In 2022, Governor Newsom signed Assembly Bill No. 195 into law which made some significant changes to California’s cannabis taxes. This post focuses on (1) new requirements for retailers effective January 1, 2023, (2) excise tax credits for social equity applicants; (3) new enforcement mechanisms; and (4) changes to how cannabis businesses pay their excise and sales and use taxes.
Starting on January 1, 2023 retailers will be required to collect 15% of gross receipts of any retail sale as an excise tax. Every quarter, the retailer must pay the excise taxes to the state. Retailers will also be required to provide receipts to customers that separately state the amount of the excise tax.
Retailers must obtain a cannabis tax permit from the CDTFA , and the CDTFA will now have authority to (i) request monthly reports of the retailer’s inventory, purchases, and sales, and (ii) to inspect the books and records of the licensee to ensure compliance with the new excise tax. The CDTFA will also have access to METRC records to ensure that the proper amount of excise tax is being remitted back to the state.
To help phase in the changes to the excise tax program, retailers may reduce the amount of excise tax owed to the state for Q1 of 2023 by any amounts already paid to Distributors for cannabis goods sold between January 1, 2023 and April 1, 2023. This transitional period whereby retailers can offset the excise tax owed to the state ends on April 1, 2023. On and after April 1, 2023, retailers will be responsible for collecting and remitting excise tax.
Below is a chart that helps visualize the transition timeline:
|If the retail sale of cannabis occurred:
|Excise tax is to be collected by:
|Before January 1, 2023
|Distributor from the retailer
|Between January 1, and April 1, 2023
|Retailer, from the customer
(But if the Retailer already paid the Distributor for excise taxes on the products sold, then the Retailer can reduce the amount they owe the state for the excise tax.)
|After April 1, 2023
|Retailer from the customer
The new law provides excise tax credit opportunities to social equity businesses. If a retailer is eligible for a fee waiver from a Department of Cannabis Control as a qualified equity applicant, then the retailer may retain vender compensation in an amount equal to 20% of the cannabis excise tax they collect until December 31, 2025. To retain vender compensation, a licensed retailer has to submit an application and wait for CDTFA to confirm in writing that the retailer meets the eligibility requirements.
The new law sets up various enforcement mechanisms to ensure the prompt collection and payment of excise tax to the state.
Retailers will be required to obtain a Cannabis Tax Permit from the CDTFA and failure to obtain a cannabis tax permit from the CDTFA is considered a misdemeanor.
Failure to remit excise tax to the state will result in a penalty of half the amount not paid.
Additionally, CDTFA can pursue criminal charges, as well as penalties against ANYONE who does not comply with the excise tax requirements, which includes illicit operators. The CDTFA may determine the amount owed using any information available to them, as well as impose a 25% penalty against licensed persons engaging in unlicensed commercial cannabis activity.
Most importantly, the new changes to cannabis tax laws impose personal liability upon the owners of the cannabis business (those that have control over the business and make the decisions to pay taxes) for any unpaid taxes that are owed to the state. This means that the CDTFA can pierce the corporate veil and go after the personal assets of the owners of the business for any unpaid taxes. Accordingly, failure to pay the excise tax to the state puts the cannabis business at risk and exposes the owners of the cannabis business to personal liability.
CDTFA requires licensees with an estimated monthly tax liability over $20,000 for cannabis tax accounts or $10,000 for sales and use tax accounts, to pay their taxes through electronic funds transfer (“EFT”). Failure to pay by EFT will result in a 10% penalty of the amount owed. Additionally, if the licensee is required to make EFT payments, and it makes a pre-payment without using EFT, a 6% penalty will be assessed.
Notwithstanding the foregoing, if the licensee receives approval from CDTFA to pay in cash the licensee will not be subject to the EFT requirement.
If you have any questions about any of the above, please feel free to contact Katchko, Vitiello & Karikomi, PC for more information and a member of the team will be happy to assist.
By James Dewey, February 14, 2023.