Frequently Asked Questions – Repository

Frequently Asked Questions – FAQ

 

How does a Cannabis Seller Register for Sales Tax with California Dept. of Tax and Fee Administration?

Seller Register – Sales Tax with CDFTA

Seller Register – Sales Tax with CDFTA

Cannabis Tax Permits/Seller’s Permits: Cannabis retailers, cultivators, manufacturers, and distributors making sales must register with the CDTFA for a seller’s permit. Distributors must register with the CDTFA for a cannabis tax permit to report and pay the cultivation tax and cannabis excise tax. A microbusiness licensee is licensed to act as a distributor, among other things, and must comply with all the same requirements as a distributor. If you make sales for resale, you must obtain a valid resale certificate.

Seller Register - Sales Tax CDFTA Cannabis Businesses
Seller Register – Sales Tax CDFTA Cannabis Businesses

Sales and use tax permit registration are available online. Beginning November 20, 2017, you can register for all the proper tax permits for your cannabis business on our website at www.cdtfa.ca.gov (click the Register link, and follow the prompt). When registering your business activity, make sure to select box number 3, Cannabis business activities.

More information about the permits necessary to collect these new taxes is available in this special notice and in theTax Guide for Cannabis Businesses. If you have additional questions, you may call our Customer Service Center at 1-800-400-7115 (TTY:711) Monday through Friday, 8:00 a.m. to 5:00 p.m. (Pacific time), except state holidays.

A complete copy of the Formal Paper on Sales Tax for Cannabis and Regulation 3700 can be found here. 

Background

In 2015, the Legislature enacted the Medical Marijuana Regulation and Safety Act (MMRSA), a package of legislation that established a comprehensive licensing and regulatory framework for the cultivation, manufacturing, transportation, distribution, and sale of medical marijuana. The MMRSA consists of three bills: SB 643 (Ch. 719, McGuire), AB 243 (Ch. 688, Wood), and AB 266 (Ch. 689, Bonta).

Among its provisions, the MMRSA established the Bureau of Medical Marijuana Regulation2 2 (Bureau) within the Department of Consumer Affairs to oversee and enforce the state’s medical marijuana regulations, in collaboration with the California Department of Public Health (CDPH) and the California Department of Food and Agriculture (CDFA).

On November 8, 2016, California voters approved Proposition 64 which established the Control, Regulate and Tax Adult Use of Marijuana Act (the Adult Use of Marijuana Act) (AUMA). Among other things, AUMA added Division 10 (commencing with Section 26000) to the Business and Professions Code (BPC), Marijuana Regulation and Safety (MRS), which establishes nonmedical marijuana regulatory and licensing provisions, and added Part 14.5, Marijuana Tax, to Division 2 of the Revenue and Taxation Code (RTC) (commencing with RTC section 34010).

In 2017, SB 94 repealed the MCRSA, included certain provisions from MCRSA into MRS, now known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), and made further amendments to AUMA. Concerning taxes, SB 94, section 162, amended Part 14.5 to ease and streamline cannabis tax collection and remittance to the Department. As relevant here, SB 94: (1) changes the law throughout to be the Cannabis Tax Law instead of Marijuana Tax Law; (2) revises the cannabis excise tax to be imposed upon purchasers at a rate of 15 percent of the average market price, instead of retail selling price, to be collected by a distributor from a cannabis retailer; (3) requires a distributor or a manufacturer to collect the cultivation tax from a cultivator, and a manufacturer to remit any cultivation tax collected from a cultivator to a distributor, for distributor remittance of those taxes to the Department; and (4) makes other corrections and other conforming changes.

The CTL was further amended by AB 133 in 2017 to, in part: remove the requirement that a cannabis retailer display the cannabis excise tax separately from the price of cannabis and cannabis products when sold to consumers; remove the requirement that a cannabis retailer state on the purchase invoice that the cannabis cultivation tax is included in the total amount of the invoice; and authorize the Department to prescribe other means to display the cannabis excise tax on an invoice, receipt, or other document from a cannabis retailer given to the purchaser. AB 133 also defines manufacturer and authorizes the Department to relieve a person of the penalty for failure to pay the cannabis cultivation and excise tax if the Department finds that the person’s failure to make a timely payment is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect

For reference, the staff has included the text of the underlying statutes (RTC sections 34010, 34011, 34012, and 34013) which are the basis for the proposed regulation (Exhibit 3).

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What are the differences in relative skills in different Tax Professionals?

Skill Differences – Tax Professionals

Skill Differences – Tax Professionals

 

Skill Differences - Tax Professionals
Tax Professional Relative Skills Infographic
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What are the differences in types of accounting and tax advisors?

