Aria Biswas

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January 1, 2023 the excise tax liability for California cannabis retailers is shifting

California cannabis excise tax changes

*Author: Patrick Finnegan, Cannabis CPA*

On January 1, 2023, cannabis retailers will be responsible for collecting and paying the cannabis excise tax to the California Department of Tax and Fee Administration (CDTFA).

California is making major changes to the way cannabis excise taxes are applied and collected beginning January 1, 2023, and these changes will greatly affect the retail cannabis industry.

One major change is the transition of Cannabis Excise Tax reporting from the distributor to the retailer, who is required to register for a cannabis excise tax account.  Beginning January 1, 2023, retailers are responsible for billing and collecting the Cannabis Excise Tax on the following categories:

The cannabis excise tax remains at 15 percent and is based on gross receipts from the retail sale of cannabis or cannabis products.

- Gross receipts include the sales price of the cannabis or cannabis products, after discounts, and all charges related to the sale, such as delivery fees and any local cannabis business tax listed separately on the invoice or receipt provided to the purchaser.
- Gross receipts do not include sales tax or the gross receipts from the retail sale of any non-cannabis item.

![2023 Excise Tax Calculation Example][1]

*Calculated with a 5% local tax and 10% sales tax rate. Percentages vary by location.

Cannabis Distributors were informed by CDTFA that their final cannabis tax return is due January 31, 2023. However, CDTFA also informed retailers that __any amount of cannabis excise tax due to a distributor for purchases made prior to January 1, 2023, must be paid to the distributor no later than April 1, 2023__.  There is a disconnect between the due date of the return and collection date;  I am sure distributors will be scrambling to collect unpaid excise taxes from some retail customers. 

Another change is the allowance of a __tax credit for excise tax paid on inventory purchased prior to January 2023__. This tax credit will be available to the retailer during their first quarter excise tax return and will lessen the excise tax that would normally be due.

Retailers should run an inventory report on December 31, 2022, detailing the amount of inventory with excise tax included in the purchase price. That excise tax amount will then be claimed as a credit against the retailers excise tax collections after January 1, 2023.  Be sure to keep all the backup associated with the pre-paid excise tax credit in case of any future audit review as the CDTFA will be records for support.

> California cannabis consumers are subject to crazy levels of taxation that hinder the legal market’s ability to compete.

__Other upcoming changes to be aware of:__

The recent tax law changes include the addition of __personal tax responsibility for any unpaid excise tax__. The State of California may hold individuals personally responsible for payment of the excise and sales taxes, which could include levies on bank accounts or personal property.  State and Local taxes collected by cannabis retailers can reach 35% of the retail sales price when local, state excise and sales tax are included.  I highly recommend that the retailer establish separate bank accounts where taxes are deposited and not co-mingled with other entity funds.

One other interesting component being formulated with the tax change is the allowance of __up to 20% of the excise tax as a credit back to the retailer__ if they are previously approved for a license fee waiver from the Department of Cannabis Control. This should assist equity retail business in establishing a source of much needed income.  Information on how to apply for this vendor reimbursement credit will be provided within a special notice issued by the CDTFA in December 2022. 

And finally, for those cannabis businesses that experienced inventory thefts of excise tax paid inventory prior to January 1, 2023, the State of California allows a tax credit of the excise tax paid since the cannabis was never sold at retail.  However, you must work with the distributor that sold you the inventory and since their last excise tax return is due on January 31, 2023, you need to file a refund claim with the distributor as soon as possible.

__California cannabis consumers are subject to crazy levels of taxation that hinder the legal market’s ability to compete.__ It’s always something in cannabis, and I feel for each of you that pay taxes instead of paying yourself or investing further in your business.  If you have any questions on these or other tax matters, I am always available by phone or email:

Patrick Finnegan CPA
- patrickfinnegancpa@gmail.com
- 916-718-1068

__Additional Resources:__

- [CDTFA Emergency Regulation 3704 Cannabis Excise Tax Credit][2]

- [CDTFA Tax Guide for Cannabis Businesses][3]

- [CDTFA Special Notice: Cannabis Excise Tax Changes][4] 

- [CDTFA Special Notice: New Responsibilities for Cannabis Retailers][5]

- [Full Text & Analysis of Assembly Bill No. 195][6]

### Meadow makes it easy to see what excise has already been paid and what's left to remit. Explore [upgrading to Meadow][7] to ensure you remain compliant and supported through these shifting regulations.

