CDTFA Proposes Changes to How Excise Tax Is Calculated: Comments Needed From Cannabis Industry by October 20, 2023
On October 12, 2023, the California Department of Tax and Fee Administration (CDTFA) held a public meeting regarding its proposed adoption of emergency Regulation 3802, Gross Receipts from Sales of Cannabis and Cannabis Products, to clarify the meaning of “gross receipts” from the sale of cannabis or cannabis products for purposes of the cannabis excise tax imposed by California’s Revenue and Taxation Code (RTC) section 34011.2. Essentially, the CDTFA’s proposed emergency regulation expands what is included in “gross receipts” when calculating the excise tax to now include ALL sales by a cannabis retailer, not just sales of “cannabis and cannabis products.” The CDTFA’s interpretation is based on the January 1, 2023 change in responsibility for remitting the excise tax to the CDTFA from the distributor to the retailer. According to the CDTFA, there is no longer a need to distinguish “cannabis and cannabis products” from any other items sold by the cannabis retailer and the 15% excise tax applies to all sales. The CDTFA insists this is not a tax increase, but a clarification because they believe cannabis retailers are “confused” about gross receipt and how sales and use tax, as well as the excise tax is to be calculated.
We believe that the proposed regulation is an overreach of the original intent of the cannabis excise tax which was originally intended on only applying to cannabis and cannabis products. The proposed regulation increases taxes imposed on the cannabis industry and its customers beyond what is required by law. Links to the proposed emergency regulation are below.
The proposed Regulation 3802 has five main components, divided into subdivisions (a) through (e).
Subdivision (a) says that the excise tax should be levied on everything sold in a cannabis retail store, including merchandise currently excluded from the excise tax calculation like cannabis accessories (pipes, vape batteries, etc.) clothing, posters, and other items unrelated to cannabis. The CDTFA clarifies that anything currently not deducible from gross receipts for the purpose of calculating the sales and use tax is also not deductible from the excise tax. Sales and use tax is calculated on the entire sale first and added to the total, and then the excise tax is calculated.
Subdivision (b) specifies that the sale price for cannabis and cannabis products includes any amount a purchaser is obliged to pay for acquiring such cannabis or cannabis products, irrespective of how this amount is designated or itemized on the invoice. The CDTFA explains that since distributors no longer collect the excise tax from retailers, there is no longer a requirement to itemize the invoice. This section of the proposed new tax regulation supports the CDTFA’s intent to apply the excise tax to t-shirts and pipes.
Subdivision (c) excludes only certain local taxes adhering to the Bradley-Burns Uniform Local Sales and Use Tax Law or Transactions and Use Tax Law from the sale price. However, any amounts that a purchaser must pay to compensate or reimburse a cannabis retailer for taxes imposed on the retailer by local governments, such as cannabis business taxes measured by the retailer’s gross receipts, would still be included in the sale price of cannabis or cannabis products. In the October 12th discussion, the CDTFA indicated that Development Agreements are a local tax and would be subject to the excise tax, however, it is unclear how it would be implemented. The overall result is an increase in what is swept into the excise tax calculation creating higher excise taxes to be collected from the customer and remitted by the cannabis retailer to the CDTFA. The CDTFA requires all local taxes to be added before sales and use tax is calculated. They have not yet provided guidance on the trend of local jurisdictions writing into their ordinances that their local cannabis taxes are to be calculated after sales and use tax, and after the excise tax.
Subdivision (d) is about transportation charges, specifying that charges not subject to sales or use tax under the current Sales and Use Tax Regulation 1628 are excluded from the sale price of cannabis or cannabis products. However, it also notes that charges a purchaser must pay to a cannabis retailer for delivery by an employee of the retailer are generally included in the gross receipts subject to the cannabis excise tax, unless specific requirements are met. The CDTFA explains that this is required so that retailers don’t charge $80 for a t-shirt and $0 for delivery as a way to get out of the excise tax. This can make billing for cannabis transportation services even more complicated and increase costs for retailers.
Subdivision (e) defines when packaging and other tangible personal property sold with cannabis products (such as vape cartridges and devices) are considered optional. It further states that the “total amount of the sale price” does not include a reasonable amount charged for optional packaging or other optional tangible personal property as a unit or for a lump-sum price, and it requires retailers to maintain records to prove the optionality and reasonableness of these charges. This introduces a significant additional record keeping and administrative burdens on cannabis retailers and creates arbitrary, convoluted distinctions regarding how retail items may be taxed.
Call to Action
If the proposed emergency Regulation 3802 is adopted as currently drafted, cannabis customers will face a significant increase in taxes. This is not just a tax increase; it’s a massive financial blow to the cannabis industry that is already struggling to compete with unregulated and untaxed intoxicating hemp products sold at convenience stores and smoke shops.
We strongly encourage everyone to voice their concerns about these proposed regulations. The comment period is open until Friday, October 20, 2023, so there’s a limited window to make a difference.
How to submit comments to the CDTFA by 5:00 pm, October 20, 2023:
1. You can submit comments directly to the CDTFA at BTFD-BTC.InformationRequests@cdtfa.ca.gov
2. You can submit comments to me. I will consolidate comments and submit to CDTFA.
Please remember to be professional and respectful when submitting comments to CDTFA regulators. Real world examples of actual tax calculations are helpful, as well as comments on how the regulation will affect your business.
Here is a link to the CDTFA Discussion Paper. The proposed Regulation 3802 is on the last three pages of this document: https://www.cdtfa.ca.gov/taxes-and-fees/3802DP101223combined.pdf