Managing California Cannabis Businesses

Featured

aBIZinaBOX Cannabis Licensing FAQ’s

aBIZinaBOX Publishes Cannabis Licensing FAQ’s

aBIZinaBOX Publishes Cannabis Licensing FAQ’s covering a substantial number of BCC issues.

What are the requirements for Cultivation licenses?

What are the fees and requirements for Cultivation licenses?

What are Cultivation site requirements?

What are the record-keeping and reporting requirements for Cultivation?

What are inspection, investigation, and audit requirements for a Cultivation license?

Who do the Manufacturer definitions apply to?

What are definitions for Cannabis Manufacturing?

What are the Manufacturer licenses and types?

What are the requirements for Manufacturer’s premises?

What are rules regarding changing a Manufacturer License?

What are the security requirements for a Manufacturer?

What are permissible extracts for a Manufacturer?

What are the rules for Manufacturer’s extraction systems?

What are operational best practices for a Manufacturer?

What are production and process controls for a Manufacturer?

What are a Manufacturer’s other responsibilities?

What are special processing requirements for a Manufacturer?

What are prohibited products for a Manufacturer?

What are Manufacturer requirements for edible products?

What are Manufacturer requirements for topical products and concentrates?

What are Manufacturer requirements for failed batches?

What are the general requirements for a Manufacturer for labeling and packaging?

What are the Manufacturer labeling requirements?

What are the Manufacturer packaging requirements?

What are Manufacturer recordkeeping requirements?

What are the Manufacturer Track and Trace requirements?

What are the Manufacturer advertising requirements?

What are the Manufacturer inspection requirements?

What are the Manufacturer transitional requirements?

What are Standard Conditions of Probation?

What are core Disciplinary Guidelines?

What is covered by required testing by a Testing Laboratory?

What are the phase-in requirements for Testing Laboratories?

What are the operating requirements for a Testing Laboratory?

What are the definitions applicable to Testing Laboratories?

What are the disciplinary provisions contained in the Emergency Regulations?

What is the Chain of Custody requirements for a Testing Laboratory?

What is contained in a Testing Laboratory Certificate of Analysis?

What are procedures for Samples obtained by a Testing Laboratory from a Distributor?

Google Custom Search Added Website

Google Custom Search Added Website Google Custom Search Added Website to aBIZinaBOX Cannabis Website. We upgraded the search function on our website today. The site now uses Google Custom Search and will now search the following websites: aBIZinaBOX Cannabis Practice aBIZinaBOX Inc. California Cannabis Chek California Bureau of Cannabis Control California Dept. of Public Health California … Continue reading “Google Custom Search Added Website”

To access this post, you must purchase Distribution Services Document Suite.

Google Custom Search Added Website Google Custom Search Added Website to aBIZinaBOX Cannabis Website. We upgraded the search function on our website today. The site now uses Google Custom Search and will now search the following websites: aBIZinaBOX Cannabis Practice aBIZinaBOX Inc. California Cannabis Chek California Bureau of Cannabis Control California Dept. of Public Health California … Continue reading “Google Custom Search Added Website”

To access this post, you must purchase Distribution Services Document Suite.

Smelly Stinky Enrolled Agents – Cannabis Experts

Smelly Stinky Enrolled Agents – Cannabis Experts

Smelly Stinky Enrolled Agents – Cannabis Experts, well self-proclaimed experts anyway. [the firm is purely fictional, but we were inspired]. We have been collecting anecdotes and observations for some time on which attributes and facts we think are important in the process of selecting an advisor.

Smelly Stinky Enrolled Agents - Cannabis Experts
Smelly Stinky Enrolled Agents – Cannabis Experts

Our list starts with issues related to professional licensure, what kind, and where the license was issued.

  • First, the commercial cannabis industry is incredibly complex, with local jurisdiction rule for just about every aspect of doing business. There are approximately thirty states with legal medicinal or adult-use cannabis. We can’t fathom attempting to keep up with that many sets of rules.  We made a deliberate decision to limit our commercial cannabis practice to California. The logic being, the size of the market, and a twenty plus year history of legal cannabis. That doesn’t mean that the transition from a laissez-faire market to a highly regulated one is going to be an easy transition.

