Distributors, Manufacturers, and Cultivators for 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.

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, 2023

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 publication 116 Sales and Use Tax Records, 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:

Sold to a qualified person.
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.
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: