Comparison of VAT, Sales and Excise Tax as it Applies to Cannabis

Author: Chigbu / Date: Thurs, Aug. 16, 2018

Taxes are generally imposed to raise money for governments. Consumption taxes such as VAT, Sales and Use Tax and Excise Tax are imposed for the same reason but in some cases, as in excise taxes, are used to control behavior or to address specific issues resulting from the use of the product. In the case of Cannabis, to help make appropriate regulations that will limit the harmful effect or to remedy damages caused by the use of the product.

A Value-Added tax (VAT) is a type of general consumption tax that is collected incrementally. VAT applies to all transactions of goods and services. VAT is collected on the value of goods or services that have been provided every time there is a sale or purchase. The buyer of goods is charged VAT by the seller, and the seller remits the VAT to the government. On the other hand, if the buyer is not the end user and the services or goods purchased are costs of their business, the VAT they paid can be subtracted from the tax they charge to customers. The government only receives the difference. VAT is paid on the gross margin of each transaction by everyone in the chain of sale.

The alternative tax system to VAT is sales tax. Sales tax is commonly charged on end users or consumers. The primary difference between VAT and sales tax is that in a VAT system tax is collected at every supply chain level starting with the manufacturer, the distributor, the retailer and then the consumer. There is no double tax in the VAT system due to an implemented credit system.

The sales tax system also avoids double taxation however exceptions are used as opposed to the credit system. For example, under a sales tax system, a manufacturer can have either a retail certificate or an exemption certificate that basically states that they are not the end user or ultimate consumer. In the sales tax system the appropriate tax is paid by the last person that gets the goods (usually the consumer).

An excise or excise tax is a local tax (or in-country tax) on the sale, or production for sale, of specific goods (such as tobacco, alcohol, gasoline and cannabis) or a tax on a good produced for sale, or sold, within a country or state such as the 15% California excise tax. Excise tax on the other hand is a flat tax applied before the purchase price for specific items, some of them by states and some by the Federal Government.

In most cases, the excise is an indirect tax like the VAT and Sales tax, meaning that the producer or seller who pays the tax to the government is expected to try to recover or shift the tax by raising the price paid by the buyer. One major difference between these three taxes is that an excise is typically a per unit tax, costing a specific amount for a volume or unit of the item purchased (as an example, California 15% excise tax on items produced and distributed commercially), whereas a sales tax or VAT is an ad valorem tax and proportional to the price of the good. In other words, excise tax is a flat tax applied before the purchase price for an item.  

As you will also note, the producer or seller (dispensary in the case of cannabis in California) pays the excise tax and passes it on to the consumer after the fact. In other words, the tax is added to the price of the product and other indirect taxes (such as the sales tax) will be calculated including the excise tax.

Other differences exist between the sales tax, VAT and excise tax such as the fact that excise tax is usually heavier (compare the California sales tax and the current 15% excise tax on Cannabis) and is levied on a narrower range of products than the VAT or sales and use tax as in the case of cannabis.

If you have any questions or would like to discuss this tax regime and other taxes that may be applicable to your cannabis business, do not hesitate to contact us. We can be reached via email at info@chigbu.com. We are also in Oakland, California at 1999 Harrison Street, Suite 1800. Our direct number in Oakland is 510-496-4675.

Chigbu & Co, LLP is a boutique International Business and Tax Law firm with a team of attorneys specializing in cross-border transactions and the taxation of Cannabis operations. We are a trans-actional law firm, so we help plan business structures and transactions aimed at minimizing federal, state and excise taxes and other consumer taxes. Our innovative approach provides clients with highly qualified attorneys with extensive in-house practical experience.

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