Unpacking the Impact: CDTFA’s Strain on California’s Cannabis Industry, Recent Developments, and Industry Advocacy

LOS ANGELES–California, a trailblazer in the legalization of recreational cannabis, has faced challenges as the industry seeks to establish itself and cannabis companies in California make great efforts to flourish within the state. The California Department of Tax and Fee Administration (CDTFA) has emerged as a pivotal player, sparking debates and concerns within the sector for cannabis companies in California.

In this article, we delve into the issues surrounding the CDTFA’s impact on cannabis companies in California, while examining recent developments that indicate a potential shift in tax strategies. Additionally, we address claims regarding the alleged extraction of hundreds of millions of dollars from customers in California, what actions could be taken, and the influence of industry advocacy.

Taxing Troubles and Recent Developments for Cannabis Companies in California

Critics in the cannabis industry have voiced primary concerns about the tax burden imposed by the CDTFA. The taxation framework, encompassing both cultivation and excise taxes, has been a focal point of contention.

For instance, detractors argue that the existing tax structure impedes the industry’s ability to compete with the illicit market, where prices subsequently remain lower due to the absence of such tax obligations.

Recent signals from the CDTFA suggest a willingness to address the industry’s concerns regarding high taxes for cannabis companies in California. Insights indicate that the CDTFA is exploring avenues to lower taxes, potentially extending these benefits to city taxes as well. This proactive stance signals an acknowledgment of the need to create a more business-friendly environment within California’s evolving cannabis landscape.

Retail Excise Tax Exemptions and Claims of Revenue Mismanagement

A noteworthy development pertains to the Retail Excise Tax, which now excludes non-cannabis items attached to a cannabis product. For cannabis companies in California, this includes ancillary items like packaging and cartridges. However, retailers must meet specific criteria to qualify for this exemption. In addition to this, allegations have arisen regarding revenue mismanagement.

1. The charge must be reasonable.

2. Non-cannabis items must be available for purchase without the cannabis product.

3. The non-cannabis item can exceed the minimum packaging requirement in cost.

4. While not mandatory, it is advisable to separately state the charge on the receipt.

5. Inclusion on the menu is a mandatory requirement.

Revenue mismanagement refers to the alleged mishandling or misapplication of the prior distributor based excise taxes (which expired on 12/31/2022) by distributors, specifically, in relation to the imputed wholesale price of cannabis products.

It is claimed that some distributors may have overlooked or misunderstood the guidelines provided by the CDTFA. For cannabis companies in California, this resulted in the collection of excise taxes on the entire imputed wholesale price without appropriately itemizing out the value of “accessories,” such as vape cartridges or other non-cannabis items.

Allegations of CDTFA Misleading Practices

Amidst these developments, claims have surfaced that the CDTFA may have misled distributors through various channels, including guidance, training, and discussions. Some distributors allegedly overlooked the fine print for cannabis companies in California and collected excise taxes on the imputed wholesale price without itemizing out “accessories.”

Industry Advocacy for Cannabis Companies and Recent CDTFA Discussion Paper

Adding to the discourse, on October 2nd, the CDTFA issued a discussion paper on the topic. This move was reportedly influenced by leading cannabis retailers in California who applied pressure to address the industry’s concerns. The paper represents a significant step towards transparency and collaborative dialogue between regulators and industry players.

What’s Next for Cannabis Companies in California? Advocacy, Transparency, and Collaboration

While recent developments suggest a potential shift in the CDTFA’s approach to taxes within California’s cannabis industry, claims of mismanagement and misleading practices demand further scrutiny.

Advocates for transparency and fairness in taxation practices call for a thorough examination of the allegations, prompting a discussion that involves tax attorneys, fact-checking, and collaboration between industry stakeholders and regulatory bodies.

As the industry continues to evolve, addressing these concerns becomes crucial for fostering a sustainable and prosperous cannabis market in the Golden State.

Editor thanks to Rachel Wright, CPA and Abraham Finberg,  CPA for their article. For all the latest updates be sure to check 420CPA.com and subscribe to our newsletter. Reach out to Stephanie Jeffries at 420 CPA to book a consultation to find out how your business can flourish from working with us here at 420 CPA. For original article please find it here