PLEASE NOTE: CA Excise Tax Changes occured 1/1/2023 so this article is outdated. However we are leaving it available for now.
Excise Tax Basics
What are excise taxes?
California assesses an excise tax of 15% on all cannabis products sold by retailers to the public. Excise tax is applied to all sales, regardless of medical or adult-use status. Retailers collect excise taxes from customers at the time of sale and remit the taxes to distributors, who are responsible for paying the state.
The amount of excise tax retailers owe to the state is 15% of the average market price (AMP) of an item when purchased at retail. How the average market price is calculated will depend on the type of sale (arm’s length vs. non-arm’s length) from the distributor to the retailer.
Why does California collect excise taxes?
Excise taxes are designated for a variety of applications:
- Restorative justice programs for communities disproportionately affected by drug laws prior to legalization
- Medical cannabis research
- Drug prevention and other education programs for youth
- Environmental protection and restoration
- Enforcement and implementation costs associated with legalization of Adult-Use cannabis sales
Arm's-Length (AL) Transactions
What’s an AL transaction?
When discussing cannabis excise taxes, an AL transaction refers to a transaction in which cannabis products are sold or transferred to a retailer from an outside company. For example, when a dispensary receives a shipment of edibles from a third-party distributor, it would be considered an AL transaction because the dispensary and the distributor that sold the edibles are separate businesses.
How is excise tax calculated on AL transactions?
The average market price on AL items is calculated based on the wholesale cost of the item rather than the retail price of the item. California sets a standard multiplier every 6 months (currently 75%) in order to determine the AMP of an item from the wholesale cost. This is intended to act as a predictor for the amount a retailer will mark-up products. The 15% excise tax is then calculated off of the AMP. Because AL excise tax is calculated on the wholesale cost of the goods and not the retail price, the amount will remain fixed at checkout — regardless of whether or not you sell the product for a discounted price
[(Wholesale Cost + (Wholesale cost x CA AMP Multiplier)] x 15% = AL Excise Tax on Item
[($5 wholesale cost + ($5 x 75%)] x 15%
How is excise tax collected and remitted on AL transactions?
In an AL transaction, excise taxes are collected and remitted to the state by the distributor. Retailers will typically pay this upfront to the distributor at the time the products are delivered and then collect the excise tax back from customers when the products are sold.
Non-Arm's-Length (NAL) Transactions
What is a NAL transaction?
A NAL transaction is a transaction in which the buyer and seller are part of the same or affiliated business entity. In the context of cannabis excise taxes, NAL transactions occur when a company is a micro- or vertically-integrated business or has multiple cannabis licenses including a distribution and retail license.
Because a single company may handle different roles in the lifecycle of a sale (e.g. cultivation, distribution, and retail) this distinction exists to ensure vertically integrated businesses are paying appropriate amounts of excise tax to the state and aren’t undercutting industry standard pricing.
How is excise tax calculated on NAL transactions?
The excise tax on items from NAL transactions is simply 15% of the retail price. This is because the average market price of these items is simply the retailer’s gross sales of the product to customers. Because NAL excise tax is calculated off the retail price of an item, the amount calculated will increase as the price goes up and decrease if the price is discounted.
Retail Price x 15% = NAL Excise Tax on Item
($10 retail price) x 15% = $1.50
How is excise tax collected and remitted on NAL transactions?
When a distribution license-holder sells or transports cannabis products to a retailer, they’re responsible for collecting the NAL excise tax from the retailer and remitting the tax to the state, regardless of whether or not the retailer is owned by the same company.
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