This is a guest post by tax lawyer, James Hunt.
The Washington Liquor Control Board (“LCB”) issued 67 penalties and warnings between May to Mid-October to cannabis businesses. Of the 67 notices, about two-thirds (66%) were in regard to taxes. Because the LCB is responsible for administering the Marijuana Excise Tax, I assume these warnings were for the excise tax.
What about taxes administered by the Washington Department of Revenue (“the Department”) such as the Business and Occupation tax and sales/use tax? Can a Cannabis business address a situation where taxes have not been filed and paid? What if taxes were filed but an error was discovered?
If you discover an error in the computation of your taxes, generally it is possible to file an amended return correcting the error. The benefit to a Cannabis business quickly correcting an error is usually a reduction of interest due.
What if a Cannabis business has not been filing tax returns but wants to come into compliance? Relief may be found by participating in the Voluntary Disclosure Program offered by the Department. The essence of this program is to allow businesses to come forward and pay taxes administered by the Department of Revenue (B&O Tax, Sales/Use tax) with a limited look-back period and possible penalty waiver, per the following:
- Participants’ tax liability is limited to the prior four years plus the current year.
- Up to 35% in potential penalties can be waived. Specifically,
- 5% penalty for substantial underpayment of tax
- 5% unregistered penalty
- 25% late payment of a return penalty
- The Department can summarize your unreported liability in a single assessment.
To qualify for a penalty waiver, a business must satisfy the following:
- Must not be registered with the Department. A business that is currently registered does not qualify for a Voluntary Disclosure Agreement. An already licensed Processor/Producer/Retailer should carefully analyze whether any penalty relief is available under its specific facts and circumstances;
- Has never been contacted by the Department for enforcement (e.g. audit or compliance contacts regarding registration or reporting requirements); and,
- Must not be engaged in evasion or misrepresentation in reporting tax.
It is possible to approach the DOR on an anonymous basis, however, full disclosure is required within fifteen days from the application date. You are protected from discovery by the Department for this period of time only. If no disclosure is made, the file is closed. However, a business may resubmit an application.
All applications for voluntary disclosure must be submitted online. If the Department determines that you qualify for the program, it will prepare a Voluntary Disclosure Agreement that must be signed and returned within 30 days. If you do not return the signed agreement within thirty days, you application will not be approved, the look back period could be extended and any tax and interest could be subject to penalties up to 35% of the tax due.
Once the formal agreement is signed, the next steps include:
- Completing a Business License Application
- Submitting a spreadsheet of gross income in the format specified in the agreement
- Submitting a Washington Business Activities Questionnaire
- Submitting a Confidential Tax/Email Authorization form
- Providing any additional information requested.
The Department will determine your tax liability and prepare an assessment with penalties and interest, if applicable, and you will be sent a draft for review. The assessment will then be submitted for processing and you will receive an invoice. Full payment must be received by the due date. If not, additional interest and late payment penalties will accrue. Many other states have voluntary disclosure programs similar to Washington’s.
Finally, it is a best practice to file a return even if your cannabis business has no revenue for the reporting period. Filing a zero return will run the statute of limitations for assessment purposes and is particularly helpful if penalty relief is sought at some time in the future.
The Department’s Voluntary Disclosure Program and other forms of penalty relief acknowledge that no one is perfect. However, a business that is diligent in addressing mistakes and missteps as soon as possible will, in the long run, benefit the business, business owners and ultimately its customers.