 Accounting – Tax Advisors

Types of Accounting and Tax Advisors

 Accounting - Tax Advisors
Types of Accounting and Tax Advisors
  • The CPA is the CLEAR HANDS DOWN WINNER AGAINST EVERY OTHER TYPE OR CHOICE OF ADVISOR. The Clown(Tech) skills win EVERY TIME AGAINST ANY ADVISOR OTHER THAN A CPA. The Clown(Tech) is the winner against Enrolled Agents and Xero Advisors. The Xero Champion status is of no consequence other than against a Xero Advisor. 
Accounting - Tax Advisors
CPA is CLEAR winner EVERY TIME!
  • The only type of advisor that is a “professional” among the types listed above are Certified Public Accountants [“CPA’s]. The background on this is discussed detail under “Yiddish Wisdom“.
  • CPA’s are required to have a graduate degree and meet an experience requirement. Enrolled Agents have neither requirement. We have offered a proposal that would close that loophole that you can read about here
  • NAEA’s website includes the following quotes
    • Only enrolled agents are required to demonstrate to the IRS their competence in all areas of taxation, representation, and ethics before they are given unlimited representation rights before IRS. Unlike attorneys and CPAs, who are state licensed and who may or may not choose to specialize in taxes, all enrolled agents specialize in taxation.” Source: http://taxexperts.naea.org/content/what-is-an-enrolled-agent.html
    • Enrolled agents (EAs) are America’s Tax Experts®. EAs are the only federally licensed tax preparers who also have unlimited rights to represent taxpayers before the IRS.”Source: http://taxexperts.naea.org/

    This bald-faced lie comes to us courtesy of the California Society of Enrolled Agents

    • Enrolled Agents (EAs) are trained in a wide variety of common and unusual tax situations. With the tax laws changing yearly, it’s more critical than ever to have a qualified tax specialist on your side when preparing your tax and financial strategy. The Enrolled Agent license is the highest credential the IRS issues. Be confident about your tax return – use an Enrolled Agent.” Source http://www.findanea.org/

    Perhaps it would help to be truthful and state that the EA is the ONLY credential that the IRS issues. CPA and Attorney licensing is the purview of the states. The US Treasury, Internal Revenue Service’s [“IRS”] Office of Professional Responsibility[“OPR”] is responsible for the discipline of EA’s, CPA’s and attorneys that represent taxpayers under Circular 230.

    Rather than restate much of what I have written on topic before, you can read Considerations In Selecting A US Tax AdvisorWhat Does Your Financial Advisor Look Like, a post with numerous links to other material in A Proposal To Ban the Use of “Meaningless Titles”,  I Found My Niche Clown Accounting

 

This one was directed at the non-professional accountants in the Xero Ecosystem

 Accounting - Tax Advisors
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Why is cannabis legal

Cannabis Illegal Under Federal – Legal Under California Law

Cannabis Illegal Under Federal – Legal Under California Law. The Supremacy Clause of the US Constitution establishes the United States Constitution, federal statutes, and treaties as “the supreme law of the land”.. Pursuant to this clause, any state law which conflicts with a federal law is otherwise preempted. This was affirmed by the U.S. Supreme Court in Gibbons v. Ogden. The Supreme Court has ruled that the federal government has a right to regulate and criminalize marijuana sales and use, even when a state’s laws permit marijuana to be used for medical purposes. 

At this juncture, we reach the conclusion that all of the State enabling marijuana legislation is otherwise voided by the Comprehensive Drug Abuse Prevention and Control Act of 1970, the federal law which classifies marijuana as a controlled substance. 

Enter the Obama Administration. On October 19, 2009, Deputy U.S. Attorney David W. Ogden issued a memorandum which we now refer to as the Ogden Memo. This document stated that the Justice Department would not make it an enforcement priority to pursue those in “clear and unambiguous compliance” with State medical marijuana laws. Further to the Ogden Memo, on July 29, 2011, Deputy Attorney General James M. Cole confirmed the Ogden Memo.

Cole further noted the “increase in the scope of commercial cultivation, sale, distribution, and use of marijuana for purported medical purposes”. Cole added that the Ogden Memo was never intended to shield such activities from federal enforcement action and prosecution, even where those activities purport to comply with state law. Cole concluded the memo by reminding persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law enforcement of the CSA.

Cannabis Illegal Federal – Legal California Law Contradiction

In light of the continuing State ballot initiatives legalizing marijuana (under state law), Cole released an updated Department of Justice policy memo to all U.S. Attorneys on August 28, 2013, the [“Cole Memo“]

The August 2013 guidance reminded U.S. Attorneys that traditionally the federal government has pursued marijuana cases which were large-scale activities where control lied with a gang, cartel or criminal enterprises. Further, the federal government has traditionally prosecuted marijuana cases involving sale and distribution

Cole Memo

Cole Memo

to minors, interstate sales, and growth or use on federal lands. Finally, the Cole memo stated that those priorities would continue to guide the federal government’s enforcement of the CSA. Federal enforcement would center on those priorities, regardless of federal law. Otherwise, outside of those priories, the federal government has traditionally relied on the States to enforce the narcotics laws of their states. Essentially, the federal government has defunded the ability of its agencies to prosecute the state-licensed marijuana businesses which are in compliance with the law and the Cole Memo [see Rohrabacher-Farr amendment.]

A state-licensed marijuana business, while violating the federal Controlled Substances Act, may operate its business without fear of federal prosecution provided the business, its owners and staff all follow the state law and comply with the Cole Memo.

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What is the History of the CHAMPS litigation on IRC Sec. 280E ?

CHAMPS litigation IRC Sec. 280E

CHAMPS litigation IRC Sec. 280E (The ‘Two Business” rule)

The use of IRC 263A alone to increase Cost Of Goods Sold may still leave the legal marijuana business with a punitive effective tax rate after application or IRC §280E. Absent any regulations to guide the practitioner, we look to relevant U.S. Tax Court cases for guidance. It is well established that a taxpayer can have more than one trade or business36. In Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner (CHAMPS)37. the Tax Court expanded IRC §280E to permit the deduction of ordinary and necessary expenses to the extent two businesses are conducted at the same business location.

