Cannabis Distributors: How to Determine the Retailer’s Wholesale Cost When Calculating the Average Market Price
As a cannabis distributor, you are required to collect the cannabis excise tax from retailers that you supply based on the average market price of the cannabis or cannabis products. In an arm’s length transaction, you calculate the average market price by using the retailer’s wholesale cost of the cannabis or cannabis products plus a mark-up predetermined by CDTFA. The wholesale cost includes:
• The amount the retailer paid for the cannabis or cannabis products, and
• The transportation charges to the retailer.
In addition, you must add back any discounts or trade allowances given to the retailer. A discount or trade allowance is when there are price reductions, or allowances of any kind, whether stated or unstated. Examples include, but are not limited to, short-term promotional incentives, such as receiving a discount or allowance for early payment, placing a large order, or having preferred-customer status. However, if the selling price is given to all retailers, the amount of the reduction is not considered a discount or trade allowance and may be excluded from the retailer’s wholesale cost.
You sell cannabis products to a retailer in an arm’s length transaction for $1,500 plus a $100 transportation charge. You allow the retailer a 25 percent discount if the retailer pays you when the cannabis products are delivered. The retailer earns the 25 percent discount of $375 ($1,500 x 25%), reducing the cost to $1,125 ($1,500 – $375). However, the retailer’s wholesale cost used to calculate the average market price in an arm’s length transaction is $1,600, calculated as follows:
|Cost of Discounted Cannabis to the Retailer||$1,125|
|Add Back 25% Discount||$375|
|Retailer’s Wholesale Cost||$1,600|
The average market price and the cannabis excise tax due are calculated as follows:
|Retailer’s Wholesale Cost||1,600|
|Mark-up ($1,600 x 60%*)||$960|
|Average Market Price ($1,600 + $960)||$2,560|
|Excise Tax Due ($2,560 x 15%)||$384|
For this transaction, you collect $384 in cannabis excise tax from the retailer plus your charges of $1,125 for the cannabis products and $100 for the transportation charge.
* This example assumes a mark-up rate of 60 percent (0.60). You must use the rate in effect at the time of sale. The current rate can be found on our website.
This email is intended to give you an overview of how to determine the retailer’s wholesale cost and does not address all requirements for the cannabis industry. For more information, we encourage you to read our online Tax Guide for Cannabis Businesses, or contact us.