California Cannabis Accounting & Tax Guide: Regulations, 280E & Compliance [2025]

The California cannabis industry is a dynamic and rapidly evolving market. California Cannabis Accounting is a complex and evolving industry. For accountants and bookkeepers, this presents both opportunities and challenges. This article will outline what to expect regarding the industry’s regulations, licensing, taxes, and other important financial considerations, including the significant impact of the 280E tax code on California cannabis accounting & taxation. This guide is valuable whether you are a seasoned professional or new to the cannabis industry.

Historical Timeline of Cannabis Legalization in California

Being the first state in the union to allow medical marijuana, California passed Proposition 215 in 1996 [1]. Since then, it has been a leader in the cause to make cannabis legal. In 2016, Proposition 64 made it legal for adults to buy cannabis [2]. This move marked a major turning point in cannabis regulation. Here’s how the regulatory system has changed over time:

• 1996: Compassionate Use Act (Proposition 215): Authorizes the use of medical marijuana.
• 2003: Senate Bill 420: Establishes rules for the medical marijuana program.
• 2015: Medical Cannabis Regulation and Safety Act: Establishes a state licensing scheme for medical cannabis.
• 2016: Adult Use of Marijuana Act (Proposition 64): Legalizes adult use of cannabis.
• 2017: Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA): Combines medical and adult-use rules.
• 2018: Commences adult-use retail sales.

Key State Agencies Governing the Industry

California Cannabis Accounting professionals must navigate complex regulations set by multiple state agencies, including:

• Department of Cannabis Control (DCC): The DCC is the central regulatory agency for the cannabis industry [3]. It oversees licensing, implementation, and the creation of rules and regulations. It serves as a “one-stop” shop for cannabis industry operators and the public.
• California Department of Tax and Fee Administration (CDTFA): The CDTFA is responsible for administering state taxes, including those levied on cannabis [4]. It enforces tax laws, manages tax collections, and provides guidance on tax requirements.
• Department of Food and Agriculture (CDFA): The CDFA oversees cannabis cultivation [5].
• California Department of Public Health (CDPH): The CDPH regulates cannabis manufacturing and testing [6].
  • Note: The DCC combined many of these departments during 2021.

Cities Where Adult-Use Cannabis is Legal

Several municipalities and counties do not permit commercial cannabis activities, although cannabis is legal at the state level. Local jurisdictions can limit or prohibit cannabis companies through zoning restrictions (zoning regulations).

• General Trends: Several large cities, including Los Angeles, San Francisco, San Diego, Sacramento, and Oakland, have shown a significant amount of support for the cannabis sector by granting permission to a wide range of operators. Nevertheless, numerous rural and smaller communities continue to prohibit the practice.
• Business Consequences: It is essential to confirm the local cannabis ordinances before establishing a business due to the current patchwork of regulations, including zoning restrictions, operational limitations, and licensing requirements. However, a company may be entirely legal at the state level but in violation of local zoning regulations.
• Resources: The DCC website offers users access to information about local regulations by providing up-to-date connections to each city and county.

Types of Cannabis Licenses in California[3]

California provides a wide variety of cannabis licenses, each designed for specific activities within the industry. The principal license categories are as follows:

• Cultivation Licenses: These licenses authorize the cultivation of cannabis plants, identified by the canopy’s size, the method of cultivation (indoor, outdoor, mixed-light), and the type of lighting used. The classification for indoor cultivation includes Specialty Cottage (up to 2,500 square feet) and Large (over 22,000 square feet).
• Manufacturing Licenses: Authorize the production of cannabis products, including extraction and infusion processes. License categories are contingent upon the methods employed, such as non-volatile solvents (Type 6) or volatile solvents (Type 7).
• Distribution Licenses: Facilitate the transportation and storage of cannabis products between licensees. Type 11 licenses are for general distribution, while Type 13 licenses are for transportation-related activities only.
• Testing Laboratory Licenses (Type 8): These licenses are available for businesses that offer detailed testing to ensure their safety and effectiveness before resellers can sell cannabis products to the end user. These laboratories must obtain and maintain ISO/IEC 17025 accreditation, an international standard for testing and calibration laboratories, ensuring the quality and reliability of their testing processes.
• Retail Licenses: These licenses facilitate the direct sale of cannabis products to consumers. Type 10 licenses are intended for storefront retailers, while Type 9 licenses are for non-storefront (delivery-only) retailers.
• Microbusiness Licenses (Type 12): This license type explicitly targets businesses that engage in at least three cannabis activities (e.g., cultivation, manufacturing, distribution, retail) under a single license while limiting the size of operations.
• Event Licenses: Permit hosting events that involve the sale and consumption of cannabis and licenses for event organizers and temporary cannabis events.

