Excise and Sales Tax on Immature Plants, Clones and Seeds

Author: Chigbu / Date: Wed, Jun 27, 2018

Last week we brought to you action taken by the California Department of Tax and Fee Administration (CDTFA) regarding taxation of cannabis samples. The CDTFA is commendably doing their best to provide guidance on the application of some of the rules they have enacted for the orderly collection of tax from the Cannabis industry. Their explanation sometimes leaves you even more confused, so we promise to do our best to help you make sense of them. This week the CDTFA continues with their effort to guide us and we in turn want to help you understand what they are really saying or not saying.

The new guidance is on the application of excise and sales & use tax to immature plants, clones and seeds. Let’s recount all the taxes we have to deal with: ncome tax Federal and State, California excise tax on cannabis products, cultivation tax imposed on those who cultivate cannabis, sales & use tax and finally the local gross receipts tax which the different cites and counties in California have enacted. These are in addition to the permit fees which of course they do not consider a tax but, in fact, is (sort of).

As we all know, nursery farming is cultivation. The first guidance introduced by CDTFA excluded imma-ture plants, clones and seeds from the cultivation tax but was silent on the application of the State 15 percent excise tax. Under the new guidance, immature plants, clones and seeds are still excluded from the application of the culti-vation tax. However, the CDTFA has debunked our belief that the State 15 percent excise tax might not apply to immature plants.

Specifically, the excise tax rules are as follows:

  1. Cultivation excise tax does not apply to immature plants, clones and seeds;
  2. Excise tax of 15 percent applies to immature plants, clones and seeds when sold at retail;
  3. While nurseries can sell their plants to other Cannabis licensees, the CDTFA requires a distributor to transport the plants to the licensee and adds that such distributor, if transporting the immature plants, clones or seeds to a retailer must collect the 15 percent cannabis excise tax from the retailer based on the average market price of the immature plants, clones or seed;
  4. The retailer is required to collect the cannabis excise tax from their retail customers who buy im-mature plants, clones or seeds.

The important point to note is that there is no mention of what should happen in terms of collecting the cannabis excise tax when the immature plant is sold to a cultivator who uses the immature plants, clones or seeds to grow cannabis.

Regarding application of Sales & Use tax the CDTFA guided as follows:

  1. Sales tax will apply to retail sale of immature plants, clones and seeds;
  2. Sales & use tax will not apply to a cultivator’s purchase of immature plants, clones and seeds when the products grown from them will be resold as part of the cultivator’s regular business activities (if the seller obtains a valid resale certificate from the cultivator).

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.