A cannabis manufacturer is a person who produces or prepares cannabis or cannabis products at a fixed location, that packages or repackages cannabis or cannabis products, or labels or relabels its container. A microbusiness licensed to act as a manufacturer must comply with all of the same requirements as a manufacturer.
Registration & Licenses
If you are a cannabis manufacturer, the California Department Of Tax And Fee Administration (“CDTFA”) requires that you:
- Register with the CDTFA for a seller’s permit.
- Collect the cannabis cultivation tax from cultivators from which you receive unprocessed cannabis and provide the cultivator with a receipt.
- Pay the cultivation tax collected from cultivators to your distributor.
- Electronically file your sales and use tax returns and pay any sales and/or use tax owed to the CDTFA. Even if you do not make taxable sales of cannabis, you are still required to file a return indicating your total sales with your claimed nontaxable or exempt sales during that particular reporting period.
In addition, you must also:
- Obtain a manufacturer license issued by the California Department of Public Health.
- Contact your city and/or county government office for information on local licenses you may be required to obtain.
Cannabis Cultivation Tax
Effective January 1, 2018, a cultivation tax on all harvested-cannabis (including medicinal cannabis and adult-use cannabis) that enters the commercial market is imposed on cultivators at a rate of:
- $9.25 per dry-weight ounce of cannabis flowers,
- $2.75 per dry-weight ounce of cannabis leaves, and
- $1.29 per ounce of fresh cannabis plant (To qualify for the “fresh” plant category, the unprocessed cannabis must be weighed within two hours of harvesting).
The cultivation tax also applies if the licensing agency allows cannabis or cannabis products to enter the commercial market without being tested. If the cannabis or cannabis product does not pass testing or quality assurance review, cannot be remediated and does not enter the commercial market, the cultivator is entitled to the return of the cultivation tax collected from them. The distributor is responsible for returning the cultivation tax collected to the cultivator.
The cultivation tax does not apply to cannabis that was transferred or sold to you or a distributor prior to January 1, 2018. You should keep documentation to support that your purchases of cannabis were made prior to January 1, 2018, for cannabis products that are sent to a distributor and enter the commercial market after January 1, 2018.
Cannabis Cultivation Tax Collection
As a cannabis manufacturer, you are required to collect the cultivation tax from cultivators when the unprocessed cannabis is first sold or transferred to you based on the weight and category of the cannabis. You must then pay the cultivation tax you collected to your distributor, based on the weight and category of the cannabis that was used to produce the cannabis product, when the cannabis products are sold or transferred to the distributor for quality assurance review and testing. The cultivation tax is based on the category and weight of cannabis. To properly calculate the cultivation tax due from the cultivator, it is important that you know the weight in ounces of each category of cannabis that is transferred or sold. Partial ounces, rounded to the nearest hundredth, must be included in the calculation of the cultivation tax due. The distributor will also need to know information on the category and weight of the cannabis sold or transferred to you to properly complete the cannabis tax return. There is no cultivation tax category for whole dry cannabis plant. If a cultivator sells or transfers the cannabis as a whole dried cannabis plant to you as the manufacturer, you must use the cannabis flower category for the whole dried plant at a rate of $9.25 per dry-weight ounce.
Cannabis Product Sold to Another Manufacturer
As a manufacturer of cannabis products, when you receive unprocessed cannabis from a cultivator, you are required to collect the cultivation tax based on the weight and category of the cannabis. When you sell or transfer the cannabis product you manufactured to a licensed distributor, you must pay the cultivation tax you collected to the distributor based on the weight and category of the cannabis that you used to produce the cannabis products. However, you may manufacture cannabis product that you sell or transfer to another, or multiple, manufacturer(s) instead of directly to the distributor. In these instances, you pass the cultivation tax that you collected from the cultivator on the cannabis you used to manufacture the cannabis product you are selling or transferring to the next manufacturer(s).
When you sell your product to a customer, such as a distributor or retailer, and the customer provides you with a valid and timely resale certificate, the sale is not subject to sales tax. As a manufacturer, you may sell samples or promotional items to a retailer. How cannabis excise tax and the sales and use tax applies depends on whether the samples are sold to the retailer for marketing purposes; that is, the retailer will consume and not resell the items, or whether the samples are sold to the retailer for resale to the retailer’s customers. When you purchase a product that will be resold, you can purchase it without paying sales and use tax by timely providing the seller with a valid resale certificate. Sales tax will apply if 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.
Having access to a Board Certified Tax Attorney-CPA with specialized knowledge in the cannabis industry and more than 30 years of experience in advising businesses in tax compliance and planning, accounting systems and cash management can help you meet your challenges to minimize your taxes and conduct business in a manner that avoids prosecution by the Federal authorities and meets State & Local laws and regulations to ensure your cannabis business remains operational. Don’t delay call us today!