CA Cannabis Legal 2018 – Professional Advisors Critical
Happy New Year – CA Cannabis Legal 2018 – Professional Advisors Critical, both your attorneys and certified public accountants. We have spent the last four years months working for our CA cannabis industry clients. However, the last ten or so months had a substantial increase in the intensity of our involvement.
Rather than yammering about what we think the law or the regulations say. We encourage you to visit our website and investigate for yourselves. Iyou are wondering what is out there, the very end of this blog summarizes what we discovered when we “googled “California cannabis industry and CPA”. It would be an understatement to say “an unmitigated disaster.
We thought that by highlighting some of our direct experiences over the past year.
Federal Tax Issues
“Situation with IRC Sec. 280E“ – which you can read the background to here. The short version is that IRS Chief Counsel’s Office issued a memorandum, CCM 201504011 which provided guidance and bright lines for proper application of IRC Sec. 280E. We had a cannabis dispensary client for which we prepared four years worth of corporate tax returns. The IRS commenced an examination of the returns in early June 2017, and we closed the audit with a “no change letter” in early December. Might be interesting to ask a prospective advisor about their IRS audit experience with IRC Sec. 280E rather than just letting them espouse their “approach”.
California Sales, Excise, and Gross Receipts Taxes – Cannabis
Calculating The Tax – The interaction between new taxes, and the classification of cannabis as Type -M [medicinal] or Type -A [adult use] is complex, and a very significant “trap for the unwary”. Our prediction is that two-three years from now, there is going to be a world of hurt for retail dispensaries when CDFTA starts auditing the tax returns and produces huge underpayments due to improper calculation of these taxes. We wrote a detailed blog about the calculations that you can read at Calculations – California Cannabis Taxes – Retail
While on the topic, two additional observations we made regarding the CA taxes:
Product in Inventory or Under Contract pre-1/1/2018 – Cannabis products which were in a Distributor’s inventory, or purchased but not delivered to the Distributor by December 31, 2017, were exempt from the new taxes if sold by June 30, 2018. The rules for retail sales are quite different, and any sales at retail after December 31 are subject to excise tax. Further, if a Distributor sells cannabis purchased prior to January 1 to another Distributor, they are required to remit the tax. [See Emergency Regulation 3701]. One might surmise that a Distributor that purchased cannabis prior to January 1 which it did not take delivery of until 2018 might generate a substantial benefit.
Draconian Consequences for Late Payments – CDFTA has promulgated SEVERE penalties for late payment of cannabis tax.
The penalties for late filing and late payment of Sales Tax are:
• A 10 percent penalty if you do not file your tax return by its due date
• A 10 percent penalty if your tax payment is late
There is an additional penalty for cannabis cultivation or excise tax –
(1) Late Payments. In addition to any other penalty imposed pursuant to the Fee Collection Procedures Law (commencing with section 55001 of the Revenue and Taxation Code) or any other penalty provided by law, a penalty of 50 percent of the amount of the unpaid cannabis excise tax or cannabis cultivation tax shall be added to the cannabis excise tax and cultivation tax not paid in whole or in part within the time required pursuant to sections 34015 and 55041.1 of the Revenue and Taxation Code.
(2) Relief from Late Payment Penalty for Reasonable Cause. If the Department finds that a 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, the person may be relieved of the penalty provided by subdivision (f)(1) for such failure.
Any person seeking to be relieved of the penalty shall file with the Department a statement under penalty of perjury setting forth the facts upon which the claim for relief is based.
If the fifty percent penalty wasn’t enough, the Bureau of Cannabis Control [“BCC”] Disciplinary provisions piles on:
It appears that the imposition of a 50% penalty by CDFTA will invoke a Tier 2 sanction under the BCC rules which imposes
Minimum: revocation stayed, 15 to a 30-day suspension, a fine (as determined by the “Fine Formula” below), or a combination of a suspension and fine.
Maximum: Revocation of License
Bureau of Cannabis Control [BCC”] License Applications
While the BCC licensing process has been relatively smooth, we have encountered some difficult questions in the following areas:
Should we apply for both a Type-M [Medicinal] and a Type-A [Adult Use] license?
Our answer, at least for Temporary Licenses is absolutely.
Our answer is based on several reasons.
Medical Card Sales Tax Exemption – There is a clear and substantial advantage for customers to avail themselves of a ” medical card” due to potential savings of sales tax [but clearly not excise tax] on purchases. Sales of medical cannabis to those who have a medical marijuana identification card (MMIC) issued on a county-by-county basis by the California Department of Public Health (CDPH) and a valid government-issued identification card are now exempt from sales and use tax. Consumers can obtain the CDPH-issued cards at their county health department, at a cost that varies by county [See Medical Cannabis Tax Exemption]. The taxes on recreational cannabis can be as high as 45%, whereas medical cannabis users can witness a 25% reduction in taxes.