 

  • The broad range of challenges with accounting, taxation, technology and regulatory compliance requires deep expertise over a broad range of topics. As such, a certified public accountant [“CPA”] with an advanced degree in taxation is the best choice. While there may be Enrolled Agents with sufficient background in accounting and technology, the lack of requirements translates to uncertainty over an individual’s qualifications with both.  No matter which you choose, you should also have a qualified attorney that works well with them.

 

  • We believe that your advisors should be licensed in the jurisdiction where your cannabis business is located. [That isn’t a general requirement for choosing a tax and accounting service provider, but for cannabis, there are some compelling reasons.]. It is possible for a CPA to obtain something known as a practice permit if they aren’t licensed in a given state in this age of CPA mobility. If an EA mentions that they have an advantage over a CPA, they should be “bitch slapped” and then ignored. We addressed that issue as Jordan S Zoot is licensed as a CPA in California with an “A” license, #132647, and Jordan S.Zoot, CPA, P.C. is licensed as a California Accountancy Corporation [#7995]. You can look up CPA’s licenses on the CBA website, or cpaverify.com.

We believe that attorneys, accountants and other consultants that serve cannabis clients in California with a physical presence by individuals [whether employee or contractors] or maintain an office in California should pay California taxes on the income they earn in California. If you use the services of a non-resident contractor, you are required to withhold CA taxes. Admittedly, the rules are complicated and read more about them here. We file and pay taxes on California sourced income, both at the firm [S Corporation] and individual levels. The firm is a California corporation.

We have been told that our posts tend to be way too long, so we will stop here, and pick up the discussion in our next post.

If you would like to discuss how we can help you, use the contact form.

Temporary Cannabis Licenses Expire April 30

Temporary Cannabis Licenses Expire April 30 Temporary Cannabis Licenses Expire April 30 if their effective date is January 1, 2018, effective date will expire in less than a week. If a license misses the submission deadline for an annual license, they will be required to shut down until an annual license is issued. Temporary licenses … Continue reading “Temporary Cannabis Licenses Expire April 30”

To access this post, you must purchase Distribution Services Document Suite.

Temporary Cannabis Licenses Expire April 30 Temporary Cannabis Licenses Expire April 30 if their effective date is January 1, 2018, effective date will expire in less than a week. If a license misses the submission deadline for an annual license, they will be required to shut down until an annual license is issued. Temporary licenses … Continue reading “Temporary Cannabis Licenses Expire April 30”

To access this post, you must purchase Distribution Services Document Suite.

California Cannabis Biz – Check Consultants

California Cannabis Biz – Check Consultants

California Cannabis Biz – Check Consultants is our small effort to make sure that any of the advisors that you might be using in your business play by similar rules that the State of California is asking you to accept. Let’s face it, the price you are paying to be a participant in the legal cannabis industry in California is HUGE! Do you think it is unfair is some growers, extractors, distributors or dispensaries don’t play by the rules and there aren’t any consequences? We would be mad as hell about it! 

Our firm is licensed in California, I am licensed as a CPA in California, our firm practices in California thru an entity which is incorporated in

California Cannabis Biz - Check Consultants
aBIZinazBOX Cannabis Practice Group

California.  The rules that apply to the practice of public accountancy in California can be found here. The firm’s entity and I personally are California taxpayers on the income we earn in California.

The State of California Franchise Tax Board [“FTB”] has very specific rules that apply to payments to nonresidents of California. If you have questions or concerns about those rules, you can find answers to most questions here.

  • California Revenue and Taxation Code Section 18662 and the related regulations (18662-1 through 18662-14) require the withholding of California income or franchise taxes from payments made to nonresident independent contractors performing services in California.
  • Withholding is also required on other payments of California source income to nonresident payees and on distributions of California source income to nonresident beneficiaries.
  • Revenue and Taxation Code Section 18668 makes the withholding agent liable for any tax required to be withheld. Revenue and Taxation Code Section 17951 contains the provision requiring nonresidents to be taxed on all income from California sources.
  • Payments made for personal services performed in California are California source income. Where the nonresident lives, the location where the contract for services is entered into, or the place of payment does not determine the source of income from personal services.
  • The source of income from personal services is the location where the services are performed. Nonresidents must include in California gross income the gross payments for all services performed in California.

If you want to know if an entity is qualified to do business in California, you can verify that here.

