Please Note: This relates to CA excise taxes only. Treez does not provide tax advice and the customer is solely responsible for compliance.
California allows for the separating of packaging from cannabis goods on invoices and only applying the excise taxes on the cannabis. You can read the full guidance here.
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Why This Is Important - The Little Picture
Cash Flow
In the example invoice provided below, outlined in RED, is an accessory that can be separated from the cannabis product itself and is exempt from CA excise tax.
For this one accessory, there is a $2814 savings in excise tax. This means a cannabis retailer is not pre-paying that amount to a distributor and waiting to collect it back from their customers. This simple step improves your cash flow and allows you to immediately invest back into your business.
Margins & Margin Strategy for Increased Revenue
Using the same example provided above, making the change to your workflow enables you to re-evaluate pricing while keeping the same margin and potentially allows you to be more competitive in your area.
Without decoupling the accessory from a cannabis product, the total cost to the consumer is $55.47
Coldfire Rose X Juice Cart costs $13,703 in total or $21 per unit.
With a 100% markup (50% margin) I would price this product at $42.
I apply 27% of the wholesale cost which = $5.67 bringing the subtotal to $47.67.
I apply the 7% city tax on top of the $47.67 and the subtotal is now $51.01.
I apply the 8.75% Sales tax layer for adult use sales and the total is now 55.47 for the end consumer.
Decoupling the accessory from a cannabis product, the total cost to the consumer is $50.44
Coldfire Rose X Juice Cart costs $13,703 in total or $21 per unit.
With a 100% markup (50% margin) I would price this product at $42.
I apply 27% of the wholesale tax to the cannabis product only which is .27 x 5.05 = 1.3635, bringing the subtotal to $43.36 (vs $47.67).
I apply City Tax @ 7%, bringing the subtotal to $46.39
I apply the 8.75% Sales tax layer for adult use sales and the total is now $50.44 (vs $55.47) for the end consumer.
You can choose to offer your product for about $5 less than the competition to drive more traffic or you can add $4.31 to your margin (120% markup or ~55% margin) if this item already sells at volume.
Why This Is Important - The Big Picture
Now let’s look at the whole invoice:
In the example above, there are six accessory items that can be separated from the cannabis product.
If we do not decouple, your total invoice cost is $112,812 + $30,459.24 = $143,271.24
If we do decouple, your invoice cost is $112,812 + $6,374.50 = $119,186.50
By decoupling you have immediately saved $24,084.74 which is now CASH FLOW that you can decide how you want to invest back into your business.
Let’s Review
I follow the guidance and separate accessories from cannabis products.
I can use the money I have saved by not pre-paying excise taxes to invest in other areas of my business.
I can lower the price of my products and keep my same margins.
With this pricing structure I am more competitive in my market.
I can use this pricing model to retain my current customers and attract new customers.
I can take the excise tax savings and invest in greater quantities of products that do very well in my shop. I may even be able to negotiate a lower price with my distributor since I am buying in bigger quantities.
The Treez POS supports this workflow and instructions on how to decouple accessories from cannabis products can be found here.
Value: You are able to correctly calculate and pay excise taxes based on the cannabis tax amount.
You will also be able to maintain the same workflows around selling each of these items online as well as in store, without having to create extra products or change SOPs.
You are understanding, protecting and maintaining your margins and are able to offer lower prices to your customers without sacrificing your margins and are on top of competitive pricing using this methodology.
Risk: Decoupling accessories from cannabis products does require manual labor. We estimate about an hour more per invoice. However, the savings provide many benefits should you choose this workflow.
In an audit, you will need to detail how you calculate the excise on each item on the invoice and explain that you rolled in the cost of packaging as well as cannabis but recorded excise only on cannabis. Your invoices’ total cost in Treez should still align exactly with the total cost on the physical invoice received from the vendor. This will require more manual effort on your part to stay in compliance.
Be aware of human error as well. Always double check to ensure you are following the steps correctly.
Note: Customers are already working with their distributors and vendors to provide invoices that separate accessories and cannabis products to avoid the manual labor. Reach out to your distributors and vendors and see if they are able to do this now or give you an estimate on when they might be able to provide this needed separation.
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Treez, Inc, its employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.