With mid-summer harvests underway, it’s time to check in on sales compliance. There is a lot to cover in this edition of The Understory, and sales will move most smoothly with informed considerations and preparations in place. A little foresight in building relationships with buyers before you are ready to transfer cannabis can give direction to how the harvest is processed, as well as dictates your state cultivation tax implications, and record keeping requirements.
Overview of the Basics
Agencies and their roles in regulating the supply chain
BCC- Bureau of Cannabis Control is responsible for licensing distributors (including transport-only types), microbusinesses, retail, testing laboratories and cannabis events.
CDFA- California Department of Food and Agriculture / CalCannabis Cultivation Licensing, responsible for licensing cultivation, nurseries and processing.
CDPH- California Department of Public Health / Manufactured Cannabis Safety Branch, responsible for licensing manufacturing facilities, including packaging, infusions, extractions, topicals and edibles.
METRC- is not a regulatory body, but a software system contracted by the CDFA to provide track and trace for California’s businesses. Cannabis operators will have log-in access and requirements for reporting in this system particular to their license type.
CDTFA- California Department of Tax and Fee Administration is responsible for setting and collection of excise taxes.
Track and Trace
For CDFA type licenses, the relevant track and trace regulation sections are found in §8402-8408. §8405 lays out the activities that must be reported by CDFA-regulated operations. BCC track and trace regulations are in Article 6, and CDPH regulations are in Article 2.
As the Track and Trace system is moving toward full implementation statewide, cannabis businesses are experiencing another wave of transition and learning curves. It’s been great to see folks sharing information, tips and tricks to the software itself, and furthering their understanding of the differences between regulatory requirements and software system options.
On the software side, the CDFA has a contract with Franwell, the company who runs METRC, which is also the software used for many other states’ cannabis tracking. The data required to be collected per state regulations is owned by the state of California. Data collected will likely be used in future modeling and enforcement efforts.
Taxes and … taxes
To talk about sales is to talk about taxes. The collection and remittance of excise taxes is administered and enforced by the CDTFA. This agency has not yet released “final” regulations; the recent discussion paper and proposed final regulations can be found here.
State excise taxes are in addition to taxes levied by local jurisdictions, such as the cultivation square footage tax assessed by Humboldt County.
The CDTFA regulates the various cultivation tax rates and the wholesale-to-retailer excise tax rate. The average mark up rate on which the retailer excise tax is calculated may be adjusted every 6 months, although this hasn’t happened yet. Transfers to retailers require the wholesale price to be entered into METRC, giving the agency data to work with in calculating their average assessment. As a cultivator, you are not required to report your sale price in METRC. We will discuss later other ways of documenting sale prices, as required (and advisable).
Because most of the cannabis businesses in the Emerald Triangle are cultivators, the cultivation excise tax is what is immediately impactful. Depending on what products you are transferring from the farm, you may have a combination of:
Flower ($9.25/oz, $148/lb) - “Cannabis flowers” means the dried flowers of the cannabis plant as defined by the CDTFA.” (The recent discussion paper recommends “Clarify that the term “cannabis flowers” includes “trimmed and untrimmed” flowers and excludes leaves and stems “removed from the cannabis flowers prior to the cannabis flowers being transferred or sold,”
Leaf ($2.75/oz, $44/lb) - “Cannabis leaves” means all parts of the cannabis plant other than cannabis flowers that are sold or consumed.”
Fresh Plant weight ($1.29/oz, $20.64/lb) - “Fresh cannabis plant” means the flowers, leaves, or a combination of adjoined flowers, leaves, stems, and stalk from the plant Cannabis sativa L. that is either cut off just above the roots, or otherwise removed from the plant”.
The first two rates are set by state law as maximum tax rates. The leaf rate is adjustable, and linked to the flower rate. The CDTFA may set more categories and rates as time goes on. Please note that there is not a so-called “bio-mass” tax rate at this time.
CDTFA §3700(f) Cannabis Removed from a Cultivator’s Premises is Presumed Sold.
(1) Unless the contrary is established, it shall be presumed that all cannabis removed from the cultivator’s premises, except for plant waste, is sold and thereby taxable pursuant to section 34012 of the Revenue and Taxation Code.
(2) The presumption in subdivision (f)(1) may be rebutted by a preponderance of the evidence demonstrating that the cannabis was removed for purposes other than for entry into the commercial market. Reasons for which cannabis may be removed and not subject to tax on that removal include, but are not limited to, the following:
(A) Fire, (B) Flood, (C) Pest control, (D) Processing by a cultivator, such as trimming, drying, curing, grading, packaging, or labeling, (E) Storage prior to the completion of, and compliance with, the quality assurance review and testing, as required by Business and Professions Code section 26110, and (F) Testing
(underlined language is proposed at this time)
The cultivation excise tax is assessed when the product is sold from the farm or processor, and due when the product (in whatever form it may be: retail-ready flower, brownies, etc.) passes Quality Assurance review and is released to retailer(s).
There is no standardized form provided by the state to track the payment of this tax. It is the responsibility of the cultivator to pay that tax through a distributor (who remits the tax payment to the CDTFA).