Some states, including California, operate using a caregiver model. It is important to understand the differences in this business model. Some dispensaries in this model offer palliative care,

CHAMPS litigation IRC Sec. 280E
CHAMPS litigation IRC Sec. 280E

which is specialized medical care for people with serious illnesses. It focuses on providing patients with relief from the systems and stress of a serious illness. The goal is improving the quality of life for both the patient and the family. CHAMPS was in the business of providing counseling and other caregiving services to its members, who were individuals with debilitating diseases.

Under the California Compassionate Use Act of 1996, the taxpayer provided marijuana to members who requested it. The business charged its members a membership fee that generally reimbursed the business for its costs of the caregiving services and its costs of the medical marijuana. This left the business substantially in compliance with California law, since in the caregiver model the caregiver is reimbursed for costs, but should not generate a profit on an ongoing basis. At audit, the Service disallowed the expenses as non-deductible under IRC §280E because they were incurred in connection with the trafficking of a controlled substance under the federal CSA.

47% of the of the CHAMPS members suffered from AIDS, while the remainder suffered from cancer, multiple sclerosis or other terminal or chronic diseases. The primary purpose the entity was to provide caregiving services to its members. The secondary purpose was to provide members with medical marijuana pursuant to the provisions of California law and instruction in the use of the marijuana to benefit their health. The most important aspect of this case is that the palliative care services provided by CHAMPS were extensive. Support group sessions were held for members including those with AIDS, addiction, and emotional development problems.

Low-income members were provided with hearty daily lunches and hygiene supplies were also available. Counseling benefits related to life-coping issues were available. In short, CHAMPS was a palliative care entity that happened to dispense marijuana, rather than simply a marijuana dispenser.

On its tax return, CHAMPS did not make any allocation subject to IRC §280E. All ordinary and necessary business expenses were deducted. At trial, CHAMPS argued they had two businesses: a primary trade or business of palliative care (caregiving) and a secondary trade or business as a marijuana dispenser. CHAMPS argued and the Court agreed, that the deductions for the non-trafficking business should not be subject to IRC §280E. The Service accepts the characterization that two or more undertakings are separate activities unless the characterization is ‘artificial or unreasonable”. Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances. They do not express intent to deny the deduction of all of a taxpayer’s business expenses simply because the taxpayer was involved in trafficking in a controlled substance.

We hold that section 280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petitioner also is involved in the trafficking in a controlled substance. It is important to note that CHAMPS had contemporaneously created records which clearly showed the costs spent on each activity, including detailed time records of employees’ time spent in each of the two businesses.

Absent §280E regulations pertaining to two distinct businesses operating from the same location, we look to the guidance under IRC §183 and the supporting regulations. Reg. §1.183–1(d)(1) provides that “(t)the taxpayer’s characterization will not be accepted, however, when it appears that his characterization is artificial and cannot be reasonably supported by the facts and circumstances of the case.”

Most significant facts and circumstances in making this determination are:

  •  The degree of the organizational and economic interrelationship of various undertakings.
  • The business purpose which is (or might be) served by carrying on the various undertakings separately or together in a trade or business or in an investment setting.
  •  The similarity of various undertakings.

The Tax Court later expanded facts and circumstances test in Rupp v. Commissioner, which provides nine factors for use in determining whether the two undertakings share a close relationship to one another:

  • Whether the undertakings are conducted at the same place;
  • Whether the undertakings were part of a taxpayer’s efforts to find sources of revenue from his or her land;
  • Whether the undertakings were formed as separate activities;
  • Whether one undertaking benefited from the other;
  • Whether the taxpayer used one undertaking to advertise the other;
  • The degree to which the undertakings shared management;
  • The degree to which one caretaker oversaw the assets of both undertakings;
  • Whether the taxpayers used the same accountant for the undertakings
  • The degree to which the undertakings shared books and records.

The Tax Court subsequently applied the nine factors of Rupp in Olive v. Commissioner 139 T.C.No 2..  While not cannabis industry-friendly, Olive helped further frame the outer limitations of the ‘two business rule’. Olive operated “The Vapor Room”, purportedly a medical marijuana dispensary and a caregiving activity. The Court found that the taxpayer was not operating two businesses and was therefore not entitled to a portion of its IRC 61 ordinary and necessary business expenses.

Some of Olive’s patrons suffered from AIDS, HIV, cancer and other terminal diseases. Taxpayer felt CHAMP applied here. The court applied the nine factors from Rupp and found that the taxpayer operated only one business. Contrary to CHAMPS, where the Court found two businesses existed, in Olive the Court determined that there was one activity, trafficking in a controlled substance.

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How Do IRC Sec. 263A UNICAP Rules Apply To CA Cannabis?

UNICAP rules require more indirect costs to be allocated to inventory than the full absorption rules under IRC §471. The UNICAP rules require a producer of inventory to include in the cost of its inventory the direct costs of such property and such property’s proper share of those indirect costs, part or all of which is allocable to such property.  Under UNICAP, direct costs include direct material costs and direct labor costs. UNICAP is required for most manufacturers and resellers with the exception of businesses with less than $10 million in gross receipts on a three year rolling average basis.

