CDTFA: Samples of Cannabis – How Does Tax Apply?
As a distributor, manufacturer, or cultivator, you may sell samples or promotional items to a cannabis retailer. How the cannabis excise tax and the sales and use tax apply depends on whether the samples are sold to the retailer for marketing purposes for the retailer’s use, or whether the samples are sold to the retailer for resale to the retailer’s customers.
Samples not sold for resale to a retailer
Cannabis Excise Tax
If the samples 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 as “not for resale.” The cannabis excise tax applies when cannabis or cannabis products are sold by a cannabis retailer to their retail customer. Therefore, the distributor is not required to collect the cannabis excise tax on sales of samples to a cannabis retailer when the retailer is the consumer of the samples and does not resell them.
Sales and Use Tax
Generally, the seller owes sales tax on the sale of samples or promotional items sold to cannabis retailers when the retailer is not purchasing these for resale. The sales tax is based on the seller’s selling price. However, if the sample or promotional items are sold for less than 50 percent of cost when the value of the merchandise is not obsolete or about to expire, the seller does not owe sales tax, but instead owes use tax based on the cost of the product sold.
Samples sold for resale to a retailer
Cannabis Excise Tax
If the samples or promotional items are sold to the retailer for resale, the cannabis excise tax applies. The distributor is 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, the distributor calculates the average market price by applying the CDTFA’s predetermined mark-up* to the retailer’s wholesale cost. The wholesale cost is the amount paid by the retailer for the cannabis or cannabis products, including any transportation charges. In addition, if any price reductions (stated or unstated) are given to the retailer, such as discounts or trade allowances off the supplier’s list price, the amount of the reduction must be added back to the sales price when determining the retailer’s wholesale cost.
Therefore, if the seller promotes regular, full-sized cannabis products at a discounted price to a retailer, the distributor must calculate the average market price of the cannabis by using the regular wholesale price, before the discount or trade allowance is given.
However, if a seller sells cannabis or cannabis products at a reduced price to all retailers, maybe the market price in general has dropped, then the reduced price is considered the regular cost or the list price and there is no discount or reduced amount to add back in. The distributor should use the amount paid by the retailer as the wholesale cost in order to calculate the average market price, even if the amount paid by the retailer is low or nominal. In the instances where the amount paid by the retailer is the same as the supplier’s list price, no discount has been given.
*The current mark-up rate can be found on our website.
Sales and Use Tax
When cannabis samples or promotional items are sold to a cannabis retailer who resells the items in their business, the sale to the cannabis retailer is not subject to sales tax. The seller (distributor, cultivator, or manufacturer) should obtain and keep a valid and timely resale certificate from the retailer as support that the sale was for resale. For information on sales for resale and resale certificates, see publication 103, Sales for Resale.
Please note: Cannabis retailers are prohibited from giving away any amount of cannabis or cannabis products unless authorized to do so by the Bureau of Cannabis Control (Bureau). The Bureau is the state agency that regulates the requirements for all licensed distributors, retailers, and microbusinesses. If you have specific questions regarding a retailer, distributor, or a microbusiness license, please email the Bureau at firstname.lastname@example.org.
This post is intended to give you an overview of the tax application of cannabis samples or promotional items and does not address all requirements for the cannabis industry. For additional information, we encourage you to read our online Tax Guide for Cannabis Businesses, or contact us at www.cdtfa.ca.gov/contact.htm.