Tax Guide for Cannabis Businesses

New Information – On November 8, 2016, California voters approved Proposition 64, Control, Regulate and Tax Adult Use of Marijuana Act, which provides:

  • Effective November 9, 2016, certain sales of medical marijuana are exempt from sales and use tax. (see the Dispensaries tab, under the heading, Proposition 64 Exempts Certain Medical Marijuana Sales)
  • Effective January 1, 2018, a 15 percent excise tax is imposed upon purchasers of all marijuana and marijuana products. Additionally, a tax on cultivators of marijuana is imposed as follows:
    • $9.25 per dry-weight ounce of marijuana flowers
    • $2.75 per dry-weight ounce of marijuana leaves

We will update this guide with additional information on the excise tax and cultivation tax as it becomes available – please check back.

Helping your business succeed is important to the Board of Equalization (BOE). To help you better understand the tax obligations specific to your medical cannabis business, we have created this guide detailing the tax issues and important information relevant to your industry.

Please note: This guide is intended to provide general information regarding issues relating to the sales and use tax laws and other programs administered by BOE which may affect medical cannabis businesses. It is not intended to provide advice or guidance related to other state and local statutes and regulations relating to the cannabis industry. Additionally, for the Federal Government's guidance regarding marijuana enforcement, refer to the U.S. Department of Justice website.

Medical Cannabis

How to Use This Guide

Each section of this guide contains important information relevant to your business. The Getting Started section provides key resources related to registration, filing returns, account maintenance, and other information you may need.

The Dispensaries section covers topics related to the general application of tax to purchases and sales by dispensaries. It also has information on exemptions that dispensaries may qualify for and the exemption certificates required.

The Growers section covers topics related to the general application of tax to growers, the available exemptions and the exemption certificates required.

Lastly, the Resources section provides links to useful information, including web-based seminars, publications, statutory and regulatory information, and access to assistance from our Customer Service Representatives.

Please note that the general information provided is not intended to replace any law or regulation.

If You Need Help

If you have questions, please feel free to contact us by telephone or email. Our contact information and hours of operation are available in the Resources section.

Free Educational Consultations

If you are starting a new business, or have tax-related questions, BOE staff is available to meet with you at your business location to provide a personal consultation to help you correctly report and pay your sales and use taxes. For more information about Free Educational Consultations see the Getting Started section.

If you have suggestions for improving this guide, please contact us via email.

Getting Started

Please note: This guide is intended to provide general information regarding issues relating to the sales and use tax laws and other programs administered by the BOE which may affect the medical cannabis industry. It is not intended to provide advice or guidance in relation to other state and local statutes and regulations relating to the cannabis industry. Additionally, for the Federal Government's guidance regarding marijuana enforcement, see the U.S. Department of Justice website.

If you own a business in California that sells medical cannabis and cannabis-related products, you must register with us for a seller's permit and regularly file sales and use tax returns.

Sales and Use Taxes in General

In California, all retail sales of tangible personal property are taxable unless the law provides a specific exemption. The law defines tangible personal property as an item that can be seen, weighed, measured, felt, or touched. Cannabis and cannabis-related products are generally considered tangible personal property and without a specific exemption, sales of such property are subject to tax.

Please note, on November 8, 2016, California voters approved Proposition 64, Control, Regulate and Tax Adult Use of Marijuana Act. Proposition 64 provides that effective November 9, 2016, certain sales of medical marijuana are exempt from sales and use tax. For more information on how Proposition 64 affects your medical marijuana sales, please see the Dispensaries tab, under the heading, Proposition 64 Exempts Certain Medical Marijuana Sales.

Use tax may be due when you purchase taxable items without payment of California tax from an out-of-state vendor for use in California. You may owe use tax on items that you remove from your inventory and use in California if you did not pay tax when you purchased the items.

Registration

Online Registration — Register with us for your seller's permit. There is no fee to register for a seller's permit. We do not require you to tell us what you sell.

All retail establishments that sell medical cannabis and cannabis-related items in California must register with us for a seller's permit. If you are an itinerant or mobile dispensary, you are required to register as well. You are not required to disclose what you sell.

You must obtain a seller's permit if you:

  • Are engaged in business in California,
  • Intend to sell or lease items that are normally taxable if sold at retail (this includes wholesalers, manufacturers and retailers.), or
  • Intend to make sales for a limited period of time (normally no longer than 90 days) regardless of the number of locations.

Registration is free and you may apply for a seller's permit online or in person at one of our field offices.

If you have multiple locations, you must register each location. If you are an itinerant or mobile dispensary, you are required to register as well.

