Retail operator files lawsuit challenging California marijuana excise taxes

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One of California’s largest cannabis retail chains is challenging an emergency rule change that state tax collectors implemented in December to vastly expand the scope of marijuana excise taxes.

HNHPC, which operates as Catalyst Cannabis Co., filed a lawsuit Dec. 28 in Superior Court in Orange County contending the California Department of Tax and Fee Administration and the Office of Administrative Law colluded to:

  • Enact excise taxes and collect related payments from retailers on non-cannabis products, such as accessories, in violation of the state’s Administrative Procedures Act.
  • Abuse their emergency regulatory authority to “cram down” improperly retroactive regulations with little notice to operators.

The lawsuit centers on which elements of marijuana products qualify under the excise tax.

Using a vape cartridge as the primary example, the lawsuit argues the state’s excise taxes should apply only to the cannabis oil – not the entire product, which also includes the pen mechanism and packaging – provided the vendor states the individual charges for the oil as well as the device’s non-marijuana parts.

Under this construct, a retailer would pay the 15% excise tax solely on the oil, which costs about $5, meaning the excise tax would be only 75 cents.

Catalyst, based in Long Beach, has been using this method to calculate its excise taxes for more than a year, according to court documents and company executives.

The retailer is one of the state’s largest cannabis operators with 25 stores located predominantly in Southern California.

State regulators, in their emergency Regulation 3802, contend that excise taxes also should be collected on “optional tangible personal property,” which encompasses the entire vape device, packaging and all.

Under the state’s directive, the excise tax on a $40 vape pen would be $6, or eight times the tax on the oil alone.

Catalyst CEO Elliot Lewis, an outspoken critic of California’s cannabis regulations, is optimistic the lawsuit will prevail.

“We’re going to knock out 3802,” he told MJBizDaily in a Friday phone interview.

“Once we knock out 3802, I think this becomes hundreds of millions of dollars back in the coffers of the cannabis industry and, ultimately, the consumer.”

Lewis said he has been receiving calls of support from fellow cannabis operators and believes other retailers will follow suit in reassessing their excise taxes.

“I think more and more people are going to do it,” he said.

Lewis contends that second-quarter 2024 excise tax receipts submitted to the state will reflect this shift.

On an annual basis, he added, “you’re talking about reducing excise-tax collection from $600 million to approximately $200 million, in my estimation.”

“The judicial remedy is here,” Lewis added.

“The moment is now, and I think this would be major relief.”

Chris Casacchia can be reached at chris.casacchia@mjbizdaily.com.