|Distributors, manufacturers, and cultivators may sell samples or promotional items to a retailer. How cannabis excise tax and the sales and use tax applies depends on whether the samples are sold to the retailer for marketing purposes; that is, the retailer will consume and not resell the items, or whether the samples are sold to the retailer for resale to the retailer’s customers.
Samples Not for Resale by Retailer
Excise Tax – If the sample or promotional items are sold to the retailer for marketing purposes, that is, the retailer does not resell the samples to their customers, the retailer is the consumer of the items. Samples or promotional items not sold for resale should be labeled accordingly; for example, “not for resale.” The cannabis excise tax only applies to retail sales from a retailer to the retail purchaser. Therefore, you are not required to collect the cannabis excise tax on sales of samples to a cannabis retailer when the retailer is the consumer.
Sales and Use Tax – Generally, you owe sales tax on the sale of samples or promotional items sold to cannabis retailers when the retailer is not purchasing these for resale, and the sales tax is calculated based on the sales price. However, if the sample or promotional items are sold for less than 50 percent of your cost when the value of the merchandise is not obsolete or about to expire, you do not owe sales tax but you do owe use tax based on your cost of the product sold.
For example, you sell a cannabis sample to a retailer for $1.00, which you originally purchased from the cultivator or manufacturer for $10.00. Since your selling price is less than 50 percent of your cost to purchase the item, you owe use tax based on your purchase price of $10.00. If your sales and use tax rate is 9.5 percent, you owe use tax of $0.95 ($10.00 x 9.5 percent).
To pay use tax, report your cost (which is generally your purchase price) of the cannabis as “Purchases Subject to Use Tax” on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.
Samples for Resale by Retailer:
Excise Tax – If the sample or promotional items are sold to the retailer and the retailer will be selling the samples to consumers in a retail sale, the cannabis excise tax applies and you are required to collect the excise tax from the retailer based on the average market price of the cannabis or cannabis products.
In an arm’s length transaction, you will calculate the average market price by applying the CDTFA’s predetermined mark-up to the retailer’s wholesale cost (currently 60%). The wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including any transportation charges. In addition, if you give any price reductions (stated or unstated), such as discounts or trade allowances off your supplier’s list price, you must add these reductions back when determining the retailer’s wholesale cost.
Therefore, if you sell or promote regular, full-sized products at a discounted price, you must calculate the average market price using the regular wholesale price, before the discount or price reduction is given. However, when you sell samples or promotional items that are single-serve, or low cost, or formerly free samples, and the wholesale cost represents your supplier’s list price, no discount is given. The amount the retailer paid for the cannabis or cannabis products is the amount you should use as the retailer’s wholesale cost when calculating the average market price to determine the amount of excise tax that is due, even if the wholesale cost is very low or nominal. In a nonarm’s length transaction, the average market price of the cannabis or cannabis products is equal to the retail selling price of the cannabis or cannabis products. As the distributor, you will apply the 15 percent cannabis excise tax to the retail selling price of the samples or promotional items, even when the retail selling price is very low or nominal.
Sales and Use Tax – When you sell cannabis samples or promotional items to a cannabis retailer for resale and the retailer provides you with a valid and timely resale certificate, the sale is not subject to sales tax.