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Thursday, September 21, 2023

Cannabis Taxes in California: Revolution vs. Reform

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Cannabis taxes in California continue to hurt the industry. Cannabis taxes in California are undoubtedly high (though not the highest in the country). The truth is that this is not going to change any time soon.

A few weeks ago I had an interview with KCRW As operators bemoan the current tax status of cannabis in California. Their complaints are warranted given the massive expenses of owning and operating a cannabis business in the Golden State, as well as the inability to take normal business deductions under IRC 280E (which makes the effective corporate income tax rate high).

The root of the problem

I totally understand the pain of cannabis taxes in California. However, operators must understand that there is no department of cannabis control management (“DCCnor the California Department of Taxes and Fees (“CDTFAThey can do a lot about it on their own. Agencies don’t make laws and don’t have the power to change them. They work within legal boundaries created by the initiatives of voters or state legislators. Under Prop .64, California’s Adult Cannabis Use Act, it would take a two-thirds majority vote in every assembly room to actually change the cannabis tax laws.

In other words, the tax guidance here is set by Primary law. It is not specified by the regulations. And while the DCC and CDTFA can exercise some control through their interpretations of the laws, they cannot get too creative under the State Administrative Procedure Act.

Laws are usually fixed unless the vote required to change the law can be obtained. In California, this vote is either by the assembly or the people. What is sometimes lost on cannabis business operators is that these taxes have been written Prop .64 (And again in the Medical Cannabis Regulation and Safety and Adult Use of Cannabis Act (“MAUCRSA”)) in order to win votes for this measure — especially from conservative voters.

In addition, cannabis will always face a higher “sin tax” to offset the social costs of legalization. From a public policy perspective, governments don’t really want to incentivize citizens to use things like alcohol, tobacco, etc. by making things too cheap. If operators want lower taxes from the start, they should press initiative writers and lawmakers off the bat regarding the unintended consequences of some of that tax language.

tax revolution

I was transferred to article About plans by some operators to forgo mandatory cannabis tax payments in the new year due to the CDTFA’s announcement of higher taxes due to inflation. These operators have pledged to maintain the line unless and until the state takes steps to lower tax rates.

Non-payers should understand that the CDTFA has no choice in relation to these tax increases; It is part of the Agency’s legal obligations under .64 View and MAUCRSA. At most, the CDTFA could have tampered with the definition of “inflation” because the term is not fully defined in law. But she cannot ignore state law.

Why the tax revolution won’t work

My reaction to this de facto “cannabis tax rebellion” is that it’s a bad idea legally, for a number of reasons.

First of all, if you are going to challenge a tax, you must pay it first (and then appeal if you have the reasons) in order to be on the offensive with the regulators.

Second, failure to pay will likely cause more pain in California as a 50% fine will be charged for late or non-payment. Per CDTFA:

The Cannabis Tax Act imposes a mandatory 50 percent penalty for failure to pay the amount of the cultivation tax or cannabis selective tax due. If you fail to pay cannabis taxes by your due date, you may be exempted from the 50 percent penalty if we find that your failure to pay in time was due to cause and circumstances beyond your control, and occurred despite the normal exercise of care and the absence of willful negligence. To request an exemption from the mandatory 50 percent sentence, you must submit a statement to the CDTFA, signed under penalty of perjury, which states the facts on which your request for commutation is based. You can request a reduced sentence by visiting our website Online services page, and follow the instructions under the Request Relief tab.

Operators may rightly believe that taxes are too high (to the point of being unable to compete with the illegal market), but this situation will not be sufficient reasons to avoid paying successfully.

Third, failure to pay taxes when they fall due in California may suspend your ability to do business in the state.

Fourth, the DCC will have the right to revoke the license of those companies that refuse to pay their mandatory state taxes.

Fifth, other operators will pay those taxes, but they will attack the problem through pressure channels to get the change legally, which is probably the best way forward albeit in the most financially stringent way.

Sixth, since distributors are in trouble for shifting these taxes to the state, I can’t really see a truly compliant distributor taking risks with CDTFA along with operators who refuse to pay (regardless of where those operators stash those dollars in the meantime).

Moving towards reform

None of this means that we support excessive cannabis taxes in California. We do not. California cannabis taxes should be lowered (and we all know they will never be eliminated; every federal cannabis bill also includes a federal tax, FYI). But refusing to pay is probably not the most effective way forward for real reform.

Operators will ultimately be better off simply paying and then resuming while pressing the country for change. Operators should also appeal to cities to reduce or suspend local taxes. This would be another way to feel some relief (see San Francisco as an example).

Grow guide for marijuana beginners.
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