Most cannabis businesses that do not produce products will not be required to comply with UNICAP. A reseller which is not subject to the UNICAP rules is usually required to include only direct costs in the cost of its inventory.28 A marijuana business would be well advised to comply with the UNICAP rules, whether or not it is required to do so. First, this would allow it to maximize the costs allocated to cost of goods sold. Potentially, it could minimize the amount of disallowed business expenses.

Nothing in the code or regulations states taxpayers cannot voluntarily follow the UNICAP rules. For growers of marijuana, not all expenses will be allowed as cost of goods sold, but many will. Examples include: rent, electricity, water, nutrients, security, insurance, scales, grinders, pacckaging materials, delivery vans, labor, excise taxes, accounting software, and traceability software.

Generally speaking, a state licensed marijuana retailer is ‘trafficking’ in the sale of marijuana in violation of the federal CSA and will NOT be allowed a deduction for ordinary and necessary business expenses. The sole written guidance from the IRS comes in the form of a Chief Counsel’s Advice (CCA).  This CCA addresses two questions:

  • First, how is cost of goods sold determined for a taxpayer subject to IRC §280E? Taxpayers should calculate Cost of goods sold “using the applicable inventory-costing regulations under §471 as they existed when §280E was enacted.30 Therefore, Reg. §1.471-3(b) for resellers, and Regs. §1.471-3(c) and 1.471-11 for producers are applicable for computing COGS.

 

  • Second, may the IRS require the taxpayer to use an inventory method for the controlled substance? “Yes, unless the taxpayer is properly using a non-inventory method to account for the…controlled substance pursuant to the Code, Regulations, or other published guidance.” It is interesting to note that the author is aware of no other circumstances where interpretation of a law is restricted to other laws in effect at that time of passage.
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What is Cost of Goods Sold [“COGS”], how is it calculated?

Cost of Goods Sold is not a deduction but actually, an adjustment is taken into account in arriving at gross income. Regulation §1.61-3(a) provides, “gross income” means “…the total sales, less the cost of goods sold.” Although IRC §280E disallows any deduction for a marijuana seller’s ordinary and necessary business expenses, the legislative history fails to include the cost of goods sold in this rule. The literature suggests that Constitutional concerns of the Sixteenth Amendment, which taxes ‘incomes’, are the reason for this exclusion.

In the Senate hearings20 prior to passing IRC §280E, discussion suggested including the cost of goods sold in the ‘disallowed’ expenses for drug traffickers. However, the feeling that this could create a constitutional issue leading to court challenges (and delays) prevailed, and cost of goods sold remained an available adjustment to drug traffickers.

Although the Service has not issued regulations related to IRC §280E, the Service allows the adjustment for Cost of Goods Sold (COGS) on the tax returns of businesses engaged in drug trafficking. On November 24, 2010, U.S. Representatives Fortney Pete Stark, Barney Frank, Jared Polis, Linda Sanchez, Raul Grijalva, and Sam Farr wrote to the office of the Chief Counsel of the IRS, asking the service to create guidance for regulations related to deductions for state-licensed marijuana businesses.

The Chief Counsel’s Office replied to the Congressman on December 16, 2010, stating that the IRS is unable to issue regulations for IRC §280E since neither the Controlled Substances Act nor IRC §280E makes the exception for medical marijuana. Further, the Chief Counsel places blame on Congress to change either IRC §280E or the Controlled Substances Act.

Cost Method for Cost of Goods Sold

A business must use an inventory method of accounting whenever “the production, purchase or sale of goods is an income producing factor. Under an inventory method, costs related to producing, acquiring, storing, and handling goods are not currently deductible. These costs must be included in the costs of inventory and deducted when inventory is sold. In the typical business, tax professionals look to minimize current income by taking deductions during the current period. IRC §263A does not magically transform otherwise disallowed costs under IRC §280E into allowed capitalized costs, although the tax professional should look to maximize the amount of deductions which can be justifiably capitalized. Much billable work exists for tax and accounting professionals who possess the skills to wade through client inventory records and classify expenses to maximize the cost of goods sold deduction and support the conclusions at examination.

Generally, the current year inventory costs are added to the beginning of the year inventory amount and reduced by the costs of inventory on hand at the end of the year to calculate costs of goods sold for the year.

Section 471 and methods required by Section 263A provide that marketing, advertising and selling expenses are “not required” to be treated as inventory costs. Under Reg. §1.471–11, 6(a), taxpayers must include as inventoriable costs all direct (e.g., the cost of inventory and delivery, and the cost of materials and labor for manufactured inventory) and indirect production costs (e.g., rent and utilities related to inventory).

 

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Who is a Manufacturer under California Cannabis Tax Law ?

Manufacturer – California Tax

A cannabis manufacturer is a person who produces or prepares cannabis or cannabis products at a fixed location, that packages or repackages cannabis or cannabis products, or labels or relabels its container.

If you are a cannabis manufacturer, the CDTFA requires that you:

Manufacturer - California Tax
Manufacturer – California Tax
  • Register with the CDTFA for a seller’s permit.
  • Collect the cannabis cultivation tax from cultivators from which you receive unprocessed cannabis and provide the cultivator with a receipt.
  • Pay the cultivation tax collected from cultivators to your distributor.
  • Electronically file your sales and use tax returns and pay any sales and/or use tax owed to the CDTFA. Even if you do not make taxable sales of cannabis, you are still required to file a return indicating your total sales with your claimed nontaxable or exempt sales during that particular reporting period.

