What's Changing?
The excise tax calculation is changing from 26.25% of the wholesale cost to 15% of the retail sale price.
The excise tax will also compound local taxes and apply to any fees on an order (such as delivery or payment fees).
The excise tax continues to be compounded by sales tax.
How Do I Prepare?
Get professional advice!
Talk to your accounting or tax professionals about any questions you have; make sure everyone who needs to understands the change.
Refer to CDTFA materials and staff for authoritative answers.
Change your tax settings before opening for business in 2023.
Meadow will be adding the ability to set up three or more tiers of compounding taxes on January 1 (so you can set up excise tax to compound local tax and sales tax to compound both excise and local taxes).
Update your prices to reflect the new tax calculation.
If you do not change your prices, your profit margins will likely change on sales made after January 1.
To keep your margins the same, account for a 15% tax at retail when calculating your new prices. This means the prices paid by customers will likely go up.
For example, in 2022 a product with a wholesale cost of $1 has $0.26 in excise due. If you priced that product at $2, your margin is ($2 - $1 - $0.26), which is $0.74 (before accounting for sales tax).
In 2023, if you keep the product price at $2, the customer will pay more because excise is added to the price amount ($2 + 15% = $2.30). This means your margin increases but so does the amount the customer pays ($2.30 - $1 - $0.30).
What About Excise Taxes I Already Paid?
Once you are ready to remit your first quarter's excise tax, you will want to calculate the amount of excise tax you have already paid using the pre-2023 calculation to claim as a credit.
For example, if I purchased a product for $10 in December 2022, the excise paid is $2.63 (based on 15% of the wholesale cost + 75% markup).
If I sell that product at retail for $20 in January 2023, the excise collected and due is $3 (based on 15% of the retail sale price).
The retailer can claim the $2.63 in excise already paid to the distributor as a credit, leaving the retailer with a $0.37 remaining tax liability to remit to CDTFA.
This information can be found in Meadow using the Orders report on the Line Items tab in column BB (Package Line CA Excise).
Sum column BA to see all the products sold that had excise taxes calculated and paid using the pre-2023 wholesale basis. This column will accurately reflect the exact excise paid per package based on the purchase order used to receive it.
Examples of Tax Calculations before and after January 1
Example 1 - let's take a product purchased for $10 wholesale and sold for $20 at retail, and apply the excise tax and a 10% sales tax.
Before 2023, excise is calculated using the wholesale cost plus a markup. In this example excise due would be $2.63 (which is 15% of $10 + 75%).
From 2023 on, excise is calculated using the retail sale price, including any fees or local taxes.
| Before Jan 1 | After Jan 1 |
Excise Tax | $2.63 | $3 |
Sales Tax | $2 | $2.30 |
TOTAL TAX | $4.63 | $5.30 |
Wholesale cost | $10 | $10 |
Revenue (incl. taxes) | $22 | $22.30 |
Margin | $7.37 | $7 |
Instead of PRICE + 15% + 10% the calculation is ((Price + 15%) + 10%). Due to this compounding, the total tax rate is actually 26.5% of the retail sale price instead of 25%.
Notice in the pre-Jan 1 example that the excise tax is based on the wholesale cost and included in the retail price (so the 10% sales tax applied to the price also compounds the excise that is baked in).
Example 2 - same as Example 1, but including a local tax and delivery fee
Let's keep things simple by using the same $10 wholesale, $20 selling price example as above, but this time adding a local tax of 10% and delivery fee of $10.
Excise tax applies as 15% of the retail price, the local tax and the delivery fee.
This means excise is now 15% of $32 instead of 15% of $20 💸
Sales tax is 10% of the retail price plus any other taxes: ($20 + $2 + $4.80)
| Before Jan 1 | After Jan 1 |
Local Tax | $2 | $2 |
Delivery Fee | $10 | $10 |
Excise Tax | $2.63 (incl. in price) | $4.80 |
Sales Tax | $2.20 | $2.68 |
TOTAL TAX | $6.83 | $9.48 |
Wholesale Cost | $10 | $10 |
Customer Total (incl. taxes) | $34.20 | $39.48 |
Margin (excl. fees) | $7.37 | $10 |
NOTE: If you are a retailer in the City of LA, make sure to consult tax and legal professionals about how to calculate LA's cannabis business tax. From our understanding, both the City and State have told retailers in LA that their tax applies last and compounds the other.
To find excise tax credit owed to each distributor, follow these recommended steps:
Option 1: Use the orders report line items tab and filter by brand. Cross-reference this information with what brands are sold from each distributor.
Option 2: Use the orders report and create a pivot table with package excise and package ID. Look up the packages in the purchase orders report to find the vendor.
Please note: If the distributor's license number is recorded in Meadow, it can be found here. If the external invoice number was recorded in Meadow, you can find the invoice number in the purchase orders report. If this information was not recorded in Meadow, you would need to refer to external data like Metrc or internal records.