Be sure to let us know about any changes to your business. Changes in ownership, corporate offices, closing your business, updates to your contact information (mailing or email address, or phone number) are especially important. Keeping your contact information updated allows us to inform you of important changes in law, tax rates, or procedures. You can easily update your account information by contacting our Customer Service Center at 1-800-400-7115 or visiting any of our field offices throughout the state. Contact information is available in the Resources section of this guide.

Please note: Cooperatives (aka collectives) must meet certain guidelines to qualify as such. Although you may consider yourself a cooperative, cooperatives are generally retailers and must collect and pay sales tax. Before you start operating as a cooperative, please contact us. You should also review the general provisions and definitions found in Revenue and Taxation Code section 6011.1 and section 6012.1.

Filing and Payments

Cash Payments

If paying your sales and use tax in person, please make arrangements with one of our field offices for cash transactions.

We may grant an exemption if paying in cash is necessary to avoid an undue hardship. You may contact your field office and explain that you need an exemption from the No Cash policy. Our staff will provide you with a No Cash Exemption Request form. On this form you will need to describe the nature of your business and why you are unable to establish a bank account or pay by cashier's check or money order. You will be notified in writing when your request has been approved or denied and you will be provided with additional information on how to proceed.

Free Educational Consultations

Entrepreneurs are the engine that drives California's economy, and we are here to help you navigate the complicated tax laws and regulations. California relies on the jobs businesses create and the tax revenues they collect. If you are starting a new business, or have tax-related questions, BOE staff is available to meet with you at your business location to provide a personal consultation to help you correctly report and pay your sales and use taxes.

Information regarding our free consultation program can be found in publication 176-1, Free Educational Consultation.

Dispensaries

Please note: This guide is intended to provide general information regarding issues relating to the sales and use tax laws and other programs administered by BOE which may affect the medical cannabis industry. It is not intended to provide advice or guidance in relation to other state and local statutes and regulations relating to the cannabis industry. Additionally, for the Federal Government's guidance regarding marijuana enforcement, see the U.S. Department of Justice website.

Seller's Permit

All retail establishments that sell medical cannabis and cannabis-related items in California must register with the BOE for a seller's permit, including itinerant or mobile dispensaries. You are not required to disclose what you sell.

Proposition 64 Exempts Certain Medical Marijuana Sales

Effective November 9, 2016, certain sales of medical marijuana are exempt from sales and use tax.

The sales and use tax exemption applies to the retail sales of medical cannabis, medical cannabis concentrate, edible medical cannabis products, or topical cannabis as those terms are defined in the Business and Professions Code section 26001. To obtain the exemption, qualified patients or their primary caregiver must furnish their valid Medical Marijuana Identification Card (MMIC) issued by the California Department of Public Health and a valid government issued identification card (ID) at the time of purchase.

In order to properly claim the sales and use tax exemption, you should not collect sales tax reimbursement on the qualifying exempt sales of medical marijuana. In addition, you should claim a deduction on your sales and use tax return for the qualifying exempt medical marijuana sales. In order to claim the exempt sales, you must verify that purchasers have the proper identification (a valid MMIC and a valid government issued ID) and maintain specific information for your records as explained below under the Record Keeping section.

Record Keeping

Medical marijuana retailers that make qualifying exempt sales and claim the deduction on their sales and use tax return, should maintain the following records (either physical or electronic) for each transaction:

  • The purchaser's nine-digit ID number and expiration date, as shown on the qualified patient's or primary caregiver's unexpired Medical Marijuana Identification Card (MMIC) (see below for example of a patient MMIC); and
  • The related sales invoice or other original record of sale.

A valid MMIC is issued by the California Department of Public Health (CDPH).  The card (sample pictured below) includes the following:

Sample Patient Medical Marijuana Identification Card
  • Issued by the "State of California" with the state seal
  • States either "Patient" or "Caregiver"
  • Patient's or primary caregiver's photo
  • Nine-digit ID number
  • CDPH website to verify ID number
  • Expiration date
  • County that issued card with phone number

Retailers may verify the validity of the nine-digit ID number on the CDPH website.

Excise Tax and Cultivation Tax

Also, effective January 1, 2018, a 15 percent excise tax is imposed upon purchasers of all marijuana and marijuana products, including medical marijuana. The 15 percent excise tax is calculated based on the gross receipts from the retail sale. In addition, a tax on cultivators of marijuana is generally imposed as follows:

  • $9.25 per dry-weight ounce of marijuana flowers
  • $2.75 per dry-weight ounce of marijuana leaves

Sales

Your sales of medical cannabis and cannabis-related items are generally subject to tax, unless your customer provides you with a valid Medical Marijuana Identification Card indicating they are a qualified patient or the primary caregiver for a qualified patient, along with a valid government-issued identification card. Please refer to the heading, Proposition 64 Exempts Certain Medical Marijuana Sales, above for more information.