In addition, you should also:

  • Obtain a manufacturer license issued by the California Department of Public Health.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

Retailer .     Distributor .   Manufacturer Cultivator

Cannabis – Sales, Excise Gross Receipts Taxes

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Who is a Cultivator under California Cannabis Tax Law?

Cultivator – California Tax

A cannabis cultivator is a person who is in engaged in the business of planting, growing, harvesting, drying, curing, grading or trimming cannabis.

If you are a cannabis cultivator, the CDTFA requires that you:

  • Register with the CDTFA for a seller’s permit.

    Cultivator - California Tax
    Cultivator – California Tax
  • Pay the cultivation tax to your distributor or manufacturer.
  • Electronically file your sales and use tax returns and pay the tax due, if any, to the CDTFA. Even if you do not make taxable sales of cannabis, you are still required to file a return indicating your total sales with your claimed nontaxable or exempt sales during that particular reporting period.

In addition, you should also:

Retailer .     Distributor .   Manufacturer . Cultivator

Cannabis – Sales, Excise Gross Receipts Taxes

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Who is a Distributor under California Cannabis Tax Law?

Distributor – California Tax

A cannabis distributor – california tax  is a person who procures, sells, and/or transports cannabis between licensed cannabis businesses, such as a cultivator, manufacturer, or retailer.
If you are a cannabis distributor, the CDTFA requires that you:

Distributor - California Tax
Distributor – California Tax
  • Register with the CDTFA for a seller’s permit, if you make sales of products in California.
  • Register with the CDTFA for a cannabis tax permit (this is separate from your seller’s permit).
  • Collect the cannabis cultivation tax from cultivators and manufacturers from which you receive cannabis and/or cannabis products.
  • Collect the cannabis excise tax from cannabis retailers you supply (sell and/or transport) with cannabis and/or cannabis products.
  • Provide an invoice or receipt to the businesses from which you collect the cultivation tax and the cannabis excise tax.
  • Electronically file both your sales and use tax and cannabis tax returns and pay the amounts due to the CDTFA.

In addition, you should also:

  • Obtain a distributor license issued by the Bureau of Cannabis Control with the California Department of Consumer Affairs.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

Retailer .     Distributor .   Manufacturer . Cultivator

Cannabis – Sales, Excise Gross Receipts Taxes

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Who is a Retailer under California Cannabis Tax Law?

Retailer – California Tax

A cannabis retailer is a person who sells cannabis and/or cannabis products directly to a consumer.

If you are a cannabis retailer, the CDTFA requires that you:

  • Register with the CDTFA for a seller’s permit.
  • Charge and collect sales tax on your taxable retail sales of cannabis and/or cannabis products, and other products.
  • Electronically file your sales and use tax returns and pay the sales and/or use tax to the CDTFA.
  • Charge and collect the cannabis excise tax from your customers who purchase cannabis and/or cannabis products (effective January 1, 2018).
  • Pay to your distributor the cannabis excise tax you collected.  DO NOT remit cannabis excise tax on your sales and use tax return.
  • Provide your customer with an invoice, receipt, or other documents that display the cannabis excise tax separately from the list price, the price advertised on the premises, the marked price, or other prices.
  • Include on your invoice, receipt, or other documents you provide to your customer the statement “The cannabis cultivation tax and excise taxes are included in the total amount of this invoice.”

In addition, you should also:

  • Obtain a retail license issued by the Bureau of Cannabis Control within the Department of Consumer Affairs.
  • Contact your city and/or county government office for information on local licenses you may be required to obtain.

Retailer .     Distributor .   Manufacturer . Cultivator

Cannabis – Sales, Excise Gross Receipts Taxes

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How is cannabis illegal under Federal law but legal under California law?

Cannabis Illegal Under Federal – Legal Under California Law

Cannabis Illegal Under Federal – Legal Under California Law. The Supremacy Clause of the US Constitution establishes the United States Constitution, federal statutes, and treaties as “the supreme law of the land”.. Pursuant to this clause, any state law which conflicts with a federal law is otherwise preempted. This was affirmed by the U.S. Supreme Court in Gibbons v. Ogden. The Supreme Court has ruled that the federal government has a right to regulate and criminalize marijuana sales and use, even when a state’s laws permit marijuana to be used for medical purposes. 

At this juncture, we reach the conclusion that all of the State enabling marijuana legislation is otherwise voided by the Comprehensive Drug Abuse Prevention and Control Act of 1970, the federal law which classifies marijuana as a controlled substance. 

Enter the Obama Administration. On October 19, 2009, Deputy U.S. Attorney David W. Ogden issued a memorandum which we now refer to as the Ogden Memo. This document stated that the Justice Department would not make it an enforcement priority to pursue those in “clear and unambiguous compliance” with State medical marijuana laws. Further to the Ogden Memo, on July 29, 2011, Deputy Attorney General James M. Cole confirmed the Ogden Memo.

Cole further noted the “increase in the scope of commercial cultivation, sale, distribution, and use of marijuana for purported medical purposes”. Cole added that the Ogden Memo was never intended to shield such activities from federal enforcement action and prosecution, even where those activities purport to comply with state law. Cole concluded the memo by reminding persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law enforcement of the CSA.

