This article provides background information on taxes and how to implement them in GrowFlow Retail. Retailers are advised to consult with their tax advisor for assistance in defining their taxes.
Overview
In some jurisdictions, including California, for MJ retailers there are two types of taxes, Standard and Compound taxes. Standard taxes are taxes levied on the pre-tax price of an item. Compound taxes are levied on the total of the pre-tax price and other taxes.
To illustrate these concepts we’ll use the following example:
Local Cannabis Tax as a Standard tax
Excise tax as a Compound tax, including the Local Cannabis Tax
State Sales Tax as a Compound tax, including both the Local Cannabis Tax and the Excise Tax
In the example below, the product has a price of $10.00.
The Local Cannabis Tax is 6%, $0.60
The Excise Tax is 15%, based on the price of $10.00 and the Local Cannabis Tax of $0.60, comes to $1.59
The State Sales Tax is 10%, based on the price of $10.00, the Local Cannabis Tax of $0.60 and the Excise Tax of $1.59 (sum of $12.19), and comes to $1.22
The total of the price and all three taxes amounts to $13.41
It’s important to note that the type of Tax, such as Excise Tax, Sales Tax, or Other Tax does not necessarily denote whether it’s a Standard or Compound Tax. The tax regulations will describe if a tax should include other taxes in its basis and is therefore a Compound Tax.
Why?
In California, and perhaps other jurisdictions, retailers are required to collect Compound taxes.
California has new Excise Tax rules going into effect on January 1st, 2023, that may require retailers to use Compound Taxes.
How do you use it?
Prerequisites
Retailers should consult with a tax advisor on how taxes should be implemented, including which taxes, if any, are compound taxes.
When creating a Compound Tax, you must select which of the already defined tax or taxes should be included when calculating the tax.
Creating Compound Taxes
Navigate to Settings.
Select Taxes.
First create a tax that is not a Compound tax, a tax that only includes the price of the product.
In the upper right-hand corner, click on the green "+" icon.
In the Add New Tax modal, enter the Tax Name, Rate, and which Products the tax applies to. Add any relevant exclusions if necessary.
If this is the first tax you are adding, there will be no taxes available for inclusion in Compound Taxation.
Click Save & Close.
You'll be taken back to the Taxes page. Click on the green "+" icon again to add another tax.
In this example, we will create an Excise Tax, as a Compound tax, and include the Local Cannabis Tax.
Complete the form and expand “Included Taxes”
Click on the check box to add the Local Cannabis Tax
Click Save & Close.
You'll be taken back to the Taxes page. To add another tax, click on the green "+" icon again.
In this example, we will create a third tax, a State Sales Tax, as a Compound tax, which includes both the Local Cannabis Tax and the Excise Tax.
Complete the form and expand “Included Taxes”
Click on both checkboxes to add both the Local Cannabis Tax and the Excise Tax.
Click Save & Close.
Example # 2 - Sales Tax Includes the Excise Tax but Not the Local Cannabis Tax
In the previous example, the Sales Tax was a Compound tax and included both the Local Cannabis Tax and the Excise Tax.
Tax regulations vary by state and municipality. In the following example, the Sales Tax includes the Excise Tax but NOT the Local Cannabis Tax.
This reinforces the importance of understanding your tax regulations.
In the case where a Compound tax does not include certain tax rates, you can select only the required tax rates when creating the tax:
Please consult with your tax advisor to determine which if any of your taxes are compound taxes, and which taxes to include.
Reviewing Your Tax Definitions
When Compound taxes are present, the Taxes page will display all taxes, the Tax Rate, which products the Tax applies to, what taxes are Included in a specific Compound tax, and for each Tax, which Tax, if any, they are included by.
Confirming Application of Tax Definitions
Once you have defined your taxes, we recommend you confirm the taxes have been correctly defined and applied.
Navigate to the appropriate product page, select one product and review the pre-tax price, post-tax price, and the amount of each individual tax collected to ensure the amounts are correct.
Using Compound Taxes with “Tax Inclusive Pricing”
With Tax Inclusive Pricing, retailers set the Price After Taxes. The POS then determines the price of the product (pre-tax price) based on the taxes that have been defined for that store.
Implementing Compound taxes will have an impact on the pre-tax price of a product, relative to the same tax rates being applied but not compounded. Compound tax results in higher overall tax rates, and thus a lower pre-tax price.
Here is an example of a product with a Tax Inclusive price of $40.00, the Local Cannabis Tax is 15% and the Sales Tax is 10%.
As you can see, when the Sales Tax is a Compound tax, the amount collected for the Local Cannabis Tax is slightly less, the amount for the Sales Tax is greater, the overall taxes collected is greater, and the pre-tax price of the product is lower. This is to be expected when a store is configured to use Price Inclusive of Taxes.
FAQs
As a retailer, how do I know if a tax is a Compound tax?
Consult with your tax advisor and local and state regulations.
How does this impact customers that are exempt from certain taxes?
The customer will be excluded from paying whatever tax is defined as tax-exempt, regardless of compounding.