After all of the discussion and debate (and voting) that went into California’s “Prop. 64” (i.e., the Medical Cannabis Regulation and Safety Act, or “MCRSA”), the California legislature has since repealed said Act and signed into law S.B. 94, (i.e., the Medicinal and Adult Use Cannabis Regulation and Safety Act, or “MAUCRSA”). Lawmakers enacted MAUCRSA at the end of June; and it has an effective date of January 1, 2018.
The new law integrates California’s rules and regulations for adult-use cannabis and medicinal cannabis.
Among other things, one of the significant differences between MAUCRSA and the former law is with respect to the structure of California’s Marijuana Excise Tax, which is basically a tax on a tax. This is because the amount of the excise tax (see below) is added to the taxpayer’s gross receipts before California’s state and local sales and use taxes are calculated.
Important Considerations Regarding Excise Tax Calculations
MAUCRSA changes the method of calculating California’s 15% cannabis excise tax. The 15% tax now applies to the “average market price” of any retail sale of cannabis by a retailer as opposed to the “gross receipts” of the retail sale. This change in taxation structure directly affects all dispensaries and other persons licensed to sell cannabis and cannabis products.
What is the Average Market Price of a Retail Sale?
With respect to a retail sale of cannabis, the newly-enacted law provides two definitions of an average market price depending on whether the sale constitutes an “arm’s length” transaction or a “non-arm’s length transaction. The distinction between the two types of transactions is extremely significant, as it establishes how the tax is collected and paid.
Average Market Price of an Arm’s Length Transaction
The law defines an arm’s length transaction as “a sale entered into in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction.”
In other words, an arm’s length transaction is a sale that takes place through good, old-fashioned negotiation in the marketplace.
In these transactions, the average market price is defined as “the average retail price determined by the wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a mark-up, as determined by the the California State Board of Equalization on a biannual basis in six-month intervals.”
With regard to these transactions, the cannabis distributor must collect the 15% Marijuana excise tax from the retailer “on or before 90 days after … the sale [from the distributor] to the retailer.”
Average Market Price of a Non-Arm’s Length Transaction
MAUCRSA mandates that, “In a non-arm’s length transaction, the average market price means the cannabis retailer’s gross receipts from the retail sale of the cannabis or cannabis products.”
In these transactions, a distributor, “shall collect the cannabis excise tax from the retailer on or before 90 days after the sale or transfer of cannabis or cannabis products, or at the time of the retail sale by the cannabis retailer, whichever is earlier.”
In other words, the distributor must collect the excise tax from the retailer when the retailer sells the product to a consumer, but in no circumstances later than 90 days from the sale from the distributor to the retailer.
Additionally, a retailer is responsible for collecting the excise tax from the consumer and then paying said tax to the distributor (pursuant to the required procedure).
Questions About MAUCRSA or the Marijuana Excise Tax? Speak to a Knowledgeable California Cannabis Law Attorney Today
The legal landscape is changing when it comes to marijuana, both in California and in neighboring states. With respect to the newly-enacted MAUCRSA and the Marijuana Excise Tax, rigid and comprehensive record keeping and strict compliance is imperative for those in the market. To understand what your options are and where you stand under these new rules, talk to the experienced attorneys at CKB Vienna LLP today. Call one of our three offices to schedule a consultation, or contact us using this short online form.