Age Requirements – Medicinal vs. Adult Use – the required age for Adult Use is twenty-one, while Medicinal is available to anyone between the ages of 18 and 20, and to any minor with an adult caregiver, for they’ll still be able to access their medicine.
Quantities For Personal Plants and Purchases Higher for Medicinal – Recreational marijuana rules in California dictate that citizens can grow six plants at home and keep an ounce in their pockets — no more, no less. With a doctor’s recommendation, however, medical cannabis patients can expect more, as in more of everything.
Greater THC Concentrations in Edibles – Starting on Jan. 1, the standard for edible cannabis products is 100 mg of THC, and that 100 mg must be divided into identifiable servings of no more than 10 mg each. Topicals and tinctures with more than 1,000 mg of THC are similarly banned.
However, there’s a loophole, and an exception: Medical cannabis patients will be able to access topicals or tinctures with up to 2,000 mg of THC. And these medical patients will also be able to legally purchase otherwise contraband edibles. Products that don’t abide by the new 100 mg rule will be able to be sold in medical dispensaries until July 1, provided they’re affixed with a label identifying them as strong medicine.
Gifts and product giveaways are not allowed for recreational marijuana users. On the other hand, medical users are exempt from this restriction under certain circumstances. Recognizing the need for low cost, easier access to cannabis for veterans and lower-income individuals, this is a huge step forward for California’s cannabis consumers.
Furthermore, medical card holders will get twice the THC limit prescribed for edibles as well. On top of that, a medicinal user will also be eligible to carry cannabis products with them on a plane.
The Owner Submission rules can be somewhat complicated. Our summary of the provisions are as follows:
An “Owner” is defined as:
Any person with an aggregate ownership interest of 20 % or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, encumbrance.
Chief executive officer of a nonprofit or other entity.
A member of the board of directors of a nonprofit.
Any individual who would participate in the direction, control, or management of the person applying for a license.
Entity-specific rules include
Financial Interest in a Commercial Cannabis Business
A financial interest means an investment in a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business except for
- The Managing Directors – Jordan S. Zoot, CPA and Samuel E. Levinson, CPA each have over thirty-five years of professional practice experience. Jordan was a Tax Partner with Arthur Andersen LLP, and Sam was an Executive Director with E&Y, and a Tax Partner with Deloitte LLP
- The firm is a licensed California CPA Corporation, and Jordan is a licensed California CPA with attest qualifications.
- We don’t spend our time yammering at seminars, we spend it serving clients located in San Diego, Orange, Los Angeles, Monterrey, San Francisco, Alameda, Sonoma, Napa, Humboldt, Mendocino, and Trinity counties [and we are growing by the day.
And now back to the “googling” and preface the following with the proviso that other then where we explicitly mention having had direct personal contact with the firms or individual practitioners identified below, our comments are general, and any prospective client is encouraged to perform their own due diligence in making an advisor selection. We suggest that asking probing questions about the topics we have identified and discussed above will certainly enlighten you with regard to the practitioners competence and current knowledge of the commercial cannabis industry in California today.
We decided to conduct an experiment to see to investigate what everyone is likely to find if they are seeking an advisor. So we performed the Google search “California cannabis and certified public accountant” and these firms showed up on page 1.
California Cannabis CPA – is led by a Derek Davis, a California CPA with six years of experience that lacks the qualifications to conduct attest engagements. The majority of their staff are Enrolled Agents, rather than CPA’s which means that may not have ANY accounting education or experience.
The next group comes from ganjapreneur.com and there isn’t much there to be had:
LC Solutions Michigan, PLLC – which was IMMEDIATELY disqualified because neither the firm nor anyone associated we could find was licensed or registered in California.
My Cannabis Accountant – isn’t even a CPA firm, its an EA with no verifiable connection to California.
420 CPA – is the Los Angeles offices of Abraham Finberg, CPA and while we commend his service in the US Army, there is no indication that he has any experience with the cannabis industry.
New Era CPA’s – is a San Diego based firm, and we will comment on them later. We have direct experience in having had to attempt to “clean up” after the work they did for an extractor that was operating a business near San Diego.
Anthony W. Imbimbo, CPA a San Diego based firm is identified on his website as a Cannabis Industry Expert, but the content of the site hasn’t been updated in two years.
If we tighten the search by adding “and Oakland” we find:
Luigi Zamarra, CPA – an Oakland based CPA that does have verifiable, cannabis industry experience. We know of him and will come back to comment on some history with IRC Sec. 280E,
We encourage you to investigate and draw your own conclusions. You are welcome to mention to any other firm that you saw them listed in our post. We are both hopeful and confident that you will reach out and engage with us. We rely on my grandmother’s Yiddish expression “I would rather lose to a smart person than win with an idiot”. Once again, a Happy, Healthy, and Successful 2018 to everyone.