Category: aBIZinaBOX Inc. and Jordan S. Zoot

The key to the long-term success of every medical or adult-use cannabis business in California will be found in the management of tax liabilities.

The reason we have chosen to frame the discussion by reference to the rules that govern Circular 230 Practitioners is that we seem to be getting a disproportionate number of questions about “is it ok to…” and finish the sentence with myriad forms of conduct that could land a business owner in prison and be a death penalty for a professional license.

Would someone please explain to me why the information in the release wasn’t produced during the process of producing five hundred pages of regulations. Let’s start with a very simple thought… do CalCannabis and CDPH’s Manufactured Cannabis Safety Board have the same views on these issues a BCC? 

Dispensary Taxes –  Post-Harborside – there is a silver lining for some well-advised cannabis dispensaries in the black-cloud Judge Mark V. Holmes hung out over the cannabis industry in his two 2018 Harborside opinions.  The two opinions are; 151 TC 11  and TC Memo 2018-208  . [See Harborside – Further Reflections, Harborside Redux  and Harborside Beats Penalties.]

CPA Firm – Cannabis Perception – just when you think the world has changed, it can still kick you in the chops. We lost a client this weekend specifically due to concerns of investor perception of our being involved with the legal cannabis industry in California.

Numerous attempts to introduce legislation to relax the provisions that placed cannabis on Schedule I of the Controlled Substances Act [“CSA”] have been made beginning in 1981[i]. Similar bills have been introduced perennially since then, most recently by Rep. H. Morgan Griffith [R-VA] (H.R. 4498). All have died in committee. In 2011, Reps. Ron Paul (R-TX) and Barney Frank (D-MA) introduced a bill to remove marijuana from the schedules entirely (“de-scheduling”). This Bill also died in committee[ii].

We turn our attention to the selection of mentors and professionals who we can rely on to seek to replace the function of the partners in my Andersen office in New York.We have chosen to approach the task by offering our view of representative examples of four group of Circular 230 Tax Practitioners whom we have observed either with clients, in webinars or on the web.

CCIA Policy Conference What’s Missing? – On Wednesday, March 20, 2019, the California Cannabis Industry Association (“CCIA”) will host its 4th Annual Policy Conference in Sacramento, California.  The conference has a notable line-up of representatives from the legislative and administrative branches of California government, including Nicole Elliott, Senior Advisor on Cannabis, Governor’s Office of Business and Economic Development; Hon. Wendy Carrillo, Assembly, District 51; Hon. Reggie Jones-Sawyer, Assembly, District 59; Hon. Scott Wiener, Senator, District 11; Hon. Scott Wilk, Senator, District 21; Hon. Ricardo Lara, Insurance Commissioner; Lori Ajax, Chief, Bureau of Cannabis Control; Christina Dempsey, Manager, California Department of Public Health; Nicolas Maduros, Director, California Department of Tax and Fee Administration; and Richard Parrott, Director,  California Department of Food and Agriculture.

Back to the BRC – while 2015 seems like ancient history, however, that was when then Lt. Gov. Gavin Newsome’s Blue Ribbon Commission published “Pathways Report – Policy Options For Regulating Marijuana in California” which contained a detailed analysis of the policy choices that were to be considered in what gave California Proposition 64 and subsequently SB 94 which led to the system of regulation for the legal cannabis industry that exists in California today.

Allocation – Costs – Gross Profit – Taxes – on February 28, 2019, we published [Dispensaries Need Accurate Receipts] to describe the financial records a dispensary must prepare and maintain and the receipts it must issue receipts to its customers in order to establish it complied with its tax responsibilities.  We published our [Which Set of Books?] note to provide every California dispensary with a guide for the preparation and maintenance of the financial records a dispensary needs to have in order to be prepared for the inevitable tax audit.

We are publishing this note to describe the how quickly, efficiently and accurately the California Department of Tax and Fee Administration (“CDTFA”) will be able to select cannabis businesses for compliance audits relating to CCT and CET.  Many millions of dollars are missing from California’s coffers.  We have described in other notes some of the reasons.  CDTFA is under substantial pressure to collect the missing revenue or to explain that all of the tax revenue that should have been collected by California has in fact been collected.  Anyone with minimal knowledge relating to California’s cannabis industry knows the latter is not true.  Consequently, audits are coming, and they are coming quickly.

CalCannabis Solves Representation Issue – approximately thirteen months ago [1], we discovered that agencies in California that regulate the cannabis industry [“CDFA-CalCannabis“, “CDPH-MCSB“, and “BCC“, collectively the “Regulators”] did not have a procedure for representation of applicants and licensees by counsel or other qualified representatives. We wrote a letter to the California Attorney the General Counsel for each of the Regulators. The response we received from CDPH was……

CBD, THC – Alternative Delivery – we have spoken to a number of start-up businesses about the potential medical uses of cannabis in myriad from. Perhaps the most exciting advance doesn’t involve the cannabis plant, rather it involves “metered dosing” or the ability to provide a delivery system of the active ingredients in cannabis in a specified quantity over a specified time period [stated another way, “how much – how fast”]. The development of an accurate and reliable delivery vector is a critical step for cannabis components to be accepted by the wider community as “medicine”.

We have discussed in other Posts our concerns about inadequacies in the information the California Department of Tax and Fee Administration [“CDTFA”] has distributed relating to the Cannabis Excise Tax [“CET”] and Cannabis Cultivation Tax [“CCT”] as well as inadequacies in the tax return CDTFA adopted[1]. We have also regularly submitted questions to CDTFA. Frequently we have suggested answers to our questions. We are publishing this Post as the foundation for a series of at least three Posts in which we will suggest best practices in the financial record-keeping for cultivators, distributors, and dispensaries[2]. In this Post we are making suggestions to improve and streamline the tax reporting and collection process for the benefit of CDTFA as well as California’s cannabis industry.

We are again writing on the topic of representation because the failure the above referenced agencies to take into account the importance of qualified representation is one of the reasons California’s roll-out of the regulation of the cannabis industry has been described as maladroit. We are not qualified to make recommendations regarding the qualifications BCC, CDPH and CDFA should establish for representatives, although we note that duly licensed attorneys have the authority as a matter of law to represent clients before administrative agencies.

“We need to first acknowledge that we understand CDTFA was tasked with the implementation of the statutory language the California Legislature worked into SB 94. CDTFA has accomplished a great deal with the language it inherited. Unfortunately, there are some gaping holes in the statutory language, including some issues that CDTFA may not be able to remedy through the promulgation of regulations. Some issues may require a legislative fix.”

Guidance – Micro-business – Multi-License – CDTFA has published a new notice that provides new guidance to the holders of multiple cannabis licenses with respect to the calculation of Cannabis Excise Tax [CET”]. We will have further commentary after we have the opportunity to review the notice carefully. However, we do note that they have not addressed their view of the impact on Cannabis Cooperative Associations [“CCA’s] in the notice. We add that we observed that the item was labeled under a new term “Tax Fact” as distinct from a “Special Notice” and will inquire as to the difference between the two.

We decided to publish our thoughts as a consequence of Jeff Daniels article on AB 286, “California Proposes Slashing Cannabis Taxes to Help Regulated Industry Compete With Black Market.” We will not “shoot the messenger.” Jeff Daniels appears to have accurately reported the information he received.