California’s Cannabis Social Equity Benefits

Vendor Compensation, Equity Fee Waivers, and More

Massive social equity efforts are being made on the East Coast on behalf of cannabis businesses (see our articles in Bloomberg and elsewhere about New York and the Tri-State area:[1]) Now California has beefed up its offerings with vendor compensation being paid to equity-approved businesses. In addition, state tax credits of up to $250,000 per year are available to a broader spectrum of cannabis businesses. These and other benefits, combined with the fee waiver already made available by the state’s Department of Cannabis Control, provide exceptionally strong support to both new and existing California cannabis companies.

But what exactly is available, and to whom? And how can a business apply?

Equity Fee Waiver: Since January 1, 2022, California’s Department of Cannabis Control (DCC) has offered disadvantaged cannabis businesses an equity fee waiver that waives the yearly license fee. As many of California’s other more recent social equity offerings hinge on being accepted by the DCC as an Equity Business, it’s important to understand the criteria.

An Equity Business must have an equity owner that owns 50% or more of the business. Equity owners either have had a cannabis conviction or arrest, or have a household income less than or equal to 60% of the median income of the area where they live, or have lived for at least five years between 1980 and 2016 in an area disproportionately impacted by past criminal justice policies implementing cannabis prohibition. Additionally, an Equity Business must have gross revenue of $5 million or less per year.[2]

In order to apply for equity status, form DCC-1601 must be filled out and submitted, along with the required documentation.[3] [4] The DCC states that you must send your completed form at least 60 days before your license expires/renews.

CDTFA Vendor Compensation:  Cannabis retailers that have been approved for the DCC’s Equity Fee Waiver may then apply to the CDTFA for vendor compensation. If approved, these retailers will be able to retain 20% of the excise tax they collect from their retail sales of cannabis or cannabis products (as of January 1, 2023, excise tax is 15% of the sales price of the cannabis products including delivery fees and the collection of local/city cannabis taxes). These payments are slated to run through December 31, 2025.

The CDTFA instructs applicants to logon to their online services account, locate their retailer excise tax account, and then select the More option. There, they will find the Vendor

Compensation Application Link. Approval for vendor compensation hinges on proof of approval of the DCC Equity Fee Waiver.[5]

FTB High-Road Cannabis Tax Credit: California’s Franchise Tax Board is also supporting cannabis businesses with their High-Road Cannabis Tax Credit (HRCTC), which is available for tax years beginning January 1, 2023 through December 31, 2027. Taxpayers conducting a qualified cannabis business may receive a tax credit of 25% of their qualified expenditures in the taxable year, up to a maximum of $250,000 of credit per year.[6]

The FTB defines a qualified taxpayer as being a retailer or micro-business that provides full-time employees with all of the following: wages, group health insurance, and retirement or pension benefits. Also, employees must be salaried or work at least 35 hours per week and must be paid no less than 150% but no more than 350% of the state minimum wage, which as of this writing stands at $15.50 per hour.[7] So, employees must be paid at least $23.25 per hour, but not more than $54.25 per hour. For the purposes of this calculation, wages may include amounts paid by the employer for group health insurance, childcare benefits, and employer contributions to retirement or pension plans.

The HRCTC authorizes a 25% credit on the above-listed wages and wage-related expenditures, as well as payments for safety-related equipment, training and services; and labor-management training programs; with the maximum credit set at $250,000 per year. The FTB states that qualified taxpayers must request a tentative credit reservation for each taxable year during the month of July of the taxable year, or within 30 days of the start of their taxable year if it begins after July. The HRCTC credit reservation must be submitted online — the link will be available from July 1, 2023 at this web page: https://www.ftb.ca.gov/file/business/industries/high-road-cannabis-tax-credit.html#tentative-credit.

FTB Cannabis Equity Tax Credit: Finally, beginning January 1, 2023 through December 31, 2027, the FTB is offering qualified cannabis businesses a tax credit of $10,000. To qualify, the business must have been approved for the DCC’s Equity Fee Waiver. The FTB notes that it will be relying on the DCC to provide it with a list of approved businesses.[8]

In summary, California is finally coming to the social equity table with some meaningful offerings to support cannabis businesses, especially those who have been disadvantaged by the war on marijuana. The Golden State certainly has the means to help strengthen its cannabis industry. With a Gross Domestic Product in 2022 of over $14 trillion, California dwarfs the next leading state, Texas, estimated at $9 trillion GDP, and New York, estimated at $8 trillion GDP. Now, hopefully, California will also make meaningful progress to correct the state’s over-taxation of licensed cannabis businesses at the same time that it takes strong steps to rein in the over $8 billion of unlicensed cannabis activity that takes place in the state annually[9].

[1]A) https://news.bloombergtax.com/tax-insights-and-commentary/new-yorks-cannabis-social-experiment-and-how-you-can-participate

1. B) https://news.bloombergtax.com/tax-insights-and-commentary/n-y-recreational-cannabis-businesses-to-run-gauntlet-of-taxes
2. C) https://420cpa.com/opportunities-challenges-in-the-tri-state-cannabis-marketplace

[2] See https://cannabis.ca.gov/wp-content/uploads/sites/2/2022/12/Guidance_Equity_Fee_Relief_Program.pdf for more details, including maps of qualifying neighborhoods, etc.

[3] https://cannabis.ca.gov/wp-content/uploads/sites/2/2022/12/Form_DCC-1601_Equity_Fee_Relief.pdf

[4] Details on how to apply for DCC Equity status: https://cannabis.ca.gov/applicants/apply-for-equity-fee-relief/

About The Author

Abraham Finberg

Managing Partner

420 CPA AB FinWright

Abraham Finberg MBA, CPA, managing partner at AB FinWright, has been a leader in the cannabis sphere since 2009, counseling clients in all phases of business advisory and tax, from start-up through M&A and IPO.

About The Author

Rachel Wright

Managing Partner

420 CPA AB FinWright

Rachel Wright, MST, CPA, managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multinational entities, advising clients on everything from internal controls to the bottom-line implications of mixed local, state, federal and international statutes of taxation.

For all your taxation challenges in cannabis, feel free to reach out to me or any of the other team members at 420CPA and share with us your business challenges. We have been helping cannabis companies since 2009.