The three-year milestone is noteworthy because that’s the cutoff for California Department of Tax and Fee Administration auditors for examination of corporate tax returns.

Prior to 2018, marijuana companies were already required to pay sales taxes. As our Los Angeles cannabis lawyers know first hand, many were were routinely subject to state audits. In 2018, when the state first allowed legal cannabis sales for recreational use, they were required to pay two new taxes – a cultivation tax and a 15 percent excise tax.

As some CPAs note, audits like these can be very advantageous for the state of California, so it should come as no shock that these are starting. In fact, the state is pumping up all its general business audits too, so it’s not necessarily that marijuana companies are being singled out. Still, the high tax rates and significant penalties associated with marijuana sales could spell trouble for some marijuana businesses if anything is amiss.

One CPA quoted by Marijuana Business Daily surmised it won’t be difficult for state auditors to uncover tax violations. Some estimate the state is going to be owed tens to hundreds of millions of dollars in unpaid taxes from the marijuana industry, which will include sales taxes, excise taxes and cultivation taxes. Further, this is the first fiscal year that both cultivation and excise tax audits are being funded by the state, and the agency has even been hiring more auditors. And estimated 60 inspectors are currently dedicated solely to ensuring tax compliance among tobacco and cannabis companies. In the words of the CPA: “It’s going to be a turkey shoot.”

A spokesman for CDTFA said that there have been ongoing compliance issues where sales taxes are concerned, which is why many have seen an uptick in sales tax inquiries. These in turn result in investigations into cannabis and excise taxes.

But while there’s unquestionably an uptick in audits, it’s also very likely the state will be more aggressively enforcing existing liabilities that don’t require an audit (something that’s a lot cheaper/faster for the state).

It’s not clear exactly how many marijuana businesses have received an audit notice, but even those that haven’t at this point may want to consider consulting with a tax specialist and cannabis business attorney to be on the safe side. This is especially true because some companies are getting hit with COVID-related tax headaches. For example, last year the CDTFA issued an announcement that there would be a delay in collections of sales taxes – a way to cut businesses some slack while they were in the throes of coronavirus response. Some companies took the agency up on that – only to hit a brick wall with the agency’s processing unit and then incurring stiff penalties for late payments.

Our law firm has heard complaints about the agency threatening to revoke operational permits of cannabis companies unless outstanding payments are made. The CDTFA insists its only goal is to compel taxpayers to pay only what they owe – no more or less.

Complaints of possible rights violations can be made to the Taxpayers’ Rights Advocate Office. An attorney can file this complaint on your behalf and help you decide your next step.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 949-375-4734.

Additional Resources:

California marijuana firms face more state tax audits, millions of dollars in unpaid taxes, Feb. 25, 2021, Marijuana Business Daily

In other words, the higher the concentration of a product’s THC content, the more it would be taxed. The proposal comes as state-legal businesses have been begging lawmakers for some relief from local and state government taxes. The high tax rates (a combined 50 percent for some businesses) are driving up the costs of marijuana products, which in turn are being passed onto consumers, a growing number of whom find it preferable to frequent the plentiful (and much cheaper) black market vendors.

The plan proposed by the state’s Legislative Analyst’s Office would:

• Eliminate existing marijuana business taxes (including the 15 percent across-the-board tax paid by customers when they buy).
• Replace this with a tiered tax system wherein taxes would range on the basis of the potency or the type of product itself.

This would effective address a few different issues, they say. First, it would help reduce the potential for consumers to get their hands on dangerous, high-potency pot products. Secondly, it would ease the tax burdens of retailers primarily selling low-to-moderate THC potency products. Once companies aren’t so squeezed financially, they’ll be better able to compete with the unregulated black market.

The proposal was lauded by the California Cannabis Industry Association, a group that has spent several years trying to compel state lawmakers to move away from the weight-based taxation rates for marijuana farmers. Comprehensive cannabis tax reform, the association said in a prepared statement, would give consumers incentive to buy marijuana products that are regulated. It would also make it easier for companies to be compliant and ease the burden on regulators and administrators. Ultimately, the group said this should bolster and stabilize the revenue the state takes in from cannabis taxes.

Whether the state takes this advice remains to be seen. For now at least, regulators seem to be doing the very opposite. In November, cannabis companies throughout California were shocked when the state announced it was introducing a marijuana business tax INCREASE. Our Los Angeles marijuana tax lawyers are encouraged that at least some state lawmakers are speaking out to say that simplification and reduction of taxes is an imperative if the state wants legal purveyors of the plant to survive, let alone thrive. At least one bill is expected to be on the table next year to do just that, at least temporarily.

However, California’s Chief of the Bureau of Cannabis Control, speaking recently at an industry conference, said legal cannabis companies can expect somewhat of a bumpy ride for a while, highlighting the scourge of unlawful dispensaries, the fallout of the national vaping crisis and mass industry layoffs.

But streamlining taxation of pot products seems an important piece of the puzzle if state officials truly want to see this reach a positive conclusion for the state, businesses and consumers. As it stands, the fact that local governments can add their own taxes arbitrarily has resulted in a widely varying patchwork of tax rates for businesses, creating additional opportunity for black market growers, producers and retailers.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 949-375-4734.

Additional Resources:

California analysts urge marijuana tax based on potency, Dec. 17, 2019, By Michael R. Blood, Associated Press