. You must provide the cannabis retailer with a receipt or similar document that indicates the amount of cannabis excise tax returned.

For cannabis excise tax that you reported and paid to us and subsequently returned to the cannabis retailer due to theft, you may submit a claim for refund for the excess cannabis excise tax you paid to us and later returned to the cannabis retailer. You will need to provide us the documentation supporting the loss that the retailer provided.

The 15 percent cannabis excise tax is due on all retail sales of cannabis or cannabis products. There is no exemption or deduction of the cannabis excise tax due to theft of cash.

Cannabis Accessories Sold with Cannabis or Cannabis Products at Retail

Cannabis accessories such as pipes, pipe screens, vape pens and vape pen batteries (without cannabis), rolling papers, and grinders are not subject to the 15-percent cannabis excise tax imposed on retail sales through December 31, 2022, when the sales price of cannabis or cannabis products are separately stated.

Cannabis accessories such as vaping devices or batteries sold in preassembled units may include cannabis or cannabis products. If you are a cannabis distributor who sells these preassembled units with cannabis or cannabis products, or other cannabis accessories, you may separately list the cannabis retailer's cost of the cannabis or cannabis products on your invoice to the retailer to apply the cannabis excise tax to the cannabis or cannabis products only. If you choose to separately state the cost of the cannabis or cannabis product from any cannabis accessories, you must maintain the supporting documentation used to establish the individual cost of the cannabis or cannabis products and the cannabis accessories.

However, when cannabis or cannabis products are sold or transferred with cannabis accessories to a cannabis retailer, and you do not separately state the sales price of the cannabis or cannabis products from the cannabis accessory, the cannabis accessory shall be included in the calculation of the average market price when determining the cannabis excise tax due.

Refunds

If you have collected and remitted more cannabis tax than the amount due, you may be able to get a refund of the overpayment.

You may file a claim for refund using our online services. To submit a claim for refund, simply login using your username and password and click on the account for which you want to request a refund. The claim for refund is located under the I Want to section, More subsection. Simply select the Submit a Claim for Refund link and follow the prompts.

Claims for refund must state the specific reason(s) for the overpayment, specify the period for which you are making the claim, and the amount of the overpayment. We may request documentation to support your claim, including proof that the amount requested has been refunded to the cultivator who paid it, before we process the claim for refund.

Be sure to file your claim for refund by the applicable deadline. If you don't file on time, we cannot consider your claim even if you overpaid the tax. You must file a claim for refund by whichever of the following dates occurs last:

• Three years after the due date of the return on the period for which you overpaid the tax.
• Six months after you overpaid the tax.
• Six months after the date a determination (billing) became final.
• Three years after we collected an involuntary payment, such as from a levy or lien.

If you have collected any amount of cannabis excise tax in excess of the amount due from a cannabis retailer, you may refund the excess tax directly to the retailer. This may occur if you used the incorrect wholesale cost or mark-up rate when calculating the amount of excise tax due from a cannabis retailer in an arm's length transaction. You may claim a credit for that amount of cannabis excise tax that was collected in excess, remitted to us, and returned to the cannabis retailer on a future quarterly tax return (provided the credit is claimed on a return no later than three years from the date of the overpayment). We may request documentation to support the credit that is claimed on the return. Examples of documentation that are acceptable include, but are not limited to, a copy of the receipt or invoice listing the amount of cannabis excise tax collected and subsequently returned to the cannabis retailer, along with the retailer's acknowledgement that the excess tax collected was returned to them.

Additionally, cannabis retailers that you sell or transfer cannabis or cannabis products to may request from you a refund of the cannabis excise tax you collected if the cannabis or cannabis products were never sold at retail (for example, if the product is destroyed or given away for free to a qualified medicinal cannabis patient), or the retailer's product was returned by their customers and a refund of the sale was given. To obtain a refund, go to our online services page as described above. You will be required to submit documentation to support that you refunded to the cannabis retailer the amount being claimed and, if applicable, the retailer refunded the excise excess tax to the customer that paid it.