If you believe that an individual or a business is paying California taxes and should be, you can report that here.

The success of the legal cannabis market depends on everyone…and includes the businesses, business owners, their advisors and consultants, and the agencies that regulate all following the rules.

If we can help your California commercial cannabis business, please contact us. California Cannabis Biz – Check Consultants

aBIZinaBOX Services

 

Post Tax Season Priorities – Cannabis

Post Tax Season Priorities – Cannabis

Post Tax Season Priorities – Cannabis are already bubbling up in the minds of aBIZinaBOX professionals. We won’t have any opportunity to catch our breath once the end of the tax season ends on 4/17. There are three top priorities that we will focus on:

California Dept. of Tax and Fee Administration [“CDTFA”] has released a substantial number of announcements in recent days that relate to the 1Q filings for Cannabis Excise, Cultivation and Sales Tax. We have posted two significant articles on the Excise Tax which are linked at the bottom of this post.

Post Tax Season Priorities - Cannabis
Filing Cannabis Excise Tax Returns

CDTFA has released quite a few notices which we summarize below.

  • Microbusinesses or Cannabis Businesses with Multiple Licenses Cannabis Excise Tax Requirements [em-322] – which reminds Microbusinesses that they are subject to the same cannabis excise tax collection and reporting requirements as an independent, third-party distributor if you are a cannabis business licensed as a microbusiness that is authorized to act as a distributor, or if you hold multiple cannabis licenses to operate as both a distributor and retailer. The continue by stating

“Distributor supplies cannabis or cannabis products to a related/affiliated retailer
It is considered a “non-arm’s length” transaction when you transfer cannabis or cannabis products to the retail portion of your business. In a non-arm’s length transaction, the average market price is the gross receipts from the retail sale of the cannabis or cannabis products. You are, therefore, required to calculate the excise tax based on the gross receipts (all charges related to the sale of the cannabis/cannabis products).”

  • Information for Cannabis Retailers Excise Tax on Cannabis Purchased before January 1, 2018 – If you had cannabis or cannabis products in your inventory on January 1, 2018, you are required to collect the 15 percent cannabis excise tax from your customer when you sell those items and then pay that amount to a licensed distributor with whom you have established a business relationship.
  • Important Information for Cannabis Distributors – provides an overview of the reporting and invoicing requirements for cannabis distributors as well as information on how to avoid substantial penalties for failure to pay the cannabis taxes due.
  • Guidance on How Taxes Apply to Cannabis Inventory Beginning January 1, 2018 – Beginning January 1, 2018, cannabis retailers must collect the cannabis excise tax from their customers on each retail sale of cannabis or cannabis products. The cannabis excise tax applies to all retail sales, including sales of cannabis or cannabis products the retailer purchased prior to January 1, 2018. Cannabis retailers are required to pay the cannabis excise tax to a cannabis distributor. Cannabis cultivators owe the cultivation tax on all harvested cannabis that enters the commercial market on or after January 1, 2018. The cultivation tax does not apply to harvested cannabis a cultivator transferred or sold prior to January 1, 2018. Cultivators are required to pay the cultivation tax to a distributor or manufacturer.
  • Information for Cannabis Retailers How to Collect the Cannabis Excise Tax from your Customers on Retail Sales  –

     

  • Information for Manufacturers of Cannabis Products How to Collect the Cultivation Tax and Pay it to Distributors or Other Manufacturers –

As a cannabis manufacturer, you are required to collect the cultivation tax from cultivators when the unprocessed cannabis is first sold or transferred to you based on the weight and category of the cannabis. You must then pay the cultivation tax you collected to your distributor, based on the weight and category of the cannabis that was used to produce the cannabis product, when the cannabis products are sold or transferred to the distributor for quality assurance review and testing.

If the cannabis product is sold or transferred to one or more manufacturer prior to being sold or transferred to the distributor who arranges for testing and performs the quality assurance review, the cultivation tax must be passed to the next manufacturer who takes possession of the cannabis product until the tax is remitted to the distributor based on the weight and category of the cannabis that was used to produce the cannabis products.

  • CDTFA Video – Filing A Cannabis Excise Tax Return can be found here.
  • CDTFA’s Tax Guide for Cannabis Businesses can be found here.
  • Finally, all three regulatory agencies have released new information about Annual Licenses which we will cover in our next post.
  • Our articles on the calculation of Excise Tax for flower and extraction.

