I asked California Department of Tax and Fee Administration a couple of questions about why cannabis tax collections are coming in low. At the end are the questions and the CDTFA’s helpful answers, from Paul Cambra.
My reactions: I. The producer or cultivation tax collected only $1.6 million in the first quarter because retailers some how brought untaxed products into inventory before the tax was effective on January 1. Retailers then sold that untaxed product in early 2018. The standard excise tax procedure for taxing jurisdictions is to apply a “floor stocks tax” to product that escaped tax as it came into inventory (and sits on the shelf or the floor). See https://www.ttb.gov/tax_audit/floor-stocks-tax-faqs-answer.shtml. California did not have a floor stocks tax, so had a short-term loophole. Its effect will soon disappear.
II. The 7.25% sales tax collected a lot compared to the 15% marijuana excise tax because the sales tax
1. includes pipes and t-shirts and so on;
2. is based on a real price, while the excise tax is often based on an artificial or phony price (the “average market price”) under California regs;
3. includes the 15% tax in the base (for an extra 1.0875% every time).
OK, here is the correspondence:
Q1: The California state-collected sales tax is 7.25 percent, with local taxes on top of that. So why doesn’t the amount collected from the 15 percent excise tax then more than double the amount collected from the 7.25 percent sales tax (15 divided by 7.25 is 2.07)? The sales tax does not apply to medical cannabis – so the 15 percent excise tax should exceed it by even more than a factor of 2.07. But the 15 percent excise tax brought it $32 million, versus $27.3 million for the sales tax.
A1: The sales tax numbers take into account everything sold in the dispensaries, which may be more than just cannabis (pipes, vapes, rolling machines … ). Also, sales tax is based on gross receipts from the retail sale and is computed after the excise tax is added on. Additionally, although the statewide sales and use tax rate is 7.25 percent, many locations impose additional district taxes which may raise the applicable sales tax rate to as high as 10.25 percent. And retailers are free to charge whatever they want for the product, which could be more than the “average market price” that the excise tax is based on.
Q2: And why did the producer tax bring in so little? I suppose that may come from the ability of taxpayers to defer payment.
A2: You may be referring to the cultivation tax. If so, the cultivation tax did not apply to harvested cannabis that cultivators transferred or sold to a manufacturer or distributor prior to January 1, 2018, therefore many distributors and manufacturers purchased larger amount of cannabis inventory prior to the effective date of the tax.
I hope this helps. Let me know if you need anything else.
Information Officer I – Office of Public Affairs
California Department of Tax and Fee Administration
450 N Street, MIC: 86, Sacramento, CA 95814