New Taxation Rules on Sale of Discounted Cannabis Samples

Author: Chigbu / Date: Tue, Jun 19, 2018

Due to the complexity of the Tax Rules California has put in place for the taxation of Cannabis and Cannabis products, Chigbu & Co, LLP will be publishing explanation of the tax rules weekly. As you are aware, there are three tax regimes applicable to cannabis in the State of California: Income tax, Excise tax and Sales & Use taxes. Each is a veritable landmine for those who do not understand how to apply it to their own trade or business. In addition, the Counties are all creating their own tax regime, some of which directly conflict with accepted tax rules under our federal and state tax regimes.

This is the first of such explanations and it is important because many cannabis companies, to compete, provide discounts and other forms of promotion the goal of which is to advertise and market their products. Therefore, it is important to the cannabis industry’s growth and maturity that we understand, and hopefully, apply the rules to our transactions correctly.

Taxation of Samples sold to Retailers

In California, cannabis cultivators, distributors, and manufacturers are permitted to sell samples or promotional items to cannabis retailers. When a distributor sells samples of cannabis or cannabis products to a retailer, the transaction is treated differently for California excise and sales & use tax purposes as discussed below:

  1. Where the retailer is the consumer of the items and does not resell the products, the distributor who sold the samples is not required to collect excise tax but is required to collect sales tax. The sales tax is based on the seller’s selling price and varies by city and county. Where the samples are sold determines what sales tax rate applies. Additionally, if the samples were sold for less than 50 percent of cost, the seller does not owe sales tax but instead owes use tax based on the cost of the product sold. Use tax rates also vary by city and county and are determined based on where the samples were sold.
  2. Where the retailer resells the samples, the excise tax applies at a rate of 15%. The distributor must collect the excise tax from the retailer at the time of the sale. The excise tax is based on the average market price of the cannabis. The retailer does not need to pay sales tax at the time of the sale. Instead, the distributor can obtain and keep a valid and timely resale certificate from the purchaser as evidence that the sale was not to a consumer but to a retailer who will then resell to a consumer and collect the appropriate sales tax.

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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