Recently, the Internal Revenue Service (IRS) issued tips for cannabis compliance. The federal agency noted that while it’s outside of the agency’s power to resolve many of the unique business predicaments that arise from federal prohibition, it wants to help support cannabis companies in becoming tax compliant. Even though marijuana continues to be classified as a Schedule I narcotic by federal authorities, these businesses are still required to shell out federal taxes.

In September, the agency released tips for tax compliance for cannabis businesses. Among those:

• Know your investors. Thousands of people are fighting to get into the industry, but working with investors may have some tax implications and repercussions for cannabis companies. Unregistered and “silent” financing and ownership arrangements, with investors sometimes being referred to as “beneficial owners,” get the benefits of ownership but avoid having the property title or activity in their name. That creates numerous challenges for the IRS, and it may result in issues for proper tax filing and accurate reporting of gross receipts. Also, cannabis business owners should be wary of nefarious investors who attempt to put their funds into a business like this, but jeopardize the entire operation with allegations of money laundering.
• Make sure you’re licensed. You can’t get federal licensing, but make sure you have proper state and local licensing for your operation.
• Timely file and pay your taxes. Even if your business operates with cash, you’re still responsible to file and pay your taxes on time. IRS code doesn’t parse out which income stems from legal vs. illegal sources. All income must be reported. Note that because you’re dealing with a Schedule I narcotic, you must abide by Section 280E – even if your business is 100 percent state legal. That section doesn’t bar you from reducing gross receipts by properly calculating the cost of goods sold to ascertain gross income, though you may not be able to deduct things like selling or advertising expenses. There aren’t any exemptions from employment tax. It may be beneficial to make quarterly payments. Late payments can result in interest and penalties. Non-filers are a priority enforcement for the IRS. So too are those who use cryptocurrency; it’s imperative to use a reputable exchanger.
• Report cash transactions. Your business may not use traditional banking, but you still need to report all cash transactions. Any company receiving $10,000 or more in cash (which is most California marijuana businesses) need to file Form 8300 within 15 days of receiving that payment. Failure to be diligent about this can cause major headaches for your business.
• Maintain good records. This is mission critical for a cannabis business. Keeping meticulous records – all receipts, canceled checks, any shred of documentation that can support income, deduction, or credit should be kept in some form. Keep these records even for expenses that aren’t legally deductible because it’s going to make it easier to prepare your returns and also answer a question quickly if one arises.

Despite the challenges, the IRS hopes to keep audits to a minimum by promoting voluntary compliance wherever possible, addressing unintentional non-compliance with proactive education. Companies that want to be proactive need to be working with an attorney and a qualified accountant.

Freeing up banks to work with state legal cannabis companies would obviously make working with the IRS (and so much more) a great deal easier. Federal regulators have repeatedly chastised Congress for failing to move forward on marijuana reform. The House of Representatives has five times now passed the Safe and Fair Enforcement (SAFE) Banking Act, but it’s been shot down each time by the Senate. Former U.S. Treasury Secretary Steve Mnuchin repeatedly pushed this issue, saying the existing policy has resulted in substantial problems for the IRS and financial regulators.

Some have gone so far as to call this a public safety issue, given the fact that marijuana businesses that deal almost solely in cash continue to be high-crime targets. Despite this, a recent defense bill that was passed failed to include cannabis banking protections – despite bicameral negotiations.

If you are a marijuana business in Southern California concerned about regulatory and tax compliance, our dedicated marijuana lawyers can help.

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:

Providing Resources to Help Cannabis Business Owners Successfully Navigate Unique Tax Responsibilities, Sept. 27, 2021, IRS

The California Cannabis Reform Project and Weed for Warriors organizations are working together to hammer out a ballot initiative that would, among other things, deprive local governments of the power to approve or deny licenses for cannabis business operators. They allege local governments have failed to wield that power effectively, in turn causing more harm than good, giving illegal operators a leg-up while making it harder for many law-abiding consumers in massive swaths of the state to obtain safe, legal cannabis.

As noted by analysis in the New York Times, roughly 8 in 10 of the state’s local governments have outlawed the sale of marijuana within their borders, effectively creating marijuana retail deserts. Local governments’ loss of control is effectively evidenced by the huge – and growing – illicit marijuana market.