[1]: //images.ctfassets.net/6kwu1u6s8j23/4Nh5Fla2jKoLKuMx3GXlSf/7ff07a12c2ae609aef75457a69e6af64/Screen_Shot_2022-12-13_at_3.01.58_PM.png
[2]: https://www.cdtfa.ca.gov/taxes-and-fees/Reg3704-Text-Emergency-2022.pdf "CDTFA Emergency Regulation 3704 Cannabis Excise Tax Credit"
[3]: https://www.cdtfa.ca.gov/industry/cannabis.htm "CDTFA Tax Guide for Cannabis Businesses"
[4]: https://www.cdtfa.ca.gov/formspubs/L866.pdf? "CDTFA Special Notice: Cannabis Excise Tax Changes"
[5]: https://www.cdtfa.ca.gov/formspubs/L869.pdf? "CDTFA Special Notice: New Responsibilities for Cannabis Retailers"
[6]: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB195 "Full Text & Analysis of Assembly Bill No. 195"
[7]: https://getmeadow.com/#upgrade-now

California cannabis excise tax regulatory changes are coming. Cannabis retail operators need to understand the changing liability.

California cannabis excise tax regulatory changes are coming

Cannabis CPA Patrick Finnegan breaks down what this changing liability means and how to adjust your SOPs to ensure compliance and avoid audits.

California Cannabis Regulatory Changes: Excise Tax Collection & Payment

Learn more about the issues with California cannabis industry in this interview with Meadow CEO David Hua and MD Numbers Co-Founder Marie Montmarquet

Marie Montmarquet and David Hua on California cannabis

In this April 2022 episode of [Meadow Memo](https://www.linkedin.com/newsletters/meadow-memo-6907026159591157760/ "Meadow Memo"), our CEO David Hua sits down with Marie Montmarquet to get her first-hand perspective on the current crisis that the California cannabis industry is experiencing.

The unsustainable combination of high taxes, 280E tax burdens, the lack of retail outlets, the unregulated market, a series of robberies and dropping cannabis prices means much of the industry is hanging on by just a thread.

As the co-founder of California-based MD Numbers, a vertically integrated family-run company formed in the Bay Area in 2010 (spanning cultivation, distribution and delivery), Marie shares some of her huge depth of knowledge. 

The most alarming thing Marie said:
“It’s not equity that’s broken, it’s this entire industry that is broken.” (31:46)

Yeah, it’s really that bad.

It’s no secret the California cannabis industry is in crisis.

To quote the [Save California Cannabis campaign](https://www.change.org/p/toni-g-atkins-cannabis-industry-united-for-less-taxes-and-more-retail):

*- The current regulatory environment threatens the viability of California’s legacy cannabis operators.*

*- The harms inflicted upon Black, Brown and Latinx communities by the War on Drugs remain unresolved.*

*- The opportunity to create a robust legal market has been squandered as a result of excessive taxation.*

*- The illicit market threatens the health and safety of medicinal patients and consumers.*

*- The State has failed to fulfill the intent and purpose of Proposition 64 as mandated by California voters.*

In the interview below with Marie Montmarquet, we unpack the struggle to regulate cannabis in California, which she has witnessed and navigated through since 2010.

Meadow’s [cannabis retail software](https://getmeadow.com/blog/tags/cannabis-retail "cannabis retail software") has powered [Marie’s Deliverables](https://mariesdeliverables.com/ "Marie’s Deliverables") since 2016. We’ve been in the trenches with Marie throughout the six years we’ve known each other, and California cannabis has been a bumpy ride, to say the least.

(Read more about Meadow’s rollercoaster journey as the first @ Y Combinator-backed cannabis startup in the [Hustle Fund](https://www.linkedin.com/feed/update/urn:li:activity:6912481773662715904/)).