CDTFA Releases Cannabis Excise Return Forms

CDTFA Releases Cannabis Excise Return Forms

CDTFA Releases Cannabis Excise Return Forms.

The electronic cannabis returns are now available online. You may access the online return on our website from the login page by using your User ID and Password, or your Express Login Code and the Account Number.

As a cannabis distributor, you are responsible for reporting and paying both the cannabis excise tax collected from retailers to whom you sold or transferred cannabis or cannabis products and the cultivation tax you collected from cultivators and manufacturers. You will report both these cannabis taxes on the same electronic return. Below are general instructions to correctly report the excise and cultivation taxes on the cannabis return.

Cannabis Excise Tax
To report the excise tax, you must enter the average market price of your sales or transfers of cannabis or cannabis products to a retailer during the reporting period in which the sale or transfer occurred. You must separately enter the total average market price on sales of medicinal cannabis and on sales of adult-use cannabis; there is a separate line on the return for each. The cannabis return will automatically compute the excise tax due based on the amounts entered.

The “Add Excess Excise Tax Collected, if any” box is used to report:

  • Any amount of tax that was collected in excess of the amount of tax that is due and was not returned to the retailer and/or retail purchaser.
  • The cannabis excise tax retailers paid to you on cannabis or cannabis products that were not purchased from you prior to January 1, 2018, and sold at retail on or after
    January 1, 2018.

Cultivation Tax
To report the cultivation tax, you must enter the category (flowers, leaves, or fresh cannabis plant) and ounces of cannabis that you acquired from a cultivator or a manufacturer during the reporting period that the cannabis enters the commercial market (that is, passes the required testing and quality assurance review). You must separately enter the weight and category for medicinal cannabis and for adult-use cannabis. The cannabis return will automatically compute the cultivation tax due based on the amounts entered.

Calculating Cannabis Excise Tax

 

Blockchain Setting Background

Blockchain Setting Background

Blockchain Setting Background
Blockchain.com

Blockchain Setting Background provides a foundation for discussion that the commercial cannabis industry in California needs to have…NOW! The best overview that we have seen was published on the website of intheblack.com which describes itself as:

intheblack.com is a leading source of information on business, finance and accounting, offering key insights into strategic thought leadership by way of expert analysis, commentary and opinion. intheblack.com features articles from Australia’s most-widely circulating monthly business magazine, INTHEBLACK, plus a variety of content, including additional commentary, polls, audio and video, photo galleries and reader comments.

They published a series of articles

Blockchain – How Does It Work?

Blockchain – Everything You Need to Know

Blockchain: the future of record keeping

The United States Securities and Exchange Commission [“SEC”] published a paper entitled A Brief Introduction To Blockchain that is an excellent primer on the topic.

We believe that it is important to be very clear that while “blockchain” is quite often associated with cryptocurrencies such as bitcoin they are vastly different. Blockchain technology is a mainstream business technology of the future, while bitcoin might be viewed as a high tech version of Las Vegas.

Bitcoin – in bitcoin.org’s own words – How It Works

If you prefer your information “dumbed down” there is:

Bitcoin Explained for Dummies

How to Explain Bitcoin To Your Parents

If you are a crypto-genius, you might prefer

Bitcoin – Technical Details

Which brings us to the question of what is the relationship between bitcoin and blockchain?

IBM’s take on the difference is explained in The Difference Between Bitcoin and Blockchain For Business which is part of an excellent blog from IBM on Blockchain Education.

Once again, a dumbed down version can be found at

Our hope is that with the background we have provided in this post, everyone will be better equipped to understand the discussion that will be forthcoming on the role of blockchain in the commercial cannabis market.

There is an excellent article about blockchain in the cannabis industry today on Marijuana Business Daily entitled Marijuana businesses experimenting with blockchain technology, but skeptics persist by Omar Sacirbey. 

aBIZinaBOXcannabis Leafly Brand Pages

aBIZinaBOXcannabis Leafly Brand Pages

aBIZinaBOXcannabis Leafly Brand Pages – we are very pleased to announce that we can now be found on leafly.com. We have created a company page, and product pages for CalCannabisChek and our IRC Sec. 280E Analysis tool.

