California Marijuana Notebook: Tax issues loom high on the agenda for state’s cannabis industry

(This is a regular column that delves into the complicated issues surrounding California’s immense cannabis market from the vantage point of Marijuana Business Daily Senior Reporter John Schroyer. Based in Sacramento, he’s written about the cannabis industry since joining MJBizDaily in 2014.)

Significant challenges are likely on the way for California marijuana businesses this year.

Even with all the upheaval of the past two years, ongoing shifts in the market involving tax increases, 280E and the potentials surrounding exporting cannabis from state to state might mean even more added costs for cannabis businesses in California.

Yet another tax hike?

The California Department of Tax and Fee Administration, which is responsible for overseeing cannabis tax rates and collection, announced in November that taxes were going up at the start of 2020. 

On Jan. 1, the markup rate increased from 60% to 80%, and because the review by the CDTFA happens every half year by state law, it could go up again in a few months.

That’s what Chris Coulombe, the CEO of distribution company Pacific Expeditors, expects.

“Right now, what we have teed up is a small death blow followed by a significant death blow – almost a coup de grâce at this point – and that’s the (tax increase) and the subsequent increase that’ll come in June or July from the CDTFA,” Coulombe said.

“With retailers doing between a 100% and 300% increase in markup, arguably we’re going to see that tax level go above 100%.”

There is a chance that the state Legislature will act before then since a bill already has been introduced to temporarily lower state marijuana tax rates.

But its success is far from certain, since similar measures have failed the past two years.

Beware the bad actors

As the legal market has expanded and more companies have continued to struggle with regulatory compliance, complicated tax bills and more, a parallel expansion has occurred in those willing to take advantage of businesses that are looking for help.

San Francisco Bay Area CPA Dana Borys said she’s seen a lot of companies lose thousands of dollars, if not hundreds of thousands, because they relied on poor advice from other ancillary business professionals who promised to help with various financial burdens and then either didn’t deliver or didn’t stand behind their work.

“There’s some bad service providers in the space, and I think it is something cannabis companies need to be careful of,” Borys warned. “We had a client recently who hired a payroll company … and they ended up taking their tax payments and keeping them and not remitting them to the IRS.

“So now the IRS has come after (my client).”

The same holds true, Borys said, for a lot of supposed tax professionals who promise they’ll be able to help cannabis companies keep more profits while remaining compliant with 280E – the section of the IRS code that bars standard business deductions for any company trafficking in a federally controlled substance.

Only later did the client find out that the tax pro was essentially running a scam.

“They’ll approach our MJ clients and say, ‘We can save you hundreds of thousands of dollars,'” Borys said, noting that the hard truth is there’s no easy way around 280E.

That can lead to a situation where marijuana companies file inaccurate federal tax returns, leaving those companies in a bind. In the meantime, Borys said, those bad actors will have vanished.

“The taxpayer, the one filing the return, they’re the one responsible for what’s on there, so the IRS could disallow all of that and the filer would have no recourse,” Borys said. “Then that CPA is gone or won’t help defend what they said.”

Exporting is ‘the endgame’

Ever since Oregon officials began considering the possibility of figuring out some way to export cannabis to other states, the notion has picked up traction in California, which for decades has produced far more marijuana than its residents consume.

There’s no immediate solution on the horizon, given the federal illegality of marijuana and the resulting prohibition on interstate cannabis commerce.

But what the situation reflects is an easily forgotten reality that California is, at its core, a marijuana export state.

“Eventually, we’ll see a marketplace where there are consuming regions and producing regions. And producing regions will be places like California, Oregon, South America, Asia, places where cannabis comes from,” said Amanda Reiman, vice president of community relations at Mendocino County-based distributor Flow Kana.

That is “the endgame,” she said.

In other words, exporting will be how California operators – especially growers – find a measure of stability, especially given all the lost profits of the past two years during the transition to a newly regulated industry.

“If all of a sudden we were competing with Oregon for market share in Oklahoma, maybe California would change its tune a little bit and they wouldn’t make it so difficult (to sell marijuana legally),” Reiman said.

“I do think (state officials) should be thinking about that, because the reality is that in five years – maybe less, maybe more – this will be an internationally traded commodity, and at that point, California stands to really benefit from the fact that California weed is really popular.”

In the meantime, however, part of the problem for a lot of the small farmers that Flow Kana works with is that there’s arguably already too many legal growers.

If more keep coming online, then California will be at the same point Oregon was just a few years ago, when an immense supply glut led to wholesale prices crashing to $50 a pound.

So, to relieve that pressure before it gets to a breaking point, insiders such as Reiman are keeping their fingers crossed that perhaps an interstate commerce solution will present itself.

(Click here to read the previous installment of this ongoing column.)

