Most of the California cities want a piece of the Cannabis money. And in my experience, they are pretty good at getting their share of it. A couple of months ago one of my dispensary clients got an email from their city. The city was requesting a 25% penalty for paying one day late! That penalty translated to an additional $7,000.
Once I got involved, I quoted the city tax specialist their own tax rules. According to the rules, the payment is considered to be made on time as long as the check was mailed before the due date. The agent agreed with me and stopped harassing the client. Only for that month, unfortunately! The next month the client received the same notice again. I suggested to the client that going forward he should be sending checks a week ahead of the due date. Fighting with city employees each month is pretty exhausting.
So, what is City business tax and how is it calculated? This tax is the responsibility of the dispensary. Some cities allow this tax to be passed onto the customer and it averages from 4% to 7%.
How is this tax calculated? Well, here is the difficult part. Each city has its own tax rules. Sometimes even counties within the same city have their own unique tax rules. But similarities can be found:
- Most of the cities tax on gross receipts, but this does not include Excise tax in the taxable base. If your retail price includes Excise tax, you would manually back out Excise tax from your gross receipts.
- Some cities allow deductions for sales with medical marijuana cards. And some of them would let you deduct sales made with a doctor’s recommendation letter.
Because this tax is so different at each location, it is very difficult to set up correct tax withholdings in your Point of Sale software. Systems I have worked on are imperfect and require a lot of customization before getting to the correct tax settings. This creates an additional liability such as over withholding and under-withholding tax from your customers.
If you need help with setting up your tax withholdings, please contact me at [email protected]