Leafly describes themselves as:

aBIZinaBOXcannabis Leafly Brand Pages
leafly.com [logo copyrighted by Leafly]

Leafly is the world’s largest cannabis information resource. We make the process of finding the right strains and products for you fast, simple, and comfortable. Whether you’re new to cannabis, a medical marijuana patient, or a seasoned consumer, Leafly is the perfect destination for you!

We are excited to become a part of their discussion about the cannabis industry, and while we are much more likely to be viewed as a B2B rather than a B2C business, our presence on the site will certainly increase our brand presence.

If you are a client, partner or friend, please do take the time to write a review about aBIZinaBOX Cannabis Practice Group [make it a good one, please]

The CA Cannabis Practice Industry has become a central part of the aBIZinaBOX practice. Our Group has professionals in Evanston, Illinois and Oakland, California. Our group has devoted several years of study to the application of our business reporting and accounting experience and services to the unique requirements of the cannabis industry.
We are the right advisor for CA cannabis industry businesses. We have made a conscious choice to limit the practice to the commercial cannabis industry in California at the present time. The California market is mature with a twenty-year history with medicinal cannabis.
Our experience includes issues relating to permitting, licensing as well as reporting and paying cannabis excise tax and gross receipts tax at the municipal and county level. We have developed effective strategies for addressing the onerous impact of the limitation on the deduction of ordinary and necessary business expenses imposed by Internal Revenue Code §280E on businesses engaged in “trafficking” in a controlled substance.
Visit us on our website.

Cultivator Annual License Apps

Cultivator Annual License Apps

Cultivator Annual License Apps were published this week by CalCannabis. They tell us

To complete the annual license application you will need to submit Live Scan fingerprints for each person who meets the definition of “owner,” as described in the emergency regulations. We are finalizing the information needed for this process and will post the required “Request for Live Scan” form on our website soon. In the meanwhile, you may begin filling out your annual license application now, and make sure you click the “save” tab on the application so you can include the Live Scan form once it is available.

The newly available forms include:

The Annual License Application states:

CalCannabis Cultivation Licensing (CalCannabis), a Division of the California Department of Food and Agriculture (CDFA), is responsible for issuing licenses for commercial cultivation of cannabis in the State of California. Any person or entity who wishes to engage in commercial cannabis cultivation must submit an application package, which includes a completed application form, all required documentation, and a non-refundable application fee. Once your application is approved, you will need to submit payment for your annual license fee in order for your license to be issued. This document is intended to provide instructions for applying for commercial cannabis cultivation licenses in the State of California and does not provide information on industrial hemp production or non-commercial cultivation.

CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture (CDFA), ensures public safety and environmental protection by licensing and regulating commercial cannabis cultivators in California. CalCannabis also manages the state’s track-and-trace system, which tracks all commercial cannabis and cannabis products—from cultivation to sale. CalCannabis is organized into three branches: Licensing, Compliance and Enforcement, and Administration.

We will have more to say about this very soon.

CalCannabis Licensing

 

CA Cannabis Excise Tax – Extraction – Processing

CA Cannabis Excise Tax - Extraction - Processing
CA Cannabis Excise Tax – Extraction – Processing

This post is the second in a series of posts we expect to publish related to CA Cannabis Excise Tax – Extraction – Processing.  Our previous post focused on a simple example involving the collection, reporting, and remittance of California’s Cannabis Excise Tax (“CET”) related to flower, it was complicated. When we begin to move to extraction, processing, and distribution, the complexity expands, almost exponentially.  We continue to be amazed by the number of comments relating to the CET that merely regurgitate information published by the California Department of Tax and Fee Administration [“CTDFA”]. The example in this post illustrates some of the inadequacies of the CDTFA’s analysis and propose some solutions.  The inadequacies of CDTFA’s analysis are principally the product of:

  • The failure of CDTFA to address the realities of the cannabis supply chain.
  • The failure of CDTFA to address the complexities of the calculation of CET.

In January CDTFA published the two CET examples that follow:

The first calculation is the CDTFA’s “arm’s length” example.

Example #1 – The retailer purchased five pounds of cannabis flowers for $7,500 and 50 cannabis candy bars for $300 in an arm’s length transaction. The average market price in the case of an arm’s length transaction is the wholesale cost of the cannabis plus a markup. This example assumes a 60 percent markup.

