California Cannabis Tax Compliance – Let the Chaos Begin!
By Jasmine Davaloo, Esq.
Co-Founder of Taxnexus, Inc.
The Golden State forgot to put some important local jurisdictional restrictions in the current cannabis tax law, which has resulted in a frighteningly high level of concern and non-compliance from cannabis taxpayers. Let’s set the stage for how we got here.
The Voters Rule!
With the enactment of the Medicinal and Adult-Use of Cannabis Regulation and Safety Act in November 2017, California joined the other eight states and Washington DC to legalize recreational cannabis. With it, effective January 1, 2018, the state began to impose an excise tax on cannabis retailers and a cultivation tax on cannabis cultivators and manufacturers.
The new law also implements a whole host of regulations related to cannabis taxes, such as record-keeping and reporting.
Below is our illustration of California’s complicated cannabis tax regimen.
No Local Restrictions = High Taxes
Further burdening and complicating compliance by taxpayers, at least 67 of cities and counties in California have adopted local cannabis taxes that vary widely both in structure and rate.[note]Footnote Fitch: Cannabis Taxes Set to Rise with Votes in Seven California Cities. (2017, November 8). Retrieved April 10, 2018, from FitchRatings: https://www.fitchratings.com/site/pr/10010624 [/note] This number continues to grow.
Not only is California’s multi-layered cannabis tax structure one of the more complex cannabis tax systems in the country, it is also one of the highest in cannabis tax rates.
Estimates of the cumulative statewide tax burden for recreational use is as high as 45%.[note]Footnote Fitch: Cannabis Taxes Set to Rise with Votes in Seven California Cities. (2017, November 8). Retrieved April 10, 2018, from FitchRatings: https://www.fitchratings.com/site/pr/10010624 [/note] This includes an excise tax of 15%, a cultivation tax, the state’s average sales tax of 8%, and additional local (county/district/city) cannabis business taxes that range from 5% to 10.25%.
Show Us The Money
While projected cannabis excise tax revenue, such as California’s projection of $175 million in FY 2017-18 and $643 million in FY 2018-19[note]Footnote Edmund G. Brown, Jr., Governor of California, Governor’s Budget Summary 2018-2019 Retrieved April 10, 2018, from http://www.ebudget.ca.gov/FullBudgetSummary.pdf[/note], has played a significant role in the push to legalize cannabis in participating states, there is great concern about the compounding tax rates and their potential impacts on the legal cannabis market.
Several local jurisdictions, such as the city of Berkeley, have already reduced their cannabis business tax rates to alleviate some of the tax burdens on cannabis businesses. In February 2018, even a bipartisan state bill (AB 3157) was introduced that, if successful, would suspend the state cultivation tax until June 1, 2021 and temporarily reduce the state excise tax from 15% to 11% until June 1, 2021.
Hard to Keep Up!
The numerous layers of state and local cannabis tax laws have proven burdensome to cannabis taxpayers not only with the high tax rates imposed, but also with the consequences of non-compliance. This affects all parties involved–the regulators, the taxpaying cannabis businesses, and the cannabis consumers–and thus, destabilizes the prospects of a successful legal cannabis industry.
Running a business in the highly regulated cannabis industry is already a difficult feat. Cannabis taxpayers, such as dispensaries, are finding it hard to stay up-to-date with the new and evolving cannabis tax rates and methods of calculation.
Non-Compliance Rears Its Ugly Head
Because of the complexity, California’s thousands of cannabis taxpayers are failing to properly apply the correct tax rates to each cannabis-related product at the point of sale, causing a host of problems:
- The cannabis consumer is paying incorrect amounts in taxes (in most cases more than they are legally required to), which will further discourage consumers to partake in the legal cannabis market and to resort to the black market for greater affordability;
- The taxpaying cannabis business is either taxing consumers at rates higher than legally permitted in violation of the law, or too little, which will hurt its bottom-line when it pays its excise taxes to its distributors; and
- The taxing authorities are not collecting the entire amount in tax revenues as expected to sustain the legal cannabis industry and fund the various programs as intended.
Lots of Work Ahead
The longevity and success of this emerging industry requires a set standard for tax compliance. Cannabis taxpayers (retailers, cultivators, manufacturers, distributors, delivery businesses, and others) need an easy and reliable system by which they apply the correct multi-layered tax rates for all applicable jurisdictions to their products, use the correct method of tax computation, meet all related record-keeping requirements, timely and accurately file their cannabis excise and sales tax returns with all applicable state and local taxing authorities, and remit the correct tax amounts for full compliance.
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By Jasmine Davaloo, Esq.
Co-Founder of Taxnexus, Inc.
(April 11, 2018)
Taxnexus Cloud makes tax compliance easy for the cannabis taxpayer. As the premier global cannabis tax management solution, Taxnexus Situs, Taxnexus Base, and Taxnexus Return are bringing order to the chaos of cannabis tax regulations. For more information about Taxnexus Cloud visit the Taxnexus website at https://taxnexus.net.