Generally, the retail sales of the following products are taxable:

  • Hash
  • Pre-rolls
  • Pipes
  • Rolling Machines
  • Capsules
  • Tinctures
  • Tonics
  • Lotions
  • Teas
  • Edibles (cookies, butters, honey, chocolates, candies, sodas, bars)
  • Waxes
  • Buds and Flowers
  • Vape Pens
  • Rolling Papers
  • Oils
  • Balms
  • Extracts
  • Gum
  • Topicals
  • Plants and Clones
  • Shirts, Hats, Books, Magazines

The above list is not comprehensive. If you have questions about a product that is not included here, you may contact our Customer Service Center at 1-800-400-7115.

Delivery charges are generally taxable when dispensaries make deliveries with their own vehicles. However, delivery–related charges may be nontaxable, or partially taxable, when you ship using a common or contract carrier. For more information on shipping or delivery charges, see publication 100, Shipping and Delivery Charges.

Sales Tax Reimbursement

A retailer has the option to collect sales tax reimbursement from its customers. It is not mandatory. Regardless of whether or not you collected sales tax reimbursement from your customers, you as the retailer are liable for the sales tax on sales of taxable items. If sales tax is included in the sales price, you must post a sign notifying your customers that the sales tax is included in the sales price. If signage is not posted, then sales tax will be based on the sales price.

Consignment Sales

You are responsible for obtaining a seller's permit and reporting and paying the sales tax on the retail selling price of consignment sales.

When you have possession or control of the item you are selling, and can transfer ownership or use of the item to the buyer without further action on the part of the owner, you are considered the retailer of the item.

For example, your dispensary accepts pipes and accessories to sell on consignment. You agree to sell the products, but will not pay for the product unless it sells. Your agreement authorizes you to sell the products and transfer ownership to the buyer. You are considered the retailer of the accessories you sell in this way and must pay sales tax based on your retail selling price.

For more information, please see publication 114, Consignment Sales.

Purchases

When you purchase an item that will be resold, you can purchase it without paying tax by timely providing the seller a valid resale certificate. Sales tax will apply when you sell the item at retail. However, when you purchase an item for resale without paying sales tax but, instead of selling it, you consume or use the item, then you owe use tax based on the purchase price.

For example, if you issue a resale certificate when purchasing a pipe but instead gift it to someone, you owe use tax based on its purchase price.

The use tax rate is the same as the sales tax rate in effect at the location of use.

To pay use tax, report the purchase price of the taxable items as "Purchases Subject to Use Tax" on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

For more information about issuing resale certificates, see publication 103, Sales for Resale.

For more information on use tax, visit our use tax webpage.

Supplies, Equipment, and other Business Expenses

Items you purchase for use in your business (signs, fire extinguishers, display cases, weight and measure equipment, computers, etc.) are subject to sales tax at the time of purchase. Your supplier will normally collect and report the sales tax. However, if you purchase equipment or supplies for use in your business online or from an out-of-state seller, the sale may be subject to use tax.

If the out-of-state seller does not charge California use tax, you should report the purchase price on your sales and use tax return. To pay use tax, report the purchase price of the taxable items under Purchases Subject to Use Tax on your sales and use tax return. Those purchases become part of the total amount subject to tax.

Please note: In general, wrapping and packaging supplies, used to wrap merchandise or bags in which you place items sold to your customers, may be purchased for resale. All other purchases of supplies are generally subject to tax.

To find out more about use tax, please visit our use tax webpage.

Record Keeping

You are required by law to keep business records so that we may verify the accuracy of your sales and use tax return and determine how much tax is due, when a return has not been filed.

Additionally, keeping good books and records will help you keep track of your sales and purchases and assist you when preparing to file your sales and use tax return. Records must be kept for at least four (4) years, unless otherwise directed by the BOE. If you do not maintain records, it may be considered evidence of negligence or intent to evade the tax and may result in penalties.

Examples of records you must keep include:

  • Sales Invoices
  • Cash Register Tapes
  • Sales Journals
  • Resale Certificates
  • Shipping Documents
  • Purchase Invoices
  • Bank Records
  • Purchase Orders
  • Purchase Journals
  • Tax Returns

For more detailed information on books and records, please see our Keeping Records webpage.