Cannabis Illegal Federal – Legal California Law Contradiction

In light of the continuing State ballot initiatives legalizing marijuana (under state law), Cole released an updated Department of Justice policy memo to all U.S. Attorneys on August 28, 2013, the [“Cole Memo“]

The August 2013 guidance reminded U.S. Attorneys that traditionally the federal government has pursued marijuana cases which were large-scale activities where control lied with a gang, cartel or criminal enterprises. Further, the federal government has traditionally prosecuted marijuana cases involving sale and distribution

Cole Memo
Cole Memo

to minors, interstate sales, and growth or use on federal lands. Finally, the Cole memo stated that those priorities would continue to guide the federal government’s enforcement of the CSA. Federal enforcement would center on those priorities, regardless of federal law. Otherwise, outside of those priories, the federal government has traditionally relied on the States to enforce the narcotics laws of their states. Essentially, the federal government has defunded the ability of its agencies to prosecute the state-licensed marijuana businesses which are in compliance with the law and the Cole Memo [see Rohrabacher-Farr amendment.

A state-licensed marijuana business, while violating the federal Controlled Substances Act, may operate its business without fear of federal prosecution provided the business, its owners and staff all follow the state law and comply with the Cole Memo.

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What are Legal Pest Management Practices For Cannabis in California?

Legal Pest Management Practices Cannabis California

Cannabis pests vary according to cultivar (variety), whether the plants are grown indoors or outdoors, and where the plants are grown geographically.  Legal Pest Management Practices Cannabis California. The pests included in this review are preliminary and based on the following sources: a presentation given in 2013 by Whitney Cranshaw, an extension entomologist at Colorado State University, and a review article by John M. McPartland, a professor of family medicine at the University of Vermont. We also received input from Kevin Hoffman, former Primary State Entomologist, California Department of Food & Agriculture (CDFA).

PRODUCTS THAT CAN BE LEGALLY APPLIED TO CANNABIS PRODUCTS IN CALIFORNIA

A pesticide product can legally be applied to cannabis under state law if the active ingredients found in the product are exempt from residue tolerance requirements1 and the product is either exempt from registration requirements2 or registered for a use that’s broad enough to include the use of cannabis. Residue tolerance requirements are set by U.S. EPA for each pesticide on each food crop and are the amount of pesticide residue allowed to remain in or on each treated crop with “reasonable certainty of no harm.” Some pesticides are exempted from the tolerance requirement when they’re found to be minimal risk. Active ingredients exempt from registration requirements are mostly food-grade essential oils such as peppermint oil or rosemary oil.

PESTS. The tables show the most likely pests in California based on Cranshaw’s presentation and McPartland’s list and gleaned from California-based websites and blogs. Some pests that drew attention on several blogs (e.g., russet mites) may be worse during drought years. Many pests have cyclic population fluctuations and others are mainstays of general greenhouse cultivation (e.g., whiteflies, thrips, and fungus gnats). We’ll add weeds to this compendium when we have more information.

DAMAGE. For damage caused by greenhouse pests, we used information from Cranshaw’s presentation; for that of outdoor pests when there wasn’t any overlap, we used McPartland’s list and information from UC IPM for various crops. Accounts of damage by rodents are anecdotal.

PESTS NOT OFFICIALLY IDENTIFIED IN CALIFORNIA Several cannabis pests in other states are not yet known in California. These pests would add to the russet mites, aphids, cutworms, budworms, borers, and flea beetles already in California. As more and more cannabis is planted throughout the state, collecting potential pests will enable entomologists to identify new species.

THE IMPORTANCE OF CORRECT IDENTIFICATION. It’s essential to identify the potential pest or you may launch a futile program for a mite or insect that isn’t a pest. And likewise, you need to know the correct species or you may use the wrong management strategy. For accurate identification, bring specimens to an entomologist.

 

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Can you provide an overview of California taxation of cannabis?

The following is a brief overview and summary of the basic provisions related to taxation of cannabis by California agencies. The summary is NOT..repeat NOT a substitute for professional advice.

CA Cannabis Tax Summary 1
CA Cannabis Tax Summary 1

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CA Cannabis Tax Summary 2
CA Cannabis Tax Summary 2

 

 

 

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What Are the Requirements for a CA Cannabis Cultivation License?

Whether you plan to commercially grow medicinal and/or adult-use (recreational) cannabis in California, here’s a checklist of documents you may need to complete your application

CA Cultivation Licensing
CA Cultivation Licensing
  •  Although not required, a permit from your city or county (or other jurisdiction) will streamline the application process n
  • Right to occupy property: Your lease agreement, property title, or deed
  • Business formation documents filed by the California Secretary of State’s office 
  • California State Water Resources Control Board permits and verification of your water source, including: well logs, Notice of Applicability, or a Waste Discharge Requirement (WDR) waiver 
  • California Department of Fish and Wildlife’s 1602 permit or a waiver 
  • California Department of Toxic Substance’s hazardous materials record search via their EnviroStor data management system
  • California Department of Fee and Tax Administration’s seller’s permit 
  • Labor peace agreement if you’ll have more than 20 employees n Surety bond valued at $5,000 
  • California Department of Justice fingerprinting via its Live Scan service

City and County Jurisdictions  -Each city and county has different protocols. Depending on where you want to commercially grow cannabis in California, you might need to contact one or more of the following agencies to get the necessary local permits:

• Building Department

• Environmental Health Department

• Office of the County Agricultural Commissioner

• Office of the Sheriff or Police Chief

• Planning Department

• Public Works Department

CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture 1-833-CALGROW (225-4769) [email protected] calcannabis.cdfa.ca.gov

California Cannabis Portal 

• California Department of Fee and Tax Administration 800-400-5448 efile

California Department of Fish and Wildlife 

California Department of Justice Live Scan Fingerprinting Locations 

California Department of Toxic Substances Control EnviroStor 877-786-9427 

California Secretary of State 916-657-5448 sos.ca.gov/business-programs

• Labor Peace Agreements Contact any major union to help you with your labor peace agreement.

