It is no secret that taxes are a big problem for the marijuana industry. Cannabis businesses are regularly hit by exorbitantly high tax bills on the federal, state, and local level, and often marijuana excise taxes are assessed on top of the standard business taxes. Some cannabis business owners have been fighting back, but usually to no avail. On August 30th, California lawmakers offered cannabis businesses a sliver of hope by passing Assembly Bill 567, which, if approved, would create a tax amnesty program for certain California collectives under the Medical Cannabis Tax Amnesty Act.
The Board of Equalization (BOE) is responsible for collecting sales tax owed on any sales of products to consumers in the state of California. Generally, sales of tangible personal property are taxable unless an exemption applies. The BOE has repeatedly declared that medical cannabis and cannabis-related products are included in tangible personal property subject to state sales taxes. In fact, the BOE has provided a guide for marijuana businesses on its website that explains how sales tax applies specifically to dispensaries and growers in California.
Still, the legislature admits in the bill that “the uncertainty created by state and federal differences has left medical cannabis-related businesses with the fear that compliance with state tax laws could lead to federal prosecution. Thus, many of these businesses have been noncompliant since their inception, and would owe massive penalties and interest if they were to come into compliance.”
According to BOE estimates, there are currently 1,623 medical marijuana dispensaries operating in California and two-thirds of cannabis businesses have not paid taxes due on their sales of marijuana to consumers. This estimate is based on the rate of unpaid taxes in other legal cannabis states, such as Colorado. In total, that would mean that California cannabis retailers owe the state about $106 million. Though the amnesty program would not forgive this debt in its entirety (and don’t hold your breath that the state would ever do this), the program would waive all penalties applied to any assessed tax liabilities.
At a penalty rate of 25 to 50 percent of the total tax liability, penalties can add up quickly, especially if a business hasn’t paid its taxes over the course of several years. The amnesty program would take place over a six-month period in late 2017, from July 1, 2017 to December 31, 2017. Tax liabilities due before January 1, 2015 would qualify for amnesty under the program. Even with the penalty waiver, the BOE estimates that it will be able to collect between $27.4 million and $54.7 million in past due taxes.
In addition to the penalty waiver, the bill would also provide amnesty from criminal prosecution for tax evasion to any business that comes forward and pays its taxes (and interest) owed. However, for the businesses that do not step forward and take advantage of the amnesty program, the bill requires the Department of Consumer Affairs refuse to issue them a state cannabis license or suspend their existing state-issued license. These “deadbeat” businesses, as BOE chairman Jerome Horton called them, could also be facing “audits, investigations, prosecutions and arrests.”
The bill is currently in the hands of California Governor Jerry Brown, who will have the option either to approve or deny the program. For any California cannabis business owners who know they owe sales tax, this is an issue you will want to follow closely. But even outside the implications for delinquent taxpayers, this move by California lawmakers is a further indication that they are taking the tax matter seriously and businesses that do not pay their taxes will not be receiving a cannabis license from the state once new statewide regulations take over.
EDITOR’S NOTE: Speaking of California cannabis, three of our California cannabis lawyers (Tiffany Wu, Alison Malsbury and Hilary Bricken) will be putting on a FREE webinar this Wednesday (September 14), moderated by our lead cannabis corporate lawyer (Robert McVay). This webinar will focus on what you should be doing now to prepare your existing or future cannabis business for California’s soon to be legalized landscape. Go here on Eventbrite to sign up to attend.Get your free tickets now and attend on Wednesday!