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Changes Coming to California's Cannabis Market - Effective on Wednesday, January 1, 2020

December 31, 2019

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Beginning January 1, 2020, any package containing cannabis or cannabis products that are transferred to a Distributor for retail sale, must be in child-resistant packaging ( ("CRP") which is designed to be difficult for children under five years of age to open.
 

Pursuant to Section 40417 of Title 17 of the California Code of Regulations, there are three (3) types of packaging that qualify as child-resistant packaging:
 
1) Packages that have been certified as child-resistant under the requirements of the Poison Prevention Packaging Act (PPPA, 16 CFR 1700.15(b)(1)). To meet this standard, packaging must be tested and be certified as meeting the PPPA standards. You can ask your packaging supplier if the packaging you are considering has PPPA-compliant certification.
 
2) A bottle sealed with a pry-off metal crown cork-style bottle cap (for packages containing only a single serving).
 
3) Plastic packaging that is at least 4 mils thick and heat-sealed without an easy-open tab, dimple, corner, or flap (for packages containing only a single serving).
 
Depending on the type cannabis or cannabis product sold, the product must be packaged in either a Single-Use ("Initial CRP") or Multiple-Use ("Lifetime CRP") child resistant packaging.
 
California's Department of Public Health's Manufactured Safety Branch has provided a Packaging Handout to assist Licensees in identifying what type of Child-Resistant Packaging is required for the type of cannabis or cannabis product transferred to a Distributor for retail sale.
 
Cannabis Taxes
Effective January 1, 2020, the California Department of Tax and Fee Administration (CDTFA) will increase Cannabis Cultivation Tax Rates and raise the Mark-Up Rate from 60 percent to 80 percent.
 
Mark-Up Rate:
According to the CDTFA website, "the Mark-Up Rate is used by Distributors to compute the 'Average Market Price' of cannabis or cannabis products sold or transferred to a retailer in an Arm's Length Transaction." The CDTFA will determine the Mark-Up Rate on a biannual basis in six month intervals.
 
In an "Arm's Length Transaction", the Average Market Price is equal to the Wholesale Cost plus the Mark-Up Rate of 80%. The Cannabis Excise Tax remains at 15% and is then multiplied by the Average Market Price in a retail transaction.
 
According to the CDTFA, the Arm's Length Transaction formula would be calculated as follows:
  • (Wholesale Cost x 80%) = Mark-Up Rate
  • (Wholesale Cost) + (Mark-Up Rate) = Average Market Price
  • Average Market Price x (15% Excise Tax) = Amount Distributor collects from Retailer and remits as the Excise Tax payment to CDTFA.
In a Non-Arm's Length transaction, the Average Market Price is equal to the Retailer's gross receipts from the retail sale of cannabis or cannabis products. The CDTFA identifies Non-Arm's Length transactions as including a transaction between a cannabis licensee that is licensed as both a Distributor and a Retailer, or a transaction within a Microbusiness that engages in Distribution and Retail activities.
 
Cultivation Taxes
The Cultivation Taxes are paid by the Distributor who collects this tax from either or both the Cultivator and/or Manufacturer.
 
According to the CDTFA website, the Cannabis Cultivation Tax Rates needed to be increased to reflect adjustments in inflation. The Cultivation Tax applies to all cannabis and cannabis products that are sold or transferred on or after January 1, 2020.
 
The increased Cultivation Tax Rates are listed below. Rates are determined based on the type of cannabis category, and are represented in ounces, with conversion into pounds:

CANNABIS
CATEGORY
PREVIOUS  RATE
EFFECTIVE
1/1/2018 - 12/31/2019
*NEW RATE*
EFFECTIVE
1/1/20
Flower per dry-weight ounce
$9.25/oz.
(or $148.00/lbs.)
$9.65/oz.
(or $154.40/lbs.)
Leaves per dry-weight ounce
$2.75/oz.
(or $44.00/lbs.)
$2.87/oz.
(or $45.92/lbs.)
Fresh cannabis plant per ounce
$1.29/oz.
(or $20.64/lbs.)
$1.35/oz.
(or $21.60/lbs.)

Cannabis Licensees are strongly encouraged to review the general guidance provided on the CDTFA's Tax Guide for Cannabis Businesses website and consult with their certified public accountant and/or legal counsel.
 
If you are interested in learning more about California's commercial cannabis licensing laws and regulations, please contact Kelly Hayes at khayes@murchisonlaw.com or (619) 544-6838.

 

 

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