<figure>
<video-player url="https://vimeo.com/697179301"></video-player>
<figcaption>Listen to the full interview.</figcaption>
</figure>

Highlights of Our Conversation:

- Why Marie loves cannabis and thinks compliant cannabis in California is one of the most interesting things in the world (3:01)
- Why Marie’s farm just increased its footprint by taking over a neighboring space with plants in the ground by operators who had over-expanded in these dismal market conditions (6:04)
- How the price pendulum swings of cannabis flower creates extinction events (6:48)
- Why 85% farmers today are trying to decide if it’s even worth replanting, and why Marie thinks the canopy tax needs to be switched to a flat rate percentage gross tax based on harvest or eliminated completely (8:08)
- Why industry economics are unsustainable: the cost of labor, construction, taxes, gas, rent and operations are going up, but the price of cannabis is going down (9:25)
- Why growing high-quality greenhouse flower that looks like indoor has kept the MD Farms business alive (11:29)
- Why current tax structures at every piece of the supply chain are unsustainable and unbearable (12:01)
- Why California cannabis is the hardest market to operate in, for every license type, especially for small businesses (13:23)
- Why the California cannabis culture and lifestyle can’t be replicated (14:46)
- Why Marie’s lack of formal capital investment has actually been a good thing (15:26)
- Why buyers need to hold the floor on cannabis flower prices (18:00)
- Why the industry switched from making money under prop 215 to raising money under prop 64 in the “green rush” era (19:00)
- Why teams need to be agile, pivot quickly, and operate more like a nimble jet ski and less like a slow barge (19:42)
- Why excess inventory, the lack of retail outlets, and insignificant enforcement on the unregulated market (both in CA and other states) has compounded industry issues (21:30)
- Why unbranded outdoor flower is getting crushed, why more consumer education around THC potency and terpenes is needed, and why solventless fresh-pressed live rosin is currently a good way for outdoor cultivators to survive (22:22)
- Why taxes are killing the industry & why there’s some hope for tax relief in upcoming bills from Senator Bradford & others (26:38)
- Why most people transitioning from the legacy market into the licensed, compliant market are trying to avoid equity programs (30:25)
- Why we need to create other license types to serve small businesses & other equity opportunities beyond just ownership to give back to people affected by the war on drugs (31:20)
- Why there was more strain diversity on dispensary menus under Prop 215 & why cannabis sold outside of the compliant market is often better and fresher than what’s sold in the licensed market (33:45)
- Why an “asset-light” model with white labeling and licensing deals can open up opportunities for the equity community and new brands who don’t have the capital to cultivate or own a license themselves (36:00)
- Why customers are the #1 thing new cannabis companies should be focused on growing (37:51)
- Why vetting business partners and avoiding predatory partnerships is key (38:27)
- Why Meadow isn’t successful unless retail operators are successful (39:34)
- Why a software’s ability to keep up with regulatory changes influences retailers' ability to thrive (41:29)
- How Marie’s consulting company Legacy Coterie can help operators get licenses and plan go-to-market strategies in undeveloped cannabis markets (43:30)
- Why cannabis is still a golden opportunity and how strong relationships will allow us to persevere (44:44)

One of my favorite things we heard Marie say:

### “I kind of equate Meadow to the iPhone. There’s definitely a robustness to certain things, and then there’s a beauty to simplicity and things working. All I want to do is sell weed and sell a lot of weed and do it really well. And I never thought that technology would play such a huge role in me selling weed...to make my customer experience as fluid as I want it to be. Technology is everything. The future of cannabis: good weed, and after that, it will be won and lost by technology.”

Thanks for exploring this Meadow Memo on the state of California cannabis. If you found this content useful, please subscribe to this monthly [LinkedIn Newsletter](https://www.linkedin.com/newsletters/meadow-memo-6907026159591157760/ "LinkedIn Newsletter") and share with a friend in the industry who is part of a retail, delivery, or vertically integrated team.

Learn more about Marie's vertical business: [MD Numbers, Inc.](https://www.mdnumbersinc.com/ "MD Numbers, Inc.")