Growers and Processors

Please note: This guide is intended to provide general information regarding issues relating to the sales and use tax laws and other programs administered by BOE which may affect the medical cannabis industry. It is not intended to provide advice or guidance in relation to other state and local statutes and regulations relating to the cannabis industry. Additionally, for the Federal Government's guidance regarding marijuana enforcement, see the U.S. Department of Justice website.

Seller's Permit

If you sell medical cannabis, you are required to hold a seller's permit and report sales and pay taxes. For more information, see the Registration section on the Getting Started tab.

Free Educational Consultations

If you are starting a new business, or have tax-related questions, BOE staff is available to meet with you at your business location to provide a personal consultation to help you correctly report and pay your sales and use taxes. For more information on Free Educational Consultations see the Getting Started section.

Sales

When growers and processors sell their product to a customer, such as a dispensary, and the customer provides the grower or processor with a valid and timely resale certificate, the sale is not subject to sales tax.

If no timely valid resale certificate is provided, it will be presumed that sales tax applies to the sale and the grower or processor must report and pay the tax to the BOE.

See publication 103, Sales for Resale for more information regarding resale certificates.

Purchases

Generally, most of the items you purchase for use in your business are subject to sales or use tax. However, purchases of certain supplies may not be taxable, whereas purchases of other items may qualify for a partial exemption.

Supplies, Equipment, and other Business Expenses

Purchases of items for use in your business (computers, fire extinguishers, advertising materials, pesticides, work gloves, among others) are subject to sales or use tax at the time of purchase. Certain purchases of specific types of equipment and machinery may be eligible for a partial exemption. Please see below for more details.

Normally, your vendor is responsible for collection of sales tax on taxable sales. However, if you purchase from an out-of-state seller that does not collect tax, the sale is generally subject to use tax and you must report the purchase price on your sales and use tax return (under "Purchases Subject to Use Tax").

To find out more about use tax, please visit our use tax webpage.

Farm and Garden Supplies

Seeds

Purchases of seeds are generally taxable. However, tax does not apply to your purchases of seeds if you resell the seeds or resell the products grown from the seed, as part of your regular business activities.

Fertilizers

Tax does not apply to the sale of specified fertilizer to be applied to land or in foliar applications, provided the fertilizer is used to produce products for sale. All other sales of fertilizer are taxable.

Plants and Clones

Tax does not apply to the sale of plants and clones to you if they will produce products you will resell. You should give your supplier a timely valid resale certificate when purchasing the plant or clone. For more information on sales for resale see publication 103, Sales for Resale.

Sales of ornamental, flower and landscaping plants are generally taxable. For more information about these exemptions see Regulation 1588, Seeds, Plants, and Fertilizer.

Partial Exemption for Farm Equipment and Machinery

In general, the sale of farm equipment and machinery is taxable. However, certain sales and purchases of farm equipment and machinery are partially exempt from sales and use tax. As a grower, you may be able to take advantage of this partial exemption.

The partial exemption applies only to the state general fund portion of the sales tax, currently 5.00 percent.

To calculate the tax rate for qualifying transactions, subtract 5.00 percent from the sales tax rate that would normally apply at the location where the purchase is made. For example, if the current tax rate in your area is 9 percent, the tax rate for a qualifying transaction would be 4.00 percent.

Note: The rate for the state general and fiscal recovery funds portion of the sales tax is subject to change. The rates used in this example are for demonstrative purposes only. You must use the rate in effect at the time of the sale. Current tax rates can be found on our website.

Three requirements must be met for the partial exemption to apply. The item must be:

  1. Sold to a qualified person.
  2. Used exclusively or primarily (depending on the type of item) in producing and harvesting agricultural products. Primarily means 50 percent or more of the time.
  3. Defined as farm equipment and machinery which includes, but is not limited to, any tool, machine, equipment, appliance, device or apparatus used in the conduct of agricultural operations.

If any of these three requirements is not met, the partial exemption will not apply.

Examples of equipment and machinery that may qualify:

  • Planting equipment
  • Trimming tools
  • Drying racks and trays
  • Grow tents and lights
  • Environmental controls
  • Greenhouses
  • Hydroponic equipment
  • Solar equipment (see below for more information)
  • Irrigation equipment

If you lease farm equipment, rather than purchase equipment, you may still qualify for the partial tax exemption. For more information about leases, please see publication 46, Leasing Tangible Personal Property.

Mobile transportation equipment generally does not qualify for the partial exemption.

For more detailed information about equipment and machinery used in farming, see Regulation 1533.1, Farm Equipment and Machinery and publication 66, Agricultural Industry.

