October 20, 2020

Who pays Cultivation Tax?

The Cultivation tax is a weird creature. It is paid by cannabis cultivators, but remitted by distributors. The way the CDTFA went about collecting this tax is confusing for everyone, including us, cannabis accountants. Below I will shortly describe the main cannabis accounting issues associated with this tax.

First, what is subject to the Cultivation tax?

The Cultivation tax is imposed on raw parts of the cannabis plant. There are three tax categories - flower, trimmed leaves, or other parts of the plant. Tax rates are different for each category, with the flower being the most expensive – $154.4 per pound.

How do you file and pay the Cultivation Tax?

The distributor pays the CDTFA two taxes at the same time: Cultivation and Excise. The distributor collects the cultivation tax from the cultivator and the excise tax from the dispensary. The distributor fills out the tax return( Called Excise Tax return) for both taxes and remits taxes on behalf of the cultivator and the dispensary. The CDTFA didn’t come up with a PDF copy of the return. Tax filing is done online and you need to make tax calculations prior to entering this info into the online system. I outlined the accounting steps below in this article.

The cultivator cannot directly pay the tax to the CDTFA. The cultivator pays the money to the distributor, and it is the responsibility of the distributor to remit this tax to the CDTFA. If the cultivator sells raw products to the manufacturer, the manufacturer collects the tax and then remits it to the distributor.

Common Issues:

The distributor cannot collect the tax. Some producers are not aware of the tax and simply refuse to pay. Or, sometimes, the supply chain has two distributors, and the first distributor has already paid the tax. When this happens, the second distributor is usually left without any explanation. Good luck explaining to the CDTFA that someone else paid this tax, but you don’t know who and when.

The cultivator presents the cultivation tax as a discount on the invoice. To me, this is an unfair cannabis accounting practice. The cultivator sneaks this tax on the invoice as a discount with little explaining. For example, Joe sells Chris 10 pounds of bulk flower for $23,000. Ideally, during the transaction, Joe is required to remit Chris the cultivation tax for these ten pounds, but Joe does not give any cash. Instead, Joe offers Chris a discount of $1,540 and names it Cultivation Tax. Chris pays $21,460 and walks away thinking that he got a great deal. Naïve Chris does not know that he is now on the hook for the cultivation tax. That $1,540 was not a discount; it was the cultivator’s way of shifting his cultivation tax liability. Now Chris must pay $1,540 of the tax out of his pocket.

The cultivator does not receive receipts for the cultivation tax that he paid. Distributors must provide cultivators with receipts of taxes paid, but they rarely do. Such negligent behavior does not benefit anyone. During the audit, the cultivators will point at their distributors, and the CDTFA will scrutinize both parties.

Cannabis Accounting Treatment. As I’ve mentioned before, it is the cultivator’s responsibility to come up with cash, and the distributor only remits it. However, when the distributor pays the invoice with the Cultivation tax presented as a discount, this tax becomes the distributor’s expense. And this expense can be deducted on the tax return. Without being super specific, The IRS will accept this deduction ONLY if you correctly assign and track this expense in your inventory. This is something that requires a good understanding of Cost Accounting and has to be done manually in the accounting software.

What is the proper way to calculate and remit cultivation tax?

Cannabis Accounting for this tax is pretty simple but labor-intensive:

  1. The distributor needs to collect all their purchase invoices for the quarter and divide them based on the categories of the plant: flower, trimmed leaves, and other parts of the plant.
  2. The distributor needs to calculate the Cultivation tax for each category. For this, the distributor would need to multiply the weight of the product stated on the invoice by the CDTFA rate for the particular plant category.
  3. The distributor needs to check and see how much of this tax was paid by the cultivator. If the cultivator refused to pay the tax, their response must be recorded in writing. I don’t believe that the distributor should pay out of pocket in case the cultivator refuses to pay it. However, if the cultivator presented the cultivation tax as a discount on the invoice, it is the distributor’s responsibility to remit it to the CDTFA.
  4. And the last step is to sum up all cultivation tax paid together and enter it on the Excise tax return.

We have hands-on experience with the cultivation tax. We can sort out your past cultivation tax issues and create a solid accounting process that will protect you in the case of the CDTFA audit.

Sincerely,

Daria Nagal, Cannabis CPA