Hire Marie to consult on your new cannabis business: [Legacy Coterie](https://www.legacycoterie.com/ "Legacy Coterie")


In this cannabis industry interview we hear about the challenges of California cannabis 

Meadow CEO David Hua with Marie Montmarquet Co-Founder MD Numbers 

The industry is hanging on by just a thread. Marie walks us through what she's seeing and what changes are needed

Meadow Memo: Surviving the Storm of California Cannabis

California cannabis regulation changes Department of Cannabis Control

2022 DCC Proposed Regs Comments

Department of Cannabis Control Public Comments from Meadow

Department of Cannabis Control Public Comments

Pull from our community-created, open-source comments below to submit your own public comments to the DCC

Cannabis CPA Patrick Finnegan and cannabis Tax Attorney Regina Unegovsky shared that in 2021 the CDTFA is starting to use Metrc variance as a means of audit, which means having a cannabis retail system that keeps you fully compliant is more important than ever.

How Cannabis Dispensaries Can Avoid & Prepare for a Cannabis Audit

2021 marks three years since the launch of California’s legal cannabis market in January 2018; this milestone is triggering a wave of audits by the California Department of Tax and Fee Administration (CDTFA), as originally reported in an article published in Marijuana Business Daily by John Schroyer titled “[California marijuana firms face more state tax audits, millions of dollars in unpaid taxes](https://mjbizdaily-com.cdn.ampproject.org/c/s/mjbizdaily.com/california-cannabis-firms-face-more-state-tax-audits-unpaid-taxes/amp/ "California marijuana firms face more state tax audits, millions of dollars in unpaid taxes").”

The article states that “cannabis tax experts warn the industry should expect state regulators to ramp up tax enforcement, noting that several audits of marijuana businesses are already underway.”

We asked two of the tax experts quoted in the article, CPA Patrick Finnegan and Tax Attorney Regina Unegovsky, to shed more light on what’s going on with taxes, tax enforcement, and what to do in case of an audit. 

<figure>
  <video-player url="https://www.youtube.com/watch?v=FLYiXoARcGU"></video-player>
  <figcaption>In this excerpt from our webinar, cannabis CPA Patrick Finnegan shares about tax audits and the inaccuracies he's seeing in the way dispensaries are calculating their sales, local and excise taxes. </figcaption>
</figure>

The three year make California’s legal cannabis market, which equals the state’s statute of limitations for how far back auditors from the California Department of Tax and Fee Administration (CDTFA) can go to examine business tax returns. 

In this discussion, we learned that the CDTFA is increasingly reviewing Metrc accounts and using inventory variance as a means of audit up and down the California supply chain, which means having a system that keeps you fully compliant is more important than ever. While other systems let you oversell, Meadow's built-in guardrails keep you compliant with clean inventory in all of your sales channels (in-store, delivery & online). 

<figure>
  <video-player url="https://www.youtube.com/watch?v=Xc_uMDx40xg"></video-player>
  <figcaption>Watch the full webinar conversation with cannabis CPA Patrick Finnegan, cannabis Tax Attorney Regina Unegovsky, and Wally Wong at Meadow.
</figcaption>
</figure>

Learn more about Meadow's [cannabis compliance software](https://getmeadow.com/blog/tags/cannabis-compliance "cannabis compliance software").

Get insight into how to prepare for tax audits in California cannabis

Insight Into 2021 CDTFA Tax Audits & Tax Issues in the California Cannabis Supply Chain

Nicole Elliott Director of Cannabis Control in California in conversation with Meadow CEO David Hua on stage at Meadowlands 2021 at Camp Navarro.

Meadowlands 2021 with Nicole Elliott Director of Cannabis Control

Meadowlands 2021 conversation with Nicole Elliott of California's Department of Cannabis Control with Meadow CEO David Hua

DCC Director Nicole Elliott with David Hua Meadow

Read and listen to the full Meadowlands conversation with Director of the DCC, Nicole Elliott

Posts tagged “Cannabis Compliance”

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Meadow Memo: Surviving the Storm of California Cannabis

2022 DCC Proposed Regs Comments

Insight Into 2021 CDTFA Tax Audits & Tax Issues in the California Cannabis Supply Chain

Meadowlands 2021: Updates from the DCC with Director Nicole Elliott