Starting July 1, 2025, cannabis retailers across California will face a significant tax shift: the cannabis excise tax rate will increase from 15% to 19% of gross receipts from retail cannabis sales. This 4% jump announced by the California Department of Tax and Fee Administration (CDTFA) is not arbitrary. It’s a recalibration mandated by Revenue and Taxation Code section 34011.2, which directs the CDTFA to adjust the tax every two years to reflect what would have been collected if the now-defunct cultivation tax were still in place.
If your cannabis business is already navigating complex compliance requirements, this change could feel like another hurdle. But with proactive planning, your retail enterprise can weather the change and maintain financial stability. Our cannabis accounting firm can help you through this transition.
Understand the Tax Shift, And Your Responsibility
Initially, the excise tax was collected and remitted by distributors, shielding retailers from direct responsibility. But as of January 1, 2023, that changed. Retailers are now responsible for calculating, collecting, and remitting the excise tax directly to the CDTFA. This makes accuracy and cash management more critical than ever.
When the rate changes from 15% to 19%, adding a few extra dollars at checkout will not suffice. You must adjust your point-of-sale (POS) system, retrain staff, communicate pricing updates to customers, and ensure your financial systems are ready to support this transition. Our cannabis accountants can support you in updating your systems correctly.
Here are 3 key steps to manage this process efficiently.
Step 1: Update Pricing Strategy
The excise tax is calculated on gross receipts, which includes the product price, any local cannabis taxes, and the excise tax itself, a concept known as tax-on-tax. This can be confusing for both businesses and consumers.
So, what should you do? You have two main choices:
• Absorb the tax increase: This protects your pricing competitiveness but impacts your margins.
• Pass it on to customers: This preserves your margins but may impact the level of customer loyalty and sales volume.
Is there a ‘best’ approach? Run a pricing analysis! Understand how a 4% increase might affect your average sales. Consider whether your customer base will tolerate a higher out-the-door price. If needed, consider bundle discounts or loyalty programs to ease the pain for regulars.
Step 2: Reconfigure Your POS and Accounting Systems
What happens if you fail to update your POS system before July 1? It could lead to under-collection, which puts your business on the hook for unpaid taxes.
Start now to work with your POS vendor and ensure:
• The new 19% excise tax rate is correctly configured.
• Your receipts clearly break down the tax amount.
• Reports align with CDTFA requirements for filing and remittance.
Also, your accounting system should be reviewed to ensure proper categorization and separation of excise tax funds. It’s a good time to consult your cannabis CPA California or cannabis bookkeeper to avoid mixing these taxes with general revenue.
Step 3: Improve Cash Flow Management
Some cannabis businesses make the risky move of using excise tax funds for operational expenses, hoping to catch up before tax remittance is due. This practice can spiral quickly and lead to penalties, interest, or worse, license suspension. We have seen this happen!
How will you stay compliant? Here are some recommendations:
• Open a dedicated tax savings account and deposit the collected excise tax daily or weekly.
• Forecast cash flow monthly and factor in the new 19% rate. If you’re not already using cash flow forecasting tools, now is the time to invest in one.
• Schedule recurring calendar reminders for CDTFA filing deadlines and payment due dates.
Engage a professional cannabis accountant to help you streamline your finances and stay ahead.
Small Tax, Big Impact: Be Prepared
While a 4% tax increase might not seem like a big figure, its ripple effects can be significant for your cannabis retail business already navigating razor-thin margins. The key is to plan early, update your systems, and treat excise tax collection as a fiduciary responsibility, not a floating source of liquidity.
When in doubt, consult with a CPA experienced in cannabis compliance. The regulatory landscape will continue to evolve, and staying ahead of the curve is not just good business; it’s a strategy for survival.
Need Help Preparing for California’s Excise Tax Changes?
Adapt your cannabis business to efficiently navigate California’s evolving tax landscape. Our team is here for you, let’s talk. The experienced cannabis accounting experts on our team can guide you on how adjust your systems, improve compliance, and protect your margins.
Contact us today to learn more about how we can help you understand and implement the forthcoming excise tax increase in your LA, California cannabis business.