Buildings for Raising Plants

Certain buildings may qualify for the partial exemption for farm equipment. The building must be a single-purpose building to house plants, such as a greenhouse.

To qualify for the partial exemption, a horticulture building must be both of the following:

  • Specifically designed for commercially raising plants or mushrooms.
  • Used exclusively for that purpose.

You should issue a partial farming exemption certificate to your vendor when you purchase qualifying items.

For more detailed information on this partial exemption see Regulation 1533.1, Farm Equipment and Machinery

Solar Power Facilities

If you qualify for the partial exemption for farm equipment, your purchase of a solar power facility may also qualify.

How does a system qualify?

  • Solar Power Facility Directly Attached to Farm Equipment and Machinery

    When a solar power facility is directly attached to, and primarily provides power to qualifying farm equipment and machinery, the solar power facility generally qualifies as farm equipment and machinery. As such, the purchase of this type of solar power facility generally qualifies for the partial exemption as long as the other requirements for the partial exemption are met.

  • Solar Power Facility Not Directly Attached to Farm Equipment and Machinery

    A solar power facility may also qualify as farm equipment and machinery when the solar power facility is not directly attached to qualifying farm equipment and machinery but is instead tied to the regional power grid and subject to a net metering agreement between the taxpayer and the electric cooperative. In such cases, you need to demonstrate that the solar facility is specifically purchased to provide power primarily to qualifying farm equipment and machinery.

For more information, see our November 2012 Special Notice, Solar Power Facilities May Qualify as Farm Equipment.

Fuels

Partial Exemption for Diesel Fuel Used in Farming Activities

Most sales and/or purchases of diesel fuel are taxable. However, a partial sales and use tax exemption exists for certain sales and purchases of diesel fuel used in farming activities.

The partial exemption applies to the sale or purchase of diesel fuel only if the diesel meets the following two requirements:

  • Be a type of diesel that qualifies for the exemption, and
  • Be used in qualifying farming activities or related contract hauling.

Types of diesel fuel

For purposes of this partial exemption, "diesel fuel" means:

  • Any liquid that is commonly or commercially known or sold as a fuel that is suitable for use in a diesel-powered highway vehicle. A liquid meets this requirement if, without further processing or blending, the liquid has practical and commercial fitness for use in the engine of a diesel-powered highway vehicle.

A liquid does not possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the engine of a diesel-powered vehicle.

As a grower you should provide a timely partial exemption certificate to your fuel supplier when you purchase diesel for a qualifying use. Your purchases of diesel from fuel suppliers will qualify for the partial sales and use tax exemption when you use the fuel to:

  • Prepare land for planting.
  • Plant, protect, or grow crops.
  • Harvest crops.
  • Transport the harvested unprocessed products from the field to the buyers.

The sale of diesel fuel to a grower may qualify for the partial exemption in the following situations:

  1. A grower transports their newly harvested cannabis (unprocessed) to a dispensary in their diesel pickup truck. After delivering the product they return to the farm.
  2. A grower uses diesel in their tractor to cultivate the land in preparation for planting the cannabis.

Diesel used to move the medical cannabis after processing is completed does not qualify for the exemption.

For more detailed information about diesel fuel used in farming, see Regulation 1533.2, Diesel Fuel Used in Farming Activities or Food Processing.

Exemption for Liquefied Petroleum Gas (LPG) Used in Farming Activities

Sales of LPG for agricultural use are not taxable when purchased by a qualified buyer and used in commercial crop production or harvesting.

You should provide a timely LPG exemption certificate to your vendor.

Nonagricultural use does not qualify for the exemption, even if used on a ranch or farm.

Partial Exemption Certificates

When you make a purchase that qualifies for a partial exemption, you must provide an exemption certificate to your supplier.

In order for the certificate to be valid, you must:

  • Furnish the certificate timely to the seller.
  • Provide all relevant information:
    Your name and address.
    The type of property being purchased.
    You or your company's name, title, telephone number, address, and the seller's permit number.
  • Sign and date the document.

An exemption certificate will be considered timely if it is given at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser.

Listed below are the types of exemption certificates you may need:

Resources

Please note: This guide is intended to provide general guidance regarding issues relating to the sales and use tax laws and other programs administered by BOE which may affect the medical cannabis industry. It is not intended to provide advice or guidance in relation to other state and local statutes and regulations relating to the cannabis industry. Additionally, for the Federal Government's guidance regarding marijuana enforcement, see the U.S. Department of Justice website.

Resources

Need to know more? Follow the links below for more information about the topics covered in this guide, as well as other information you might find helpful:

Special Notices

Guides

Publications

Regulations

Other Helpful Resources