The Cultivation tax is a weird creature. The way the CDTFA went about collecting this tax is confusing for everyone. It also creates a lot of tension between cultivators and distributors.
First of all, what is subject to the Cultivation tax?
The Cultivation tax is imposed on raw and unprocessed 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 Cultivation tax is a part of the Cannabis Excise Tax return. Cultivators themselves (unless they are also distributors) cannot file and pay Excise and Cultivation taxes. The cultivator must pay the tax to the distributor, and the distributor must 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. Only distributors can file and pay Excise and Cultivation tax returns.
- The distributor is unable to collect the tax. Some of the 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. 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 cultivation 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.
- 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 good understanding of Cost Accounting and has to be done manually in the accounting software.
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.
Daria Nagal, Cannabis CPA