The wholesale cost of flowers

$7,500

Markup for flowers ($7,500 × 60%)

$4,500

Average market price of flowers

$12,000

The wholesale cost of candy bars

$300

Mark-up for candy bars ($300 × 60%

$180

Average market price of candy bars

$480

Total average market price ($12,000 + $480)

$12,480

Total cannabis excise tax due ($12,480 × 15%)

$1,872

The distributor is responsible for reporting and paying the $1,872 CET to the CDTFA on his/her cannabis tax return. The distributor is not responsible for verifying the retail selling price of the cannabis. The CET is based on the average market price. In an arm’s length transaction, the average market price is not based on the retailer’s gross receipts from the retail sale.

The second calculation is the CDTFA’s assumed “non-arm’s length” example.

Example #2 – The retailer, which is part of a microbusiness, sells four pounds of cannabis flowers for $9,600 and 25 cannabis candy bars for $500 to their customers (the consumer). This is considered a non-arm’s length transaction because the microbusiness is both the distributor and the retailer. The average market price in the case of a non-arm’s length transaction is the cannabis retailer’s gross receipts from the retail sale.

Gross receipts from sale of flowers

$9,600

Gross receipts from sale of candy bars

$500

Total average market price ($9,600 + $500)

$10,100

Total cannabis excise tax due ($10,100 × 15%)

$1,515

The microbusiness is responsible for reporting and paying the $1,515 cannabis excise tax to CDTFA on their cannabis tax return.

CDTFA’s simplistic explanation of the collection, reporting and remittance of the CET is inadequate for the real world business. A real business world example illustrates the inadequacies of CDTFA’s analysis. The inadequacies of CDTFA’s analysis exist whether or not a micro-business is involved.  The weakness in CDTFA’s analysis principally arises from the fact multiple transfers of cannabis material and multiple transformations of cannabis material are likely to occur between a cultivator and a consumer.

CDTFA provides the following as “official” conversion rates:

Weight Conversion Chart

1 Gram = 0.035 Ounces = 0.001 Kilograms

1 Ounce = 28.35 Grams = 0.0625 Pounds

1 Pound = 453.6 Grams = 16 Ounces

Our Example – Grow LLC is a licensed cannabis Cultivator. Grow LLC harvests cannabis trim with a total weight of 1,000 pounds (wet weight). Grow LLC sells the entire 1,000 pounds [16,000 ounces] to Ed the Extractor for $20/pound based on the wet weight. Ed the Extractor will extract oil from the trim for medical use.  Ed the Extractor is a California cannabis micro-business that is licensed for Manufacturing, Distribution, and Retail.  Ed the Extractor picks up the trim from Grow LLC and transports the trim to its facility.  The California Cannabis Cultivation Tax (“CCT”) that Grow LLC is required to pay over to Ed the Extractor for subsequent payment to CDTFA is $20,640 [16,000x$1.29/ounce].  Ed the Extractor assumes Grow LLC’s CCT liability as an addition to the purchase price for the trim. The complexity of CA Cannabis Excise Tax – Extraction – Processing grows.

Ed the Extractor dries the trim and extracts cannabis oil from the 16,000 ounces of trim.  Ed the Extractor produces 750 ounces [21,262 grams] of raw oil. Ed the Extractor’s cost of extraction and testing the 21,262 grams is $23,200 including the costs incurred in picking up the raw material. The value of the oil is $5.00/gram for a total value of $106,313 in a bulk sale.

The CET Ed the Extractor owes to CDTFA is $25,515. The CET is based on the value of the oil increased by 60% to a presumed eventual retail sale value of $170,101 [$106,313 x 1.6 = $170,101]. The CET is $25,515 [$170,101 x 15% = $25,515].

We note that the costs incurred by Ed the Extractor are part of his Cost of Goods Sold (“COGS”) for income tax purposes, but these costs are not part of the CET computation. We also note that Ed the Extractor is responsible for remitting the CCT of $20,640 to CDTFA.  Ed the Extractor owes CDTFA $46,155 for CCT and CET.

Ed the Extractor sells the entire lot of 21,262 grams of raw oil to Boris the Baker, a California cannabis edibles manufacturer, for $106,313 plus $25,515 (CET). The CET must be separately stated in order to facilitate tracking by CDTFA as well as other businesses.  Ed the Extractor’s gross margin is $42,473 [$106,313 – $20,000 – $23,200 – $20,640 (CCT) = $42,473].

