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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

Who is Inept? – We were surprised a few days ago when we discovered California Cannabis Industry Association (“CCIA”) has been suspended by the Franchise Tax Board (“FTB”).  At the moment CCIA lacks the authority to engage in business.

We stumbled across this information quite inadvertently.

We were checking to see if the National Cannabis Industry Association (“NCIA”) was authorized to engage in business in California as a foreign corporation.

  • NCIA is organized under the laws of Washington, D.C.  NCIA is registered with Colorado as a foreign corporation.
  • NCIA maintains an office in Colorado.
  • NCIA is organized and files federal income tax returns as a business league pursuant to Internal Revenue Code (“IRC”) §501(c)(6).
  • NCIA does not appear to have registered to engage in business in California as a foreign corporation.

NCIA does not appear in the registry of tax-exempt organizations maintained by the Office of the Attorney General very likely because NCIA has not registered to engage in business in California.

We have included the preceding as background because we discovered to our surprise that CCIA also filed a 2017 federal income tax return as a business league pursuant to IRC §501(c)(6).  This is part of the reason for the title of this article.

 

CCIA is organized as a Nonprofit Mutual Benefit Corporation.  This form of a nonprofit corporation is normally utilized for social welfare organizations.  Such organizations are entitled to secure exemptions from federal income tax pursuant to IRC §501(c)(4).  A Nonprofit Public Benefit Corporation is the more appropriate corporate entity for a business league under California law.

CCIA ‘s choice of a corporate entity is irrelevant at the moment as a consequence of its suspension by the Franchise Tax Board (“FTB”).  CCIA did not complete the process to establish its entitlement to an exemption from corporate tax under any provision of the California Revenue and Taxation Code (R&T”).  CCIA’s claim for exemption has been pending since 2013.  We suspect CCIA’s failure to complete its claim for exemption coupled with its filing of an income tax return as a business league may well be the reason for the FTB’s suspension.  Of course, we do not know what returns CCIA has filed with the FTB.

An organization can be exempt from income tax under California law and not be exempt under federal law, and vice-versa.  The public records of the California Secretary of State indicate that CCIA has been suspended as a corporation at the instigation of the FTB.  We do not know the reason for the suspension.  We have no idea whether, or how, or if, the suspension of CCIA can be rectified.  We also do not know what ramifications the suspension of CCIA will have for NCIA.  CCIA and NCIA appear to partner on all activities in California.  We discovered CCIA was suspended while we were trying to determine if NCIA had qualified to engage in business in California.

Who is Inept?

The information we discovered relating to CCIA and NCIA piqued our curiosity regarding the status of some other cannabis membership organizations.  We discovered four entities that appear to be minor clones of CCIA: the San Diego Cannabis Industry Association; the Mendocino Cannabis Industry Association; the Monterey County Cannabis Industry Association; and the Cannabis Industry Association of Marin County.

Each of these four entities is organized as a Nonprofit Mutual Benefit Corporation even though the activities of these organizations indicate incorporation as a Nonprofit Public Benefit Corporation would be more appropriate.  None of these entities appear to have secured California tax exemptions under either R&T §23701e or R&T §23701f.   R&T §23701e is the California exemption that is equivalent to IRC §501(c)(6).  R&T §23701f is the California equivalent to IRC §501(c)(4).  Only one of these four organizations appears to have bothered applying to the FTB for a tax exemption.

Our curiosity continued.  We looked up Humboldt County Growers Alliance (“HCGA”).  We understood HCGA was organized as the successor to California Growers Association (“CGA”) following Hezekiah Allen abrupt departure from CGA late in 2017.  HGCA operates as a cannabis trade association even though the organization is incorporated as a Nonprofit Mutual Benefit Corporation.  HCGA appears to be quite active as a trade association, but it has not applied for a tax exemption.  HCGA’s tax-exempt status in California is pending.

We looked up CGA because we found a link to CGA on the HCGA’s website.  We were surprised to find the link.  Our readers will recall Hezekiah Allen left CGA in late 2017 in order to go into business for himself.  Much to our surprise CGA appears to be alive and well.  The records of the Secretary of State indicate it is a corporation that is wholly owned by Hezekiah Allen.  CGA was formed as a Nonprofit Mutual Benefit Corporation in 2015.  It still is.  CGA started an application for a tax exemption in 2015.  The tax exemption application is pending.

Who is Inept?

CGA maintains a website.  The website indicates CGA partners with a number of cannabis trade associations.  Most of these entities appear to be incorporated as Nonprofit Mutual Benefit Corporations even though the business activities of the organizations are those of trade associations or business leagues.  None of the partners of CGA appear to have secured, or even applied for, tax exemptions under either R&T §23701e or R&T §23701f.

The most egregious examples of entity partners of CGA that have flouted California’s tax exemption laws are Southern California Coalition and California Minority Alliance.  Both are organized as IRC §501(c)(4) organizations based on the information on their respective websites.  Both of these organizations are cannabis trade associations.  They are not social welfare organizations.  Trade associations are entitled to exempt status as IRC §501(c)(6) organizations.  Social welfare organizations are entitled to exempt status as IRC §501(c)(4) organizations.   It will surprise no one who has read this far that neither of these organizations has secured a tax exemption under either R&T §23701f or R&T §23701e.

Who is Inept?

The preceding is a long explanation for the title of this article.  It is the ineptitude of the advisors and organizers of these cannabis trade organizations, as well as the ineptitude of the California Department of Tax and Fee Administration (“CDTFA”) and the Office of the Attorney General, that has allowed so many things to be done incorrectly that could have easily been done correctly.

Who is Inept?

What is it about California’s cannabis industry that causes its organizations to do so many things incorrectly that could be easily done correctly.  A social welfare organization is easily organized.  Such an organization can readily secure a tax exemption under IRC §501(c)(4) and R&T §23701f.  A trade association is easily organized.  A trade association can readily secure a tax exemption under IRC §501(c)(6) and R&T §23701e.

The correction of organizational missteps is invariably more costly than the costs of organizing properly from the beginning.  Is there a reason cannabis businesses so frequently incorporate as Nonprofit Mutual Benefit Corporations which is almost always improper.  Is there something about the cannabis industry that CDTFA and the Office of the Attorney General have not figured out?

In most instances, there will be enough time and money to correct organizational errors although there are substantial savings in avoiding errors at the beginning.  In the instance of CCIA, there may not be enough time or enough money to clear up the errors that caused the suspension of CCIA by the FTB as the errors appear to span six years.