California Department of Tax and Fee Administration

Proposition 64, as approved by the voters, requires a 15% excise tax on the gross receipts of cannabis sales. That 15% excise tax rate remains unchanged.

When implementing the proposition, the legislature moved the incidence of the tax from the retailer to the distributor, requiring the California Department of Tax and Fee Administration to determine the average markup rate to ensure that the tax paid is equal to 15% of the gross receipts as required by law. The purpose of the markup is to compute the Average Market Price and have the actual tax match the 15% gross receipts rate approved by voters.

After analyzing thousands of transactions in the state’s Track and Trace system, CDTFA analysts have determined that the required markup rate for the period beginning January 1, 2020, is 80%.

Here is an example of how the markup calculation works when the actual sales data shows that the average markup between wholesale and retail prices is 80%.

A cannabis retailer purchases cannabis from a distributor for $50. The distributor will calculate the 15% cannabis excise tax due from the retailer as follows:

Retailer’s wholesale cost $50.00

Mark-up ($50 x 80%) + $40.00

Average Market Price $90.00

15% excise tax (Average Market Price x 0.15)

Excise tax due $13.50

The distributor will collect $13.50 in cannabis excise tax from the cannabis retailer and remit that tax payment to the state.

If the 15% excise tax were on the retail sale, as provided for in Proposition 64, the 15% tax on a $90 sale would be $13.50, equal to the tax due under the markup method.

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