Recreational Use of Cannabis Passes, Sparking a Budding Industry

Sacramento – With the passage of Proposition 64, Marijuana Legalization, voters have broken through the prohibition of recreational cannabis use, making California the largest state allowing recreational and medical use of cannabis. Four other states (Arizona, Maine, Massachusetts, and Nevada) also voted on the recreational use of cannabis withfour states (Alaska, Colorado, Oregon, and Washington) already allowing legalized recreational use.

“With the passage of Proposition 64, there is the potential to have hundreds of new businesses generating new tax revenue. But the uncertainty in the cannabis industry continues to make operating a business a challenge,” said California State Board of Equalization Chairwoman Fiona Ma, CPA. "With the implementation of the new licensing structure, a new product tracking system under consideration, and difficulties facing product transportation, we need to do everything we can to encourage tax compliance in this billion dollar industry.”

The California State Board of Equalization (BOE) will be sending information out to the industry to help business owners understand their tax compliance requirements. The BOE already sent out a special notice notifying sellers that effective immediately (November 9, 2016), medical cannabis patients with state issued marijuana cards and a valid government issued identification card will be exempt from state sales and use taxes when they purchase cannabis products from a dispensary. BOE staff will be sending information out to dispensaries on how to document sales to patients with state issued cards for sales and use tax purposes.

Beginning January 1, 2018, both medical and adult use cannabis will be subject to a cultivation tax of $9.25 per ounce for flowers and $2.75 per ounce for leaves. Both medical and adult use cannabis will also be subject to a 15% excise tax imposed on purchasers and collected from retailers of medical and adult use cannabis. It is important to note that in addition to the 15% percent excise tax, consumers of cannabis will still have to pay state sales and use taxes on medical and adult use cannabis products. However, medical patients with state issued medical cards and a valid government issued identification card will be exempt from state sales and use taxes. 

The passage of Proposition 64 does nothing to address the lack of access to banks facing the cannabis industry. “Because Proposition 64 creates the potential for many new cannabis businesses to spring up with no access to financial institutions, this will create a tsunami of cash that California regulators will have to manage,” said Chairwoman Ma. “The challenges facing BOE regarding collecting and processing these cash payments will be magnified and brings to the forefront the need for some kind of banking solution for the industry. It's not the fault of the business owner that they couldn't work with a bank. Businesses are trying to pay their taxes responsibly and shouldn't be penalized for paying their taxes however they can,” continued the Chairwoman.

More information about the excise tax rate and industry will be available on the BOE’s online tax guide for the Cannabis Industry.

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Board Member Fiona Ma, CPA, was elected to the Board of Equalization in November 2014, to represent the Second Equalization District. She represents 9.5 million residents in many of California's coastal counties, from Del Norte to Santa Barbara, including the entire San Francisco Bay Area. Ms. Ma served in the California State Assembly from 2006 to 2012, serving as the first Asian woman Assembly Speaker pro Tempore since 1850. While in the Assembly, Ms. Ma focused on improving California, authoring legislation to create jobs and grow the state's economy. As an Executive Board Member of the National Conference of State Legislators, she worked to keep California's economy competitive with other states. Ms. Ma has been a Certified Public Accountant (CPA) in California since 1992. For more information, visit Board Member Ma's website.

The five-member California State Board of Equalization (BOE) is a publicly elected tax board. The BOE collects $60.5 billion annually in taxes and fees supporting state and local government services. It hears business tax appeals, acts as the appellate body for franchise and personal income tax appeals, and serves a significant role in the assessment and administration of property taxes. For more information on other taxes and fees in California, visit the California Tax Service Center.