Find an extensive list of each license type and a detailed description of each license type by consulting the official guidelines provided by the DCC.

Understanding License Fees

License Fees, Initial Costs, Renewal Costs and Timing:

When managing California Cannabis Accounting, understanding licensing fees is crucial. License fee fluctuations depend on the license type, the business size, and other factors. The following is a general overview; however, for the most current fee schedules, please consult the DCC’s official website:

• Application Fees: A non-refundable application fee is associated with each license.
• Initial License Fees: These are due upon the approval of an application. The fees are subject to significant variation depending on the size of a business and the license type.
  • Estimated Fees (Subject to Change)
    • Cultivation: The size of the grow determines the fee, ranging from a few hundred dollars to several thousand.
    • Manufacturing: Fees start in the $1,000 range
    • Distribution: Fees start in the $1,000 range
    • Retail: Fees start in the $1,000 range
    • Testing: $1,000+
    • Microbusiness: $2,500+
    • Event: Fees Vary
• Renewal Fees: License holders must renew their licenses annually and pay a yearly renewal fee. The renewal fee is typically the same rate as the initial license fee.
• Timing: The time it takes for the DCC to process a cannabis license application can vary significantly. Processing time depends on the license type, the volume of applications, and department resources, to name a few. It’s vital to submit renewals as soon as possible to avoid losing one’s license.
• Local Fees: Remember to budget for these, or you may have difficulty renewing your license. In addition to the state license fees, many local governments charge fees for cannabis business licenses and permits.
• Resources: Because these fees and the rules and regulations surrounding the cannabis industry in California are subject to change regularly, we recommend that you examine the official fee schedule on the DCC website to obtain the most up-to-date information.

Current License Numbers

Number of Licenses Issued:

As the exact quantity of active licenses changes constantly due to the dynamic nature of the cannabis industry in California, below is a snapshot based on data that was accessible at the time of writing. As of February 2025, the California Department of Cannabis Control (DCC) reports the following numbers of active cannabis licenses by type [13]:

• Cultivation: 4,320 
• Retail: 1,561
• Distribution: 1,130
• Manufacturing: 635
• Nursery, Processor & Event Organizer: 465
• Microbusiness: 369
• Testing: 28

Internal Revenue Code (IRC) Section 280E Decoupling Status

A key challenge in California Cannabis Accounting is navigating the 280E tax implications.

• Background: Businesses that fall under the definition of Schedule I or Schedule II of the Controlled Substances Act (CSA) are not permitted to take regular business deductions under the Internal Revenue Code (IRC) Section 280E [7]. Cannabis, which is still considered a Schedule I substance at the time of publishing this article, is included in this category. This results in a significantly higher effective tax rate for cannabis businesses than businesses in other industries.
• California’s Stance: Although California cannot override federal law, the state had previously decoupled from 280E for state income tax purposes under Assembly Bill 37 (AB 37), allowing cannabis businesses to deduct ordinary business expenses at the state level [8]. However, at the time of this writing (February 2025), AB 37 expired on December 31, 2024, meaning that as of January 1, 2025, cannabis operators are once again subject to 280E at the state level and can no longer claim these deductions. As of now, there has been no official extension or replacement for AB 37, leaving cannabis businesses facing renewed financial burdens. Compounding these challenges, California’s excise tax on cannabis is set to increase from 15% to 19% on July 1, 2025, under the provisions of Assembly Bill 195 (2022), which was intended to offset the elimination of the cultivation tax [14]. In response, Assembly Bill 564 has been introduced in an effort to prevent this tax hike, signaling ongoing legislative efforts to support the legal cannabis sector.
• Strategic Implications: To ensure your cannabis clients pay minimal taxes, accountants must thoroughly understand these distinctions. Although it is not ideal, this decoupling has the potential to save a cannabis company a significant amount of money.

State Tax Requirements

State and Local Tax Requirements[4]

• State Taxes:
  • Excise Tax: 15% of the average market price. Set to increase July 1, 2025 [14]
  • Sales Tax: General sales and use tax (currently 7.25% state rate; may be higher with local add-ons) [4].
  • Cultivation Tax: This tax was temporarily suspended effective July 1, 2022.
• Local Taxes:
  • Variability: Local taxes vary significantly from one jurisdiction to another.
  • Types: Some cities/counties impose taxes on gross receipts, while others have flat business license fees.
• Due Dates:
  • State Taxes: Typically paid quarterly. See the CDTFA website for specifics.
  • Local Taxes: The respective local government usually sets the due dates.
• Tax Filing: Tax requirements can be complex. Consult the CDTFA website, local municipal websites, and professional tax advisors for the most up-to-date information.