John Schroyer can be reached at [email protected]

7 comments on “California Marijuana Notebook: Tax issues loom high on the agenda for state’s cannabis industry
  1. Mike on

    The golden goose lives in the emerald triangle but if the ca state regulators and taxies don’t wake up and see that they are so anxious to grab those golden eggs that they have started strangling the goose to squirt out more eggs before they are ready. the goose cries ‘I can lay no egg before its time’ but the state continues to squeeze with overpowering regs and taxes. No wonder the black market thrives.

    Reply
  2. Stan Cox on

    Leave it to government to screw things up… even when they’re given a gift ie the cannabis market producing much needed tax revenue.

    Reply
  3. Kevin Hart on

    One person’s opinion here but as long as this industry remains unbanked, tax states, especially the large market states, are going to keep moving the tax rates higher. The very clear disconnect from unbanked businesses and the ability to collect taxes is undeniable. No other industry has this tax problem because the reported sales via banking relationships ensure a higher rate of tax compliance and collections. This isn’t hard to understand. From its launch with adult sales, CA has seen two very distinct opposing trend lines. Higher product sales than expected yet lower tax revenue, significantly lower than the original forecasted sales number for tax collection. This is not a fluke. Without real banking solutions for MRB’s the state will never be able to set a proper baseline tax rate (never mind these contemplated increases) or have any hope of collecting anywhere near their original forecast. And the worse unintended consequence of all of this? More illicit businesses and sales will continue meaning even lower revenue for all the legitimate operators.

    Raising tax rates will only make the problem worse. Begin with the end in mind and then put the plan in place to make it happen! Address the banking problem and watch predictable, planned intended results.

    Reply
  4. Pat on

    The problem isn’t so much about taxes as it is the promulgation and implementation of a bad law. Taxes are a part of the problem. But, taken together with the premise of this law…it’s just a small, really inconsequential part of it. Why? The illicit market ( 80% of the total market ) doesn’t care about any of it. Be it taxes, regulations, penalties, etc..

    The state had an opportunity to do it right; but squandered it in high fashion. The vast majority of the illicit market has to see itself as as much more ethically correct and likely legally righteous belief that what they are doing with respect to this issue, places them ( in their minds ) at a higher moral/legal ground. Much more so than during the counter culture movement that was actually born in this state over 50 yrs earlier. So, was born born the second iteration of the counter culture, with the passage and implementation of this corrupt law. The scenario is almost identical, just two generations more have been added to the mix.

    When a government passes is law that is clearly discriminatory, and its regulations have no basis in fact as to their efficacy; but quite evident in their effect to act as barriers, is only fodder for this courageous group to keep doing what they’re doing. What was the state expecting when a law such as this has it’s basis in the aforementioned and instigated by the establishment consisting of old guard politicians and their special interest cronies? The state was ( and still is ) hoping to keep ignoring what’s really going on and not to report on it ( its ongoing failure in this regard ) as they should. However, the state is more than willing to keep on quietly flushing the tax payers tax dollars down the toilet so long as they ( and their cronies cartel friend’s, whom they hope to get a job with down the road, for the corrupt favors…) keep making money, via this not talked about “forced tax subsidy” that the public never has had a say in; because it’s not disclosed.

    Anyone, with some native intelligence can see right through it all. And, it turns out, the the counter culture historically, was correct in their notions, and reactions to establishment deceit.

    Reply
  5. Michael Flynn on

    Not paying the tax. Not now. Not ever. UNDERGROUND RULES!!!!!

    You got greedy. Now you get what you deserve. NOTHING. You’ll love it. It’s just like being a citizen.

    Reply
    • Pat on

      Well said, MF. Just as Willie Wonka ( the 1971 original ) said to Charlie ( although Charlie was the unwitting ambassador to the rest of the little a**holes, and he didn’t have it coming..): You get NOTHING!

      State of Ca: “Mr. Wonka?

      Post 215/420 Grower: “I’m extraordinarily busy, sir!”

      State of Ca: “I just wanted to ask about the unfounded fees/taxes/regulations and high barriers to entry.. The lifetime supply of unnecessary b.s state bureacracy re: the “legal” cannabis industry?” When do we get it? All those taxes,fees, and penalties?

      Post 215/420 Grower: You won’t. Because you broke the rules.

      State of Ca.: “What rules? We didn’t see any rules in our favor..”

      Post 215/420 Grower: “Wrong Sir! Wrong!! Is says right here, that all offers shall become null and void when YOU don’t play by your OWN rules!! It’s all there, black and white! So, you get Nothing! YOU LOSE!!! Good day, Sir!

      It’s ALL that simple.. Who, STILL, doesn’t see it?!?

      Reply
  6. Enigma Valdez on

    As a Cannabis/CBD writer, I’m also a certified and licensed California tax preparer, so this article is of high interest to me. I seriously hope the AB-1948 Bill comes through in time, but I’m certainly not holding my breath. While I’m on the subject, California with their ridiculous AB-1140 Legislation is targeting and discriminating against California registered tax preparers like myself, along with restricting free trade. Seriously hoping for a change for the better on both ends.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *