California Cannabis Excise Tax Cut Would Be a Welcome Change

As California’s legal cannabis market continues to develop, taxes remain a top issue for legal operators in their quest to supplant the illicit drug trade. Assembly Bill 564 would aid their efforts by reducing the cannabis excise tax. The bill passed in the assembly on Sept. 11 and now awaits Gov. Gavin Newsom’s (D) signature.

California’s excise tax on retail sales of cannabis and cannabis products increased to 19% in July. The bill creates a varying excise tax rate for 2025 through 2030. For July 1, 2025, through Sept. 30, 2025, the rate would remain at 19%. From Oct. 1, 2025, to June 30, 2030, the rate would be 15% percent. After June 1, 2030, the rate would be subject to adjustment every two years.

Cannabis operators in California should review distribution and retail agreements for tax escalation clauses that have already anticipated the higher rate. They also should review product sheets and point-of-sale pricing to reflect the stabilized 15% rate and remove any scheduled increases from sale systems.

The mechanics of collection and remittance won’t change. Retailers still have to collect and remit the excise tax, unless an exemption applies. Two exemptions are cannabis or cannabis products marked as trade samples or donated medicinal cannabis. Proper use of these exemptions provide tax relief from the excise tax and avoid the over-application of the tax in ongoing operations.

The excise tax exemption for trade samples is tightly controlled and applied under limited circumstances. Trade samples must be officially designated as a trade sample per the requirements of Revenue and Taxation Code 26153.1.

Retailers are specifically prohibited from providing trade samples to other licensees (except their own employees) or to unlicensed persons, such as customers. Of course, if the trade samples are sold, the excise tax applies.

Like the excise tax exemption for trade samples, the exemption for donated medicinal cannabis must carefully adhere to statutory requirements to preserve eligibility. The exemption applies to donations made to licensed cannabis retailers or directly to qualified medicinal cannabis patients. Prior to initiating a donation, entities must confirm recipient eligibility to ensure compliance.

The retail licensee distributing the medicinal cannabis must provide written certification to the donating licensee affirming that the product will be used solely as authorized under state law. Misuse of the donated cannabis invalidates the exemption and exposes the recipient to tax liability, including penalties and interest.

Documentation may take the form of a letter, note, or purchase order and must be retained by the donor for at least seven years to provide a defensible record in the event of audit or dispute.

Additionally, transfers between licensees must be recorded in the California Cannabis Track-and-Trace System, with products explicitly designated as donations. The current use tax exemption is extended only through Jan. 1, 2030, with renewal contingent on state evaluation of fiscal impacts relative to patient access.

While AB 564’s passage would give legal operators a welcome 4% excise tax rate reduction, compliance fundamentals remain the same. Review operational legal and accounting documents and systems to ensure accuracy and be sure to apply exemptions to the rate where eligible.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Sam Imandoust is a tax attorney at RJS Law who focuses on tax litigation, planning, audits, collections, and appeals.

Kaveh Imandoust is a CPA at RJS Law who has been practicing tax for 20 years, advising clients across myriad specialties and industries.

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