Tax Revenues

Amount of Annual Tax Revenues Collected by the State Since the Start of the Program

Since the beginning of the adult-use program, California has collected substantial revenue from cannabis taxes. As of July 2024, California has collected approximately $6 billion in tax revenue from about $27 billion in taxable sales [9, 12]. Here’s a breakdown of annual tax revenue [9, 12]:

• 2018: $401,172,173
• 2019: $645,972,372
• 2020: $1,134,107,772
• 2021: $1,360,438,598
• 2022: $1,115,104,476
• 2023: $1,088,555,671
• 2024 (Sept): $786,136,629

During 2019, California collected approximately $635 million in cannabis tax revenue from state and local sources [12, 11]. The state received $538.1 million, while local governments collected around $100 million in sales tax revenue [12, 11].

The state allocates its cannabis tax revenue to three primary areas [15]:

• 60% support youth programs aimed at substance abuse prevention and education.
• The state dedicates 20% to environmental efforts, addressing damage caused by illegal cultivation.
• The final 20% funds public safety initiatives, including grants for law enforcement and health services.

The state does not track local cannabis tax revenue, and many cities do not report it.

California Cannabis Regulations

State Regulations:

The DCC, the regulatory agency for the California cannabis program, provides a comprehensive set of rules and regulations for cannabis businesses in the state [3]. These constantly change, so California cannabis accountants must carefully review the rules and regulations to ensure they remain current.

Some key regulatory areas include [3]:

• Licensing Requirements: Details of all license types, application requirements, and renewals.
• Operating Standards: Requirements for business operations, including security, recordkeeping, and sanitation.
• Packaging and Labeling: Standards that must be adhered to in order for cannabis products to be packed and labeled in a manner that is congruent with both state and federal regulations.
• Testing and Quality Assurance: Regulations for testing requirements and quality control.
• Advertising and Marketing: This document outlines the regulations governing the advertising and marketing of cannabis products.
• Track and Trace Requirements: Regulatory requirements for tracking cannabis from seed to sale utilizing the Metrc system.

Access the full text of the California cannabis regulations here [10].

Inventory Management

Inventory Management in the Cannabis Industry:

For those professionals and operators working in the cannabis industry, it is necessary to have inventory management that is both accurate and thorough. Here’s why:

• Compliance: California utilizes the Metrc track-and-trace system. Businesses must record all transactions from the cultivation to the sale of the final product. Failure to handle inventories properly can result in compliance concerns and severe penalties.
• Cost Accounting: To accurately establish the cost of goods sold (COGS), essential for financial reporting and taxation, the accounting department must track inventory accurately.
• Tax Implications: Due to 280E, proper inventory management can help maximize state deductions tied to COGS.
• Security: Effective inventory controls also help minimize the risk of theft, shrinkage, and product loss.

Reporting: Proper inventory controls help to file taxes and complete audits properly.

Audit Requirements

Audit Requirements:

• Financial Statement Audits: California cannabis accounting professionals must understand that these businesses may require audits of their financial statements.
  • The state does not explicitly mandate these audits, but lenders, investors, and, in some cases, larger municipalities may require it.
  • Audits verify financial records, test internal controls, and provide an independent financial performance review.
• Regulatory Compliance Audits: California cannabis accounting professionals need to be aware that the DCC can conduct regulatory compliance audits of cannabis businesses to ensure they adhere to all state regulations [3].
  • Complaints may trigger these audits or be part of a random selection.
  • Audit results can impact licensing and operating privileges.
• Areas of Focus: Auditors will focus on inventory controls, revenue recognition, cash management, tax compliance, and compliance with all cannabis-specific regulations.
• Preparation: A business should prepare for audits at any time. Businesses should have good processes in place, as well as documentation that will support any claims made.

Additional Data Useful for Accountants and Bookkeepers

• Banking and Financial Services: Banking access can be difficult for cannabis businesses because it’s still federally illegal. This limitation often results in unique cash management and reporting challenges.
• Internal Controls: Robust internal controls are essential to managing cash, inventory, and regulatory compliance, given the sensitive nature of the product.