Boris uses an entire lot of raw oil together plus $17,000 of ingredients and $22,000 of labor to produce 500 packages [600 cookies per wholesale package] of Prune flavored cannabis cookies which have a total wholesale value of $220,000.

The CET Boris the Baker owes CDTFA is $27,284 based on the wholesale value of the cookies. The CET is based on the incremental increase in wholesale value [Exit Wholesale Value – Intake Wholesale Value; $220,000 – $106,313 = $113,687] increased by an assumed retail sale mark-up. The mark-up of the incremental increase in value is $181,899 [$113,687 x 1.6 = $181,899]. The CET owed to CDTFA by Boris the Baker based on his incremental addition to the wholesale value of the cannabis product is $27,284 [$181,899 x 15% = $27,284].

Boris the Baker’s gross margin for income tax purposes is $74,867 [$220,000 – $106,313 – $17,000 – $22,000]. Boris the Baker sells the 500 packages of cookies to Doug the Distributor for $272,799 [$220,000 + $52,799 [$25,515 + $27,284] (CET)].

Doug the Distributor incurs $35,000 in additional costs for packaging, labeling and testing the cookies for retail sale. Doug the Distributor sells the cookies to Dismal Dispensary for $365,799 [$295,000 + $70,799 (CET)]. The $70,799 of CET includes $52,799 of CET owed to CDTFA by Ed the Extractor ($25,515) and Boris the Baker ($27,284) plus the additional $18,000 in CET Doug the Distributor owes CDTFA based on his incremental addition of $75,000 to the value of the cannabis material [$75,000 x 1.6 = $115,000 x 15% = $18,000].

Dismal Dispensary advises Doug the Distributor the cookies will be sold at retail for $475,000. Dismal Dispensary’s statement of the amount for which it will sell the cookies raises a question.  Is the CET that Doug the Distributor owes CDTFA determined by Dismal Dispensary’s statement of the retail sale price $475,000 x 15% = $71,250, or is the CET $70,799 [$18,000 from Doug the Distributor’s incremental increase in the value of the cookies plus the $52,799 (CET carried forward)].  Doug the Distributor’s gross margin for income tax purposes is $40,000 [$295,000 – 40,000 – $220,000 = $40,000].

The CET owed to CDTFA by Doug the Distributor will be reduced by the $52,799 [$25,515 + $27,284] which is owed to CDTFA by Ed the Extractor and Boris the Baker, earlier participants in the supply chain leading to the retail level.  Doug the Distributor owes either $18,451 or $18,000 in CET to CDTFA.  The author believes the CDTFA’s answer must be $18,000.  Tax computations cannot be based on the opinions of a retailer of the price at which a product will be sold.  Also, CDTFA’s regulations anticipate adjustments to the assumed 60% retail mark-up.

The preceding presentation of a methodology for the computation, collection and remittance of CET to CDTFA in a real business world model is similar to the incremental value added tax model of the European Union’s Input VAT.  The basic CDTFA model, CA Cannabis Excise Tax – Extraction – Processing, is inadequate for real-world transactions. The utilization this model provides a foundation for addressing other complexities arising from California’s CET regime such as the relationship between the timing of product transfers, payments, tax collection and tax remittance. The critical observation that must be made is that each step in the stream of commerce adds new information, which is dependent on all of the information from each prior step. The authentication, validation, and integrity of the data relating to the movement of cannabis in c-commerce build in an interdependent fashion.  As a consequence, California’s regulated cannabis industry is an ideal candidate for the utilization of BLOCK-CHAIN technology.  California’s regime for the taxation of cannabis coupled with California’s plans relating to the tracking of cannabis demand the implementation of BLOCK-CHAIN technology.

The preceding real business world example of the computation, collection and remittance of Cannabis Excise Tax literally screams “BLOCK-CHAIN”.  The reason the preceding screams BLOCK-CHAIN has NOTHING to do with Bitcoin or another cryptocurrency.  The decentralized transactional recordkeeping, authentication and verification required at each incremental step in the stream of commerce makes BLOCK-CHAIN technology ideal for record-keeping for all aspects of California’s regulation of its cannabis industry.