Many of us know how the IRS functions and how tough they can be with businesses, specially the Cannabis industry. But how much do you know about the California taxing authorities? This is especially important in the cannabis industry as the State taxing agencies play a huge role in cannabis taxation. As your cannabis company begins to thrive, knowing the tax system becomes highly important. With steep penalties and interest, being out of compliance with your state taxes can be extremely expensive and even put you out of business.
The California taxing landscape is complex. This is the first of a multi-part series covering topics such as the roles of the various agencies, how to handle audits, how to pay your tax bill in cash and tips to stay under the radar.
Part-one: California Taxing Agencies
California Franchise Tax Board
Let’s begin with the California Franchise Tax Board (FTB). FTB collects state personal income tax and corporate tax in California, basically the agency equivalent to the IRS.
Income tax rates:
- Personal income tax rate is between 1% to 12.3% depending on taxable income
- Corporations 8.84%
In addition, every company registered or doing business in California must pay the $800 minimum franchise tax even if there is zero taxable income for the year.
Every Cannabis business must file income tax returns with FTB just like any other business. The filing requirements will be different based on the entity type you choose; sole proprietor, partnership, limited liability company (LLC), S corporation or corporation. Your business must also select a principal business activity code (PBA) that most closely matches your business operation. And of course, your business must pay any taxes due timely, or interest and penalties are assessed. See FTBs Penalties Reference Chart FTB 1024: Penalty reference chart | Forms and Publications | FTB.ca.gov
FTB Company Income tax Filing Due Dates: (FTB follows IRS due dates)
- Partnership and S Corp – March 15
- Corporate – April 15
Quarterly Tax Due dates
- Q1 (Jan-Mar) – April 15
- Q2 (Apr-June) – June 15
- Q3 (July-Sept) – Sept 15
- Q4 (Oct-Dec) – Dec 15
Generally, FTB does not accept cash payments for taxes, but an exemption can be filed. Finally, your business must keep accurate and complete records to support your income and deductions. This includes sales and purchase records, invoices, receipts, and other books related to your income and expense transactions.
FTB has setup an email specifically for issues or questions related to cannabis FTBCannabis@ftb.ca.gov But it is always best to have a tax professional who specializes in the cannabis industry to help you navigate complex tax issues and keep your company in compliance.
California Department of Taxes and Fees Administration
fuel, tobacco, alcohol, and cannabis taxes, as well as other various taxes and fees that fund specific state programs. These tax programs are concentrated in two general areas – sales and use, and special taxes and fees.
You must register with the CDTFA for a seller’s permit and regularly file sales and use tax returns. In addition to a seller’s permit, if you are a distributor or microbusiness licensed to act as a distributor of cannabis and/or cannabis products, you must register with the CDTFA for a cannabis tax permit and regularly file cannabis tax returns.
CDTFA assigns filing frequency (monthly, quarterly, or annual) of sales and use tax returns based on your reported or anticipated taxable sales at time of registration. Cannabis tax returns are due by the last day of the month following the reporting period.
Sales and Use Taxes
In California, all retail sales of tangible personal property are taxable unless the law provides a specific exemption. The law defines tangible personal property as an item that can be seen, weighed, measured, felt, or touched. Cannabis and cannabis products are generally considered tangible personal property and without a specific exemption, sales of such property are subject to sales and use tax.
The Control, Regulate and Tax Adult Use of Marijuana Act of 2016, an initiative measure approved as Proposition 64 on November 8, 2016, provides certain sales of medicinal cannabis as exempt from sales and use tax. Use tax may be due when you purchase taxable items without payment of California tax from an out-of-state vendor for use in California. You may also owe use tax on items that you remove from your inventory and use in California if you did not pay tax when you purchased the items. You must file a return with the CDTFA even if you have zero use taxes due.
Cannabis Excise Tax and Cultivation Tax
Effective January 1, 2018, a 15-percent excise tax is imposed upon retail purchasers of cannabis or cannabis products. The 15-percent excise tax is calculated based on the average market price of the cannabis or cannabis products sold in a retail sale. The 15-percent excise tax results in an 80-percent mark-up rate.
In addition, a cultivation tax is imposed on cultivators for all harvested cannabis that enters the commercial market based on the weight and category of the cannabis product. There are currently three categories:
- Cannabis flowers,
- Cannabis leaves, and
- Fresh cannabis plant (To qualify for the “fresh” plant category, the unprocessed cannabis must be weighed within two hours of harvesting)
CDTFA is required to annually adjust the cultivation tax rates to account for inflation starting January 1, 2020. Beginning January 1, 2022, the cultivation tax rates reflect an adjustment for inflation as required by the Cannabis Tax Law. The adjusted rates for each category shown below should be reflected on the monthly and quarterly cannabis tax returns beginning January 1, 2022.
The CDTFA published a tax guide for cannabis businesses, which should be bookmarked on your web browser for periodic referencing. Tax Guide for Cannabis Businesses.
Final Thought
As a business owner or manager, your time is best spent growing your business, not dealing with tax matters. Work with a reputable CPA to help you through taxing issues. At Canna CPA Masters we only work with Cannabis businesses so if you have a specific taxing issue with the state, give us a call to discuss.