Major Areas of Tax

Tax

In the Cannabis industry taxes are very important at local, state, and federal levels. Currently, all references to local and state taxes are based upon the state of California rules. We provide tax consulting, preparation, and filing of all levels of tax.

Local

Every locality that allows for cannabis commerce expects cannabis to provide strong tax revenues. To start the tax process, each locality must establish the rules for obtaining a local business license and method of taxation. Each locality is different. As an example, the City of Los Angeles has a limit as to the licenses it will issue and the associated timetables. It collects its local tax on a monthly basis starting July 1. A cannabis business cannot get a state license until the local license is issued.

State

The state of California has several licenses, but as noted above, the cannabis business must have a local license in order to get a state license. 

  • Cultivation excise tax is paid by the grower when product is sold and remitted to the state by the distributor. Currently, the tax is remitted quarterly.
  • Distribution excise tax is paid by the retailer purchasing the product and remitted to the state by the distributor. Currently, the tax is remitted quarterly.
  • At this writing, sales tax is the same for cannabis as it is for non-cannabis industries. The sales tax is paid by the consumer/purchaser and remitted by the retailer.

Income tax

State income tax in California has special issues regarding the Cannabis Industry. 

Federal income tax is a very delicate situation. Due to the scheduling of cannabis as a Schedule One drug, IRS Code Section 280e applies. This code section, 280e, greatly restricts the deductibility of many business expenses.

We work with our clients to achieve the best outcomes at both the state and federal level.

Major Areas of Audit

In the Cannabis Industry, it is not a question of IF a company will be audited but WHEN. Due to the high revenue expectation and the newness of an industry that is demanding compliance, all agencies are interested in auditing tax returns.

Local

It is expected that a cannabis business in most California localities will be audited every year. One municipality has it written into the local licenses that each retail license holder will be audited two times a year. You have to be “audit-ready” at all times. All tax authorities share information. Generally, the local auditors will have all of the information of the state tax returns for the business entity, which allows for a check and balance between the state and local reporting.

State

State auditing in California is not as aggressive as the local auditing. This is not unexpected; California is still focusing on other areas of the Cannabis industry. Also, just remember that the state has several years open on its statute of limitations, so time is on the side of the state. Each cannabis business must still be “audit-ready” each quarter that they file returns.

Based on the structure of the government of California, audits will come from two departments within the CDTFA, one for sales tax and one for cultivation and distribution excise tax.

METRC

METRC is the other agency that is a factor for audits. METRC reports quantities of product moving through the cannabis system “seed-to-sale.” All cannabis companies with permanent licenses will have to report all product movement.

The additional audit concern is that METRC and CDTFA will share information and develop audit plans to identify inconsistencies.