LOS ANGELES- HNHPC Inc., part of Long Beach-based Catalyst Cannabis Co., has initiated legal action against several state agencies, including the primary tax collection bureau. The lawsuit, filed on December 28 in Orange County Superior Court, accuses the California Department of Tax and Fee Administration (CDTFA) and the Office of Administrative Law (OAL) of conspiring to illicitly expand the state’s 15% cannabis excise tax to encompass cannabis accessories, resulting in what the suit labels as a “massive overcollection” of taxes from marijuana businesses.
The crux of the lawsuit lies in a recent regulatory change by the CDTFA, which broadened the scope of the excise tax to include cannabis accessories, in addition to traditional cannabis products like flower, edibles, and extracts. This move, according to the suit, contradicts the CDTFA’s previously established policy. The OAL is alleged to have facilitated this change, making it complicit in the process.
Catalyst argues that this alteration in tax policy was motivated by a desire to claim victory in an audit of the company’s books. The audit concluded that Catalyst had underpaid its excise taxes, but Catalyst maintains it remitted the correct amount, arguing that the 15% tax should apply solely to actual cannabis goods, not accessories or the company’s total gross receipts.
The lawsuit claims that, as a result of this policy shift, many in the industry have been inadvertently overpaying taxes, while Catalyst may have been one of the few to pay the correct amount. This situation, the suit contends, benefits the state unjustly.
Catalyst’s response to the CDTFA audit was to appeal, and the lawsuit alleges that one CDTFA staff member initially validated Catalyst’s interpretation of the tax rules before the agency later claimed Catalyst was in arrears for the first and second quarters of 2023.
The lawsuit illustrates its point with the example of a $40 vape pen. According to Catalyst, instead of remitting the $6 in tax (15% of $40) expected by the CDTFA, they paid only 75 cents, representing 15% of the $5 value of the cannabis oil in the vape pen. Catalyst argues that the other components of the pen, like the cartridge and battery, should not be subject to the state excise tax.
The dispute over this tax interpretation led to the December rule change by the CDTFA, which the lawsuit claims was illegally expedited and approved by the OAL, and improperly allowed changes to regulations even after formal language had been submitted.
The CDTFA has declined to comment on the ongoing lawsuit. The case is set for a hearing on April 4 in Orange County, where the outcome could have significant implications for the cannabis industry’s taxation practices in California.
