By Hilary Bricken, Principle at Harris Bricken
California cannabis taxes continue to plague the industry. California cannabis taxes are undoubtedly high (although not the highest in the country). The truth is that that’s not changing anytime soon.
A few weeks ago, I did an interview with KCRW where operators bemoaned the current California cannabis tax situation. Their complaints are warranted given the massive expense of owning and operating a cannabis business in the Golden State, plus the inability to take normal business deductions under IRC 280E (making the effective corporate income tax rate sky high).
The Root of the Problem
I fully understand the pain caused by California cannabis taxes. However, operators should understand that neither the Department of Cannabis Control (“DCC“) nor the California Department of Tax and Fee Administration (“CDTFA“) can do much about it on their own. Agencies do not make laws and have no power to change them. They operate within a legal boundary created by voter initiatives or state lawmakers. Under Prop. 64, California’s adult use cannabis law, it would take a 2/3 majority vote in each chamber of the Assembly to actually change the cannabis tax laws.
In other words, the tax directives here are set by statute. They are not set by regulation. And although the DCC and CDTFA can exercise some control via their interpretations of the statutes, they can’t get too creative under the state’s Administrative Procedure Act.
Statutes are typically static unless the requisite vote to change the law can be had. In California, that vote is either by the Assembly or the people. What’s sometimes lost on cannabis business operators is that these taxes were written into Prop. 64 (and again in the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)) in order to win votes for the measure– especially from conservative voters.
In addition, cannabis will always face a higher “sin tax” to balance out the social costs of legalization. From a public policy perspective, governments don’t really want to incentivize citizen use of things like alcohol, tobacco, etc. by making things too cheap. If operators want lower taxes from the outset, they should be lobbying initiative writers and legislators off the bat regarding the unintended consequences of some of that tax language.
The Tax Revolt
I was quoted in an article about certain operators planning to forego the payment of their obligatory cannabis taxes in the new year due to CDTFA’s announcement that taxes are going up due to inflation. These operators have pledged to hold the line unless and until the state takes steps to lower the tax rates.
Non-payers should understand that CDTFA does not have a choice regarding these tax increases; they’re part of the agency’s statutory obligations per Prop. 64 and MAUCRSA. At most, the CDTFA could have played around with the definition of “inflation” since the term isn’t fully defined in statute. But it cannot ignore state law.
Why the Tax Revolt Won’t Work
My reaction to this de facto “cannabis tax revolt” is that it’s a bad idea legally speaking, and that’s for several reasons.
First and foremost, if you’re going to challenge the payment of a tax, you should pay it first (and then appeal it if you have the grounds) so that you’re on the offensive with regulators.
Second, failure to pay is likely to lead to even more pain in California where a 50% penalty will be attached to the late or non-payments. Per CDTFA:
The Cannabis Tax Law imposes a mandatory 50 percent penalty for failure to pay the amount of cultivation tax or cannabis excise tax due. If you fail to pay the cannabis taxes by your due date, you may be relieved of the 50 percent penalty if we find that your failure to timely pay was due to reasonable cause and circumstances beyond your control, and occurred notwithstanding the exercise of ordinary care and absence of willful neglect. To request relief of the mandatory 50 percent penalty, you must file a statement with CDTFA, signed under penalty of perjury, which states the facts upon which the request for penalty relief is based. You may request relief of penalty by visiting our Online Services page, and following the directions under the Request Relief tab.
Operators may rightly think taxes are too high (to the point of an inability to compete with the illegal market), but that position isn’t going to be sufficient grounds to successfully avoid paying.
Third, failure to pay taxes when due in California can lead to suspension of your ability to do business in the state.
Fourth, the DCC would be well within its rights to cancel the license of those businesses that refuse to pay their state-mandatory taxes.
Fifth, other operators will pay these taxes, but they’ll attack the issue through lobbying channels to lawfully achieve change, which is probably the best way to proceed albeit the financially tougher way.
And sixth, given that distributors are on the hook for remitting these taxes to the state, I cannot really see a truly compliant distributor taking the risk with CDTFA alongside operators that refuse to pay (no matter where those operators stash those dollars in the interim).
Moving Toward Reform
None of this is to say that we support California’s excessive cannabis taxes. We do not. California cannabis taxes should be lowered (and we all know that they’ll never be eliminated; every federal cannabis bill also includes a federal tax, FYI). But refusing to pay probably isn’t the most effective way to proceed to achieve real reform.
Operators would ultimately be better off just paying and then appealing while lobbying the state for change. Operators should also appeal to cities to lower or suspend local taxes. That would be another way to feel some relief (see San Francisco as an example).
Re-published with the permission of Harris Bricken and The Canna Law Blog
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