One way this might function practically for your operations is ensuring you retain receipts and records proving the tax has been collected and/or is being reserved for remittance, from the total sale price, by the buyer.
Speak with distributors as you set up supply relationships to gain insight into how they are collecting and remitting excise taxes, and how this affects the price you will negotiate for your cannabis/product in return. There is not a way for businesses to check if a tax payment has been remitted by the distributor to the CDTFA at this time. Remember to get things in writing!
The Importance of verifying Vendor and Purchaser relationships
BCC § 5032. Commercial Cannabis Activity.
(a) All commercial cannabis activity shall be conducted between licensees. <this section continues>
It is your responsibility to conduct buyer/seller diligence for license to vet license transactions. Consider creating your own form with check points for buyers/sellers to fill out and turn back to you. Companies who are forthright with their documentation make transactions and record keeping run much more smoothly.
Documentation to acquire from buyers, prior to conducting sales
A California Cannabis License number is required for all transfers and to input in manifests, and can be verified as active ahead of time.
Links to verify the licenses by issuing agency:
Ensure that the license status is active. If it’s getting close to expiration, ask if an annual has been applied for, and what the buyer’s application status is. Payment for sales are allowed to be collected after a license expiration, but a buyer cannot hold or transfer product if their license has expired. If you know a buyer is close to expiration, ask about their ability to transfer it before expiration.
Resale Certificate / Cannabis Tax Permit
Buyers should give you a resale certificate, with their seller’s permit number, a signature, and type of products purchased. You will only need one resale certificate per purchasing entity, if you continue to do business with the same buyer. You will not need a copy of their seller’s permit, as the resale certificate provides you with the information you need. Likewise, you are not required to give copies of your seller’s permits out to buyer(s).
A blank copy can be found here. You can use your own seller’s permit number in other transactions where you are qualified to buy wholesale/sales tax exempt.
- Retain the resale certificates you receive, as any question about sales tax due that may be tracked back to you can be shown to have the tax deferred to your wholesale buyers.
- A distributor likely has two permits from the CDTFA, a seller’s permit and a Cannabis Tax Permit, for different purchase and tax liability purposes.
If your transfer/sale is to a non-distributor, you may ask for the buyer’s seller’s permit, and the Cannabis Tax Permit number of their distributor who will be remitting your cultivation excise tax.
We do not yet see where to verify the Cannabis Tax Permits, but you may want to ask for a copy until this is clarified or available online.
You may use this link to verify a seller’s permit number here.
IRS 8300 Form
This form is filed for self reporting to document cash transactions over $10,000. This is a requirement to be filed per transaction, not per payment as in the case of “structured payments” (i.e., splitting into multiple <$10,000 payments.) Structured payments do not negate the requirement to file a form 8300 which cover multiple payments for the same transaction.
Other useful considerations (in our opinion)
Additional links and tips for verifying vendors and buyers
Search the company in the Secretary of State Business Database. This database will tell you the status of a corporation, including if they’re Franchise Tax Board (FTB) Suspended. If you see any status other than active, you may want to ask why.
For transportation- California Driver’s License, and Vehicle information for driver and vehicle to enter into shipping manifest.
Business License may be asked for, but isn’t a record you are required to retain in documenting sellers/buyers/vendors.
If the business is operating under another business name, do they need to and have they filed a DBA or Fictitious Business Name statement? You can use http://www.coordinatedlegal.com/fbn.html to search some of California’s registrations of fictitious business names.
Documentation to acquire from a seller
Employer Identification Number (EIN) / W9
State cannabis license of the seller, sales invoices/receipts, shipping manifest, contracts, and many of the same items as above regarding the businesses standing.
Documentation to complete with each transaction
BCC § 5314. Shipping Manifest. (a) Prior to transporting cannabis goods, a licensed distributor shall generate a shipping manifest through the track and trace system for the following activities… (3) A licensed distributor shall not void or change a shipping manifest after departing from the originating licensed premises. (d) A shipping manifest shall accompany every transport of cannabis goods.
You may continue using the sample shipping manifest as in the past year and/or enter transfers into METRC, depending on if you and/or the receiving license is a temporary or annual/provisional license holder. Licensees with METRC credentials can refer to the transition guide in the support tab.
Sales Invoices or receipts are required for all sales/transfers between licensees, as per Business and Professions Code section 26161. This section of code also directs what information must be captured on the invoice/receipt.
Black's Law Legal Dictionary defines a receipt as “the written acknowledgment of the receipt of money, or a thing of value, without containing any affirmative obligation upon either party to it; a mere admission of a fact, in writing.”
The CDTFA’s proposed regulations contain language regarding invoicing for the cultivation excise tax, which will clarify the distributor’s responsibility and the requirements for the receipt/remittance of this tax.
Proposed language: “CDTFA §3700. (d)...the originating cultivator, associated unique identifier of the cannabis, the amount of cultivation tax, and the weight and category of the cannabis. The weight and category of the cannabis identified on the invoice shall equal the weight and category of the cannabis entered into the California Cannabis Track-and-Trace system.”
Weighmaster certification of weight or count
We suggest reaching out to your accountant and utilizing the resources provided to cannabis businesses by the CDTFA to understand reporting requirements.
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