Conclusion:

California Cannabis Accounting presents tremendous opportunities for accountants and financial professionals looking to specialize in this high-growth industry. By staying abreast of the latest developments and seeking expert guidance, accountants and bookkeepers can play a vital role in the success of businesses in this growing market. The National Association of Cannabis Accounting and Tax Professionals is here to support you on this journey.

Call to Action:

Ready to elevate your expertise and connect with a network of top cannabis accounting professionals? Join the National Association of Cannabis Accounting and Tax Professionals today and gain access to exclusive resources, networking events, and continuous education.

Need a California-based accountant specializing in the cannabis industry? The National Association of Cannabis Accounting and Tax Professionals offers a directory of qualified professionals to assist you. Find a California Accountant here.

Key Takeaways:

• The legal landscape is complex and constantly changing.
• Understanding state and local taxes is critical.
• Federal 280E rules create unique challenges.
• Robust accounting and inventory management practices are essential for success.
• Businesses should budget for license fees and renewal costs.

Note: This blog post is intended for informational purposes only and should not be considered professional tax or accounting advice. Always consult with qualified professionals for guidance tailored to your specific situation.

References

1. California Department of Public Health. (2010). Medical Marijuana Program. Retrieved from:  https://web.archive.org/web/20100101143455/http://www.cdph.ca.gov/programs/MMP/Pages/Medical%20Marijuana%20Program.aspx
2. California Courts. (n.d.). Proposition 64 – Adult Use Marijuana Act. Retrieved from: https://courts.ca.gov/programs-initiatives/criminal-justice-services/proposition-64-adult-use-marijuana-act#:~:text=Effective%20November%209%2C%202016%2C%20Proposition,sealing%20of%20prior%2C%20eligible%20marijuana%2D
3. California Department of Cannabis Control. (n.d.). California cannabis laws and regulations. Retrieved February 24, 2025, from: https://cannabis.ca.gov/
4. California Department of Tax and Fee Administration. (n.d.). California cannabis tax information. Retrieved February 24, 2025, from: https://www.cdtfa.ca.gov/
5. California Department of Food and Agriculture. (n.d.). California cannabis cultivation regulations. Retrieved February 24, 2025, from: https://www.cdfa.ca.gov/
6. California Department of Public Health. (n.d.). Cannabis manufacturing and public health guidelines. Retrieved February 24, 2025, from: https://www.cdph.ca.gov/
7. Internal Revenue Service. (n.d.). Marijuana remains a Schedule I controlled substance; Internal Revenue Code Section 280E still applies. Retrieved February 24, 2025, from: https://www.irs.gov/newsroom/irs-marijuana-remains-a-schedule-i-controlled-substance-internal-revenue-code-section-280e-still-applies#:~:text=Section%20280E%20disallows%20all%20deductions,the%20federal%20Controlled%20Substances%20Act
8. California State Legislature. (2020). Assembly Bill No. 37: Personal income taxes: deductions: commercial cannabis activities. Retrieved February 24, 2025, from: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB37
9. California Department of Tax and Fee Administration. (n.d.). Cannabis tax revenues dataset. Retrieved February 24, 2025, from https://www.cdtfa.ca.gov/dataportal/dataset.htm?url=CannabisTaxRevenues
10. California State Legislature. (n.d.). Business and Professions Code – Division 10: Cannabis. Retrieved February 24, 2025, from https://leginfo.legislature.ca.gov/faces/codes_displayexpandedbranch.xhtml?tocCode=BPC&division=10.&title=&part=&chapter=&article=
11. Leafly. California’s $635M in cannabis taxes: Where is it going? [Internet]. Available from: https://www.leafly.com/news/politics/californias-635m-in-cannabis-taxes-where-is-it-going
12. The Marijuana Herald. (2024, August). California marijuana stores: Taxes and sales 2018-2024. Retrieved February 24, 2025, from https://themarijuanaherald.com/2024/08/california-marijuana-stores-taxes-sales-2018-2024/
13. California Department of Cannabis Control. (n.d.). Cannabis license summary report. Department of Cannabis Control. Retrieved February 24, 2025, from https://cannabis.ca.gov/resources/data-dashboard/license-report/
14. California State Legislature. (2022). Assembly Bill No. 195: Cannabis taxation and regulation. Retrieved February 24, 2025, from https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB195
15. California Department of Tax and Fee Administration. (n.d.). California cannabis tax law – Section 34019. Retrieved February 24, 2025, from https://www.cdtfa.ca.gov/lawguides/vol3/ctl/ctl-34019.html