California Cannabis Manufacturers: A Guide to Cash and Taxes
For manufacturers and sellers of cannabis products in California, the sky’s the limit when it comes to revenue growth. Worldwide consumer spending on legal cannabis products jumped to $12.2 billion in 2018, a 28% increase from 2017. The next few years are expected to see similar growth rates. There is, however, a catch: money. Handling, depositing, paying, and taxing money connected to cannabis is anything but simple.
Both cash management and taxes are a rough spot for the state’s rising cannabis manufacturers. From restrictions on the banking industry – making producing or selling edibles, oils, tinctures and other beverages a risky, expensive process – to the hefty tax burden, CRB business owners have to be exceptionally diligent when it comes to cash management and tax filing.
Here’s a guide to what cannabis businesses can do to stay on top of their finances and tax obligations, and still manage to experience the strong revenue growth the cannabis industry promises.
Cash Management for California’s Cannabis Industry
As a cannabis manufacturer, you won’t be able to use the low-cost, efficient payment processing and banking services that businesses in other industries have access to. This issue arises because, despite cannabis being legal in California, it’s still illegal at the federal level. In fact, the US government lists marijuana as a Schedule 1 drug, which means the same anti-laundering and other laws that apply to controlled substances like cocaine and heroin, apply to cannabis.
Under federal law, no entity is allowed to profit from marijuana use, which is why the major credit card companies have distanced themselves from the industry. As a result, many cannabis-related businesses are forced to rely on “cash and carry,” which, just like it sounds, means holding cash outside of the safety of a bank until it can be deposited. Having to store and transfer large amounts of cash puts cannabis-related businesses at risk of theft, while also making the cost of doing business go up – cannabis manufacturers, retailers, and others have to pay for security like armored cash couriers and armed guards to keep their cash – and employees – safe.
To provide solutions for the state’s growing industry, a small number of financial services providers are offering services that cannabis businesses can use. To thrive as a manufacturer of cannabis edibles, drinks, and other products, you can work with a provider that specializes in serving CRBs. These companies know exactly how to comply with federal anti-laundering laws, which require intensive and onerous reporting of all money used to purchase cannabis. They can also work with certain banks so you can safely and legally deposit money into a financial institution and then pay vendors and employees electronically – such as with AHC or Wire transfers – or by check.
How Does Cannabis Cash Management Work?
To service CRBs, financial service providers have to check and verify everyone that’s involved in financial transactions, including the manufacturer, vendors, and employees. Every payee undergoes a due diligence review, which can include a background check. Once they are approved, the bank that partners with your service provider will let you write checks to them and pay electronically. All transactions have to be reported to the federal government.
How Is the Actual Cash Handled?
If your business has to hold large amounts of cash, you can schedule an armored courier service to pick up cash on premises and then deliver it to the bank for a deposit.
Taxes for California’s Cannabis Industry
When it comes to filing taxes, cannabis-related businesses don’t have it easy. To begin with, at the federal level, CRBs aren’t allowed to claim business deductions like other businesses can – which means you’re paying taxes on gross profits, not net earnings.
Second, in California, several taxes need to be paid.
Sales and Use Tax – sales of tangible personal properties are generally subject to sales and use taxes. In the case of cannabis businesses, since their products are considered tangible, these taxes apply at every stage of the cannabis chain from cultivator to manufacturer/distributor, from distributor to retailer, or from retailer to consumer. However, exemption can be claimed from these taxes if a valid and timely resale certificate is presented to the re-seller of the items being sold.
Cannabis Excise Tax – this is a 15 percent tax on purchases of cannabis or cannabis products (subject to change)
Cultivation Tax – this is a tax on all harvested cannabis that goes into the commercial market
To complicate things even more, different parties along the cannabis tax supply chain – retailers, distributors, manufacturers, and cultivators – have varying responsibilities for collecting and filing taxes.
Tax Management for Cannabis Manufacturers
Cannabis manufacturers have to collect the cultivation tax from the cultivator when the cannabis is initially purchased from the grower, which is based on the weight of the cannabis leaves. Then, they have to pay the cultivation tax to the distributor, who pays the cultivation tax to the California Department of Tax and Fee Administration. A manufacturer that passes on cannabis products to another manufacturer will pay the cultivation tax to this manufacturer, who then passes it on to the distributor.
It's not just the state that collects cannabis tax on the sale of products. Every entity along the chain of cannabis sale and production also has to account for local cannabis tax regulations that pertain to the cities and counties they are doing business in.
And that’s just a general look at taxes. Depending on what specific actions your business takes, things can get more complicated. For example, if you’re a manufacturer of cannabis edibles and you also sell your products to consumers, you’ll have to worry about tax obligations both as a manufacturer and a retailer. There are also specific permits that are necessary for selling cannabis that everyone who sells cannabis products is required to hold. If you sell cannabis products at any stage of the production-to-sale cycle, you'll need a seller's permit.
And, you’ll have to file returns at the state and federal level like other businesses. Filing is not always straightforward, but there are resources that can make the process a little easier.
How to Make Cash and Tax Management Easier
With so much red tape, it’s critical that cannabis product manufacturers maintain flawless bookkeeping practices and ensure all transactions are reported, all taxes are filed, and every step along the way keeps your business compliant with current state and federal law. For interpretation, support, or consultation, it's best to talk with groups who are familiar with this industry.
Scrubbed is a full-service accounting and professional services firm who can keep your books squeaky clean and your financial statements audit-ready. Not only do we have the knowledge and experience to handle accounting tasks for cannabis manufacturers, but we also take the time to get to know the details of your business, ensuring you enjoy the benefits of tailored bookkeeping services.
Contact Scrubbed today to learn more about our cost-effective accounting and bookkeeping services.
About The Authors
Raiza specializes in tax compliance and planning for businesses and individuals. She has over 9 years experience in handling Tax Return Preparation, Tax Provisioning, Tax Planning, and setting up Tax Workbooks. She also specializes in Sales and Use Tax Return Filings, Other State and Local Tax Compliance Requirements, Reviewing IRS and State Department Notices and guiding clients for compliance.
Brian worked as CPA in various areas of accounting and auditing. He had administrative assignments with an engineering company, and has spent time abroad to help oversee the construction of a Liquefied Natural Gas refinery. At Scrubbed, Brian handles manufacturing, distribution, and other professional services clients, passionate about delivering results for his clients.