Managing Excise-pectations: How ‘Distributor Type’ Effects Excise Tax Calculations at Checkout
So, here’s the deal.
In California, there are two main types of distributors “arm’s length” and “non-arm’s length”. For the majority of retailers, you’ll be working exclusively with arm’s length distributors, which makes calculating excise tax pretty simple. However, for those retailers who hold a distribution license—and distribute product to your own retail operation (i.e. a non-arm’s length transaction)—it’s likely you’ll have both arm’s length and non-arm’s length products in a single transaction, making it a little trickier to understand how excise tax is being calculated at checkout.
Let’s take a deeper look at each of these distributor types so you know exactly what to expect when ringing customers up.
Arm’s Length Distributors
For this type of transaction, the excise tax is paid upfront to the distributor and is calculated off the wholesale cost of the goods you’re purchasing by utilizing the AMP Multiplier calculation—Cost x Industry Standard Markup (60%) x Excise Tax Rate (15%). This means, at checkout, the retail price of your product has no effect on the excise tax amount being charged.
For example, if you’re selling an arm’s length eighth for $10 that is normally sold for $60, the excise tax amount will be the same at $60 as it is at $10. This is because the taxable amount is based on the wholesale cost of the product and not the retail price of the goods being sold.
Non-Arm’s Length Distributors
For this type of transaction, the excise tax is remitted at the end of the month and is calculated at 15% of the subtotal at the point of sale. This means the retail price of your products does have an effect on the excise tax amount being charged at checkout.
For example, if you’re selling a non-arm’s length eighth for $10 that is normally sold for $60, the excise tax amount will be significantly lower at the $10 price point than it is at the $60 price point. This is because the taxable amount is based on the retail price of products, plain and simple.
At the current AMP rate of 60%, the excise tax amount being calculated on non-arm’s length products will be slightly higher than that charged on arm’s length products.
Laying Customer Concerns to Rest
Occasionally, you may encounter some confusion at checkout if a customer believes they’re being overtaxed—and who can blame them? It’s confusing. This rings especially true when it comes to a heavily discounted arm’s length product because as you recall, the retail price doesn’t affect the excise tax amount on those types of transactions. Thus, having a solid understanding of how this tax works across arm’s and non-arm’s length distributors will empower your sales associates to lay to rest the concerns of your customers.
If you have questions about the amount of excise tax you’re charging, be sure to review both the distributor type (via Retail Products > Distributor Management), as well as the wholesale cost of a product (via Reports > Purchase Order) when investigating your calculated taxes in SellTreez.
As a default, all new distributors entered into Treez will be set to ‘arm’s length’, since this is the most common transaction type. Meaning, you only really need to worry about adjusting this information if you conduct non-arm’s length transactions and distribute to yourself.
Now, get out there and manage those distributor types!
P.S. Don’t forget, changing the ‘distributor type’ will affect that excise tax amount being charged at checkout. So, don’t be surprised if your out the door prices are different before and after this information has been updated.