State and Regional Water Control Boards 916-319-9427 waterboards.ca.gov

If you need assistance with the process start with our Client Support Portal

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Is The IRS Required To Accept Tax Payments in Cash?

IRS Required Accept Cash Tax Payments
IRS Required Accept Cash Tax Payments

IRS Required Accept Cash Tax Payments

The short answer is YES…the IRS is required to accept cash for tax payments. However, they are not required to accept them in all locations at all times. As such, you may need to contact the local IRS office and set up an appointment to make a payment in cash, particularly if the payment is substantial. 

If you need further assistance, check our Doing Business in Cash or open a ticket with our Client Support Portal. 

[We intend to add a list of contact information for IRS Offices in California. 

The following is the text of an IRC Chief Counsel Memorandum on the subject:

 

Acceptance of Cash Payments at Taxpayer Assistance Centers

Issue:

Are the Taxpayer Assistance C~nters (TACs) required to accept cash from taxpayers

for the payment of taxes?

Conclusion:

The TACs are required to accept cash from taxpayers for the payment of taxes pursuant

to 31 U.S.C. § 5103. However, the IRS Is not legally prohibited from limiting the

acceptance of cash payments to TACs where safeguards cannot be implemented to

protect the interests of the I RS and taxpayers.

Discussion:

The United States Code provides that “United States coins and currency (including

Federal reserve notes and circulating notes of Federal reserve banks and national

banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or

silver coins are not legal tender for debts.” 31 U.S.C. § 5103. Thus, it seems clear that

the IRS is required to accept U.S. coins and currency for the payment of taxes. The

Department of Treasury’s website also includes a frequently asked question regarding

the requirement of accepting cash as legal tender for a debt. The response clarifies that

a private party (I.e., a non-government entity) is not required to accept cash payments.

See http://www.ustreas.gov/education/fag/currency/legal-tender.shtml.

While the U.S. government is required to accept cash in payment of taxes or other

debts, there is no statute or regulation requiring the United States to accept cash

payments at each and every location that accepts payments. The Service has

approximately 400 Taxpayer Assistance Centers (TACs). Taxpayers are able to make

FILES-123805-08 2

payments at each of the TACs. As a security measure, the Service has implemented

specific procedures to be followed when a taxpayer makes cash payment at one of the

T ACs. This procedure intentionally involves more than one employee. First, a taxpayer

desiring to make a cash payment must provide exact change. Second, this taxpayer

must be provided a receipt for the payment. The taxpayer is given Part 2 of the Form

809 as a receipt for the cash payment See IRM 21.3.4.7.2.1. The employee who is

authorized to receive the payment and to issue the Form 809 receipt is not authorized to

make any adjustments to the taxpayer’s account on IDRS. See IRM 21.3.4.7.2(4). This

limitation precludes an employee from accepting a cash payment, adjusting the

taxpayer’s account to reflect the payment, and then converting the cash payment to the

employee’s personal use. The mandatory separation of duties protects the employee,

taxpayers, and the IRS.

In those locations where there are a very limited number of employees, is not feasible to

accept cash payments. Minimal staffing at a location generally necessitates having

employees with more than limited authorities. Having an employee with limited IDRS

access in a TAC of this size severely restricts the services that can be provided to other

taxpayers at that location. Therefore, it seems reasonable that the Service accepts cash

payments only at the TACs with greater staffing. The IRM incorporates this reasoning

and authorizes the Director, Field Assistance or the Area Director to grant a deviation

from accepting cash payments to T ACs with fewer than three employees.

The exception provided for cash payments at small TACs is reasonable, but care needs

to be taken to ensure that the exception does not become the rule. That is, the Service

cannot eliminate its obligation to accept cash for the payment of taxes by staffing the

T ACs so that no centers have sufficient personnel to accept cash payments.

If you have additional questions or further concerns, please contact me or Joanne

Minsky of my staff at 202-622-5777.

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Why is aBIZinaBOX a good choice to advise a California cannabis business?

We are a good choice because:

  • We are California Licensed Firm – Individual CPA and you can verify it here or at CPAVerify.org

  • We are an AICPA Private Companies Practice Section [“PCPS“] member firm.  The AICPA’s Private Companies Practice Section (PCPS) supports CPA firms in the everyday intricacies of running a practice.
    aBIZinaBOX PCPS
    aBIZinaBOX PCPS

    PCPS partners with firms of all sizes, creating targeted and customizable practice management resources, networking opportunities and is a strong, collective voice within the CPA profession. We understand how difficult it is to keep up with the ever-changing business landscape while also plotting your firm’s direction.  PCPS strives to fill the gaps where your firm might not have internal resources.   According to the PCPS CPA Top issues survey, the top five issues for medium-size firms include bringing in new clients, finding qualified staff (at all levels), succession planning, retaining qualified staff (at all levels), retaining current clients. 

