As California’s legal recreational marijuana market enters its third year, industry participants can expect stricter tax laws in the near future. With a growing number of audits already underway, there are fears that some marijuana businesses are drowning in back tax payments – some of which can run into the tens of millions of dollars.
The three-year milestone is important because it is a deadline for California Department of Revenue auditors to review companies’ tax returns.
Prior to 2018, marijuana businesses were already required to pay sales tax. Our Los Angeles cannabis lawyers know firsthand that many are regularly audited by the state. In 2018, when the state first allowed the legal sale of recreational cannabis, they had to pay two new taxes – a cultivation tax and a 15% excise tax.
As some auditors have pointed out, these audits can be very beneficial to the State of California, so it should not come as a surprise that they are starting. The state also exercises more general oversight over businesses, so there’s no reason to list marijuana businesses separately. However, due to the high tax rates and significant penalties associated with marijuana sales, some marijuana businesses can run into trouble if things go wrong.
An auditor quoted by Marijuana Business Daily suggested that state auditors would have no problem identifying tax violations. By some estimates, the state will have to pay tens, if not hundreds, of millions of dollars in unpaid marijuana taxes, including sales tax, excise tax and marijuana cultivation taxes. In addition, this is the first fiscal year in which the state is funding both crop and excise audits, and the agency is hiring more auditors. An estimated 60 inspectors are currently engaged in tax enforcement of tobacco and cannabis businesses. In the words of the Navy: It’s gonna be a turkey fight.
A spokesperson for the CDTFA said there are ongoing sales tax compliance issues, so many have had to deal with a sales tax increase. This leads to the study of cannabis and excise taxes.
But while the number of audits will certainly increase, it is very likely that the state will be more aggressive in enforcing existing obligations that do not require audits (which is much cheaper/faster for the state).
It is unclear how many marijuana businesses have been audited, but even those that have not yet been audited should consult a tax professional and a cannabis attorney as a precaution. This is all the more true because some companies are experiencing headaches from the COVID burden. Last year, for example, the CDTFA announced that sales tax collections would be delayed – a way to give businesses a break while they fight the coronavirus. Some companies have used this agency, but ran into a wall with the agency’s processing department and then imposed heavy fines for late payment.
Our law firm has heard complaints that the agency is threatening to revoke the licenses of cannabis businesses if back payments are not made. The CDTFA sticks to its sole purpose: to ensure that taxpayers pay only what they owe – no more and no less.
Complaints about possible violations can be filed with the Office of the Taxpayer Advocate. An attorney can file this complaint on your behalf and help you decide how to proceed.
The Los Angeles-based CANNABIS LAW group represents manufacturers, dispensaries, suppliers, patients, physicians and individuals facing marijuana-related charges. Call us at 714-937-2050.
Additional resources :
California marijuana companies face new state tax audits and millions in unpaid taxes, Feb. 25, 2021, Marijuana Business Daily
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