Whether the ballot initiative has any hope of passing is questionable. As a Los Angeles attorney practicing cannabis law, I think it’s a fair assumption that local governments aren’t likely to cede any of the control they currently hold. A big part of the battle to pass Proposition 64 was gaining local government buy-in. Assurance of local control, while controversial, made it more digestible and was one of the only reasons some cities didn’t fight it harder.

However, five years in, it’s become clear that reform is necessary if we want to wrest control from the black market. Addressing issues of taxes and local control is going to be critical.

Organizations that represent cities so far haven’t commented on the effort, saying they don’t offer opinions on proposed ballot measures that have not officially qualified. Still, blanket statements were issued to the effect that local control of cannabis issues is something they still staunchly support.

Another element to the proposed ballot measure would be to restructure California cannabis taxes. The proposal would eliminate the cultivation tax, which is $9.65 per ounce of dry cannabis flower, $2.87 per ounce of dry cannabis leaves and $1.35 per ounce of dry weight for fresh cannabis plants. Further, it would reduce the existing excise tax, currently 15 percent of the average market price, to 5 percent. Further, it would bar local government entities from imposing any cannabis taxes. To compensate municipalities, it would grant local governments 1/5 of the total revenue of state excise taxes.

The effort of the cannabis activists is still in the early stages. Just getting the question in front of voters is estimated to cost $6 million on the low-side. The current planning phase involves discussions with lawmakers, lawyers and industry insiders and weighing whether such a measure would be best suited for presentation next year or in 2024.

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:

Should California reform its marijuana laws? Why advocates want cannabis back on the ballot, April 20, 2021, By Andrew Sheeler, Sacramento Bee

More Blog Entries:

California Cannabis Companies Should Expect More Audits, Taxes, March 30, 2021, Los Angeles Cannabis Lawyer Blog

Now, Fontana’s de facto ban on home cannabis grow operations has been nixed in a San Bernardino Superior Court ruling, finding the city’s rule’s to be “excessive,” paving the way for individuals to grow and possess amounts of the drug that are more in line with state provisions, which are far more lax.

This is likely to prompt other municipalities to look carefully at their own policies if they are tighter than provisions of state law.

Fontana Marijuana Lawyers Outline Stringent City Ordinance

The city ordinance in Fontana was strict, effectively amounting to a de facto ban on individuals growing even small amounts of the drug in their homes for personal use.

The ordinance mandated that all residents who wanted to grow marijuana in the city had to first register with the city. It also required they undergo a criminal background check (blocking any who owed fees to the city), open their home to city officials to undergo an inspection and then on top of that pay a substantial fee to do so. Furthermore, it excluded a number of individuals, such as those with prior convictions, from obtaining a permit. Furthermore, the ordinance made it illegal to grow six plants at home absent a permit – effectively making illegal the very thing that Prop. 64 had allowed to be legal.

Court Strikes Down Most of Fontana’s Marijuana Rules

Plaintiff in this case was a man who had been a medical marijuana patient for years, and all he wanted was to grow marijuana for his own use inside his home. Fontana’s marijuana ordinance, he argued, was far too restrictive to be “reasonable” as is required under Prop. 64, the state law.

Trial court judge agreed, echoing the sentiments of the Drug Policy Alliance, which was that the city’s ordinance was essentially designed to deter residents from engaging in conduct that is legal per state law. Furthermore, it effectively prejudiced less wealthy occupants of the city, who would have a difficult time paying the hefty costs necessary to comply with the city’s inspection rules. It’s a legal victory that could well impact cannabis consumers across California, where many communities have sought to impose restrictions that are altogether unfair and effectively criminalized even those who sought to grow small amounts of the drug for their own personal use. Fontana marijuana lawyers know this was a closely-watched case because it was one of the first legal tests regarding the boundaries of how far cities could go when regulating resident’s rights to use and grow recreational marijuana since the state first passed the law in 2016.

Other communities with restrictive marijuana policies include San Bernardino, Colton, Rancho Palos Verdes, La Canada Flintridge and others.

Prop. 64 is quite clear in its directive allowing those over 21 to grow up to six plants per household, so long as those plants are secure and not visible from the street. Cities cannot restrict that right – something now this court ruling further affirms.

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

Additional Resources:

Fontana loses marijuana lawsuit; other cities might have to ease rules too, Nov. 9, 2018, By Brooke Staggs, Orange County Register

More Blog Entries:

Catching a Plane? Be Wary With Weed, California Marijuana Attorneys Advise, Nov. 6, 2018, Fontana Marijuana Attorney Blog