 

  • We are a member of the California Society of Certified Public Accountants [“CALCPA“]. The CALCPA is the largest statewide professional association of certified public accountants in the United States with more than 42,000 members. The following  strategic priorities support CalCPA’s
    CALCPA Member
    CALCPA Member

    vision and mission as well as the organization’s long-term success.

    • Advocate for issues that protect the profession.
    • Enhance and promote the visibility of CalCPA and the profession.
    • Cultivate the pipeline of future financial professionals and CalCPA members.
    • Provide value and engagement at every career stage.

 

 

  • We are licensed by the California Board of Accountancy [“CBA”] both at the firm and individual levels. 

    Jordan S. Zoot, CPA, P.C. – California Firm Lic. #7995
Jordan S. Zoot CPA, California Lic.# 132647
Jordan S. Zoot CPA, California Lic.# 132647

Our view is that if your cannabis business is located in California, your advisors should be licensed in California. When a CPA has a California license, it means that they have been subjected to CBA’s licensing review and vetting procedures, the individual has passed a rigorous California CPA Ethics exam, and it demonstrates a commitment to being in business in California…just like the businesses that we seek to represent day in and day out. If you are considering a different choice of advisor, take the time to verify and confirm that they have made the same commitment to professional practice in California. 

 

 

 

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What is you solution for for payroll and HR compliance?

ADP for Payroll HR

We recommend ADP 

ADP - our "go to" solution for payroll and HR
ADP – our “go to” solution for payroll and HR

exclusively for payroll compliance and HR. Our primary contacts are:

Small Business [1-50 employees] – Nicole Paris [email protected]  Cell:+1.508.868.1577

Larger Business [ > 50 employees] – Jeremy Paul  [email protected]

Tel: +1.312.221.1782

[More to come]

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How does the IRS audit cash intensive businesses like those in the cannabis industry?

Cash Intensive Businesses Audit

 

The purpose of this audit techniques guide (ATG) is to provide guidance for the examination of income in a cash-intensive business. This guide can be used during all phases of the examination. This ATG will:  Provide background about Cash Intensive Businesses  Identify frequent and/or unique issues  Provide examination techniques  Supply applicable laws and court cases This guide is not designed to be all-inclusive The use of Indirect Methods, also referred to as the Financial Status Audit Techniques (FSAT), is not prohibited. However, examiners must first establish a likeliness of underreported or unreported income. Examiners must then request an explanation of the discrepancy from the taxpayer. If the taxpayer cannot explain, refuses to explain, or cannot fully explain the discrepancy, an FSAT may be necessary. Remember that just being a Cash Intensive Business (CIB) does not automatically allow the use of an FSAT.

The accurate reporting of income and expenses by cash-intensive businesses has been the subject of various studies by the Service, as well as General Accounting Office (GAO). The GAO estimates that the individual income tax “gap” is in the hundreds of billions of dollars. The common theme of these studies is that there has been, for those taxpayers with the ability to determine their own reported income, an increasing underreporting of income. Of particular interest are businesses and individuals who receive most of their income in cash. Cash transactions are anonymous, leaving no trail to connect the purchaser to the seller, which may lead some individuals to believe that cash receipts can be unreported and escape detection. There are three main ways to misappropriate cash from a business.

It can be skimmed from receipts, for example, pocketed before it is recorded. If this happens it will not be discovered by auditing the books.  It can be stolen after it has been recorded, for example, cash removed from the cash register or goods stolen from the shelf for future resale.  A fraudulent disbursement can be created, for example, a payment to a vendor that is actually cashed by the owner’s son. The most significant indicator that income has been underreported is a consistent pattern of losses or low-profit percentages that seem insufficient to sustain the business or its owners. Other indicators of unreported income include:

  • A lifestyle or cost of living that can’t be supported by the income reported.
  • A business that continues to operate despite losses year after year, with no apparent solution to correct the situation.
  • A Cash T shows a deficit of funds.
  • Bank balances, debit card balances and liquid investments increase annually despite reporting of low net profits or losses.
  • Accumulated assets increase even though the reported net profits are low or a loss.
  • Debt balances decrease, remain relatively low or don’t increase, but low profits or losses are reported.
  • A significant difference between the taxpayer’s gross profit margin and that of their industry.
  • Unusually low annual sales for the type of business.

Auditing cash businesses are both a science and an art. Tax law, accounting and the process of reporting income are sciences. These require specific knowledge and are concrete and tangible. These can all be verified. The art comes from the examiner’s own creativity in developing a method to determine that all income is properly included. For this, the examiner must use their individual style and flexibility to modify the examination process as needed for each particular case. If an examiner wants to find income, they must actively look for income.

Unlike examining expenses, which can either be verified or not, hidden income is harder to find and requires a proactive approach. Examination techniques must be tailored to provide for the best analysis of a specific taxpayer’s possible income stream.

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How Does A California Cannabis Industry Business Pay Taxes in Cash?

The payment of tax liabilities in cash is not a simple matter. In some cases, it is necessary to make an advance appointment with the agency that is to be paid. The following is the most current information we are aware of:

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