On June 30, 2022, Governor Gavin Newsom signed California Assembly Bill 195 (AB 195), a bill specific to the cannabis industry that will bring tax relief, enforcement against unlicensed operators and financial assistance to social equity applicants. Below we provide tax updates relevant to your cannabis business.
Starting July 1, 2022, the cultivation tax no longer applies to harvested cannabis entering the commercial market. Before the elimination, cultivation tax was about $161 per pound on cannabis flower, $48 per pound on cannabis leaves, and about $22 per pound on fresh cannabis plants.
The excise tax will remain at 15% imposed upon retail purchasers of all cannabis and cannabis products. However, for California’s 2025-2026 fiscal year and every two years thereafter, the excise tax rate will be adjusted, as necessary but not to exceed 19%, to generate revenue in the amount of the cultivation tax that would have been collected in the prior fiscal year had the cultivation tax not been repealed. Also, starting January 1, 2023, cannabis retailers will be required to remit this excise tax to the California Department of Tax and Fee Administration (CDTFA). Currently, the distributor is responsible for remitting the tax to the CDTFA and collecting the tax from the retailer.
As a cannabis retailer, it will be important to register for a cannabis tax account before the July 1, 2023, effective date of this change to ensure timely remittance of the excise tax starting in 2023.
Local jurisdictions in California operate programs that focus on inclusion and support of individuals and communities in California’s cannabis industry who are linked to populations or neighborhoods that were negatively or disproportionately impacted by cannabis criminalization.
For a cannabis equity licensee, AB 195 allows a credit of $10,000 against taxes for each taxable year beginning on or after January 1, 2023, and before January 1, 2028. Until December 31, 2025, the bill also authorizes a cannabis equity licensee that is a licensed cannabis retailer vendor compensation in the amount of 20% of the cannabis excise tax that the licensee would otherwise be required to remit, provided that it has received approval from the Department of Cannabis Control for a fee waiver and contingent upon the availability of funds.
For a qualified taxpayer, AB 195 allows a credit against taxes for each taxable year beginning on or after January 1, 2023, and before January 1, 2028. The amount would equal 25% of the total amount of qualified expenditures in the taxable year, not to exceed $250,000 per taxable year.
These qualified expenditures are defined as the following:
While these tax changes will certainly be welcomed by the cannabis industry, the relief may have come too late for many California cannabis companies. The tax credit is an important benefit, but there are many hurdles to navigate. If you need assistance preparing for the changes to the California Cannabis Tax or if you believe you qualify for any of these tax credits, contact our experts.
