By Abraham Finberg CPA and Simon Menkes CPA
“A long time ago, in a galaxy far, far away …”
It is a time of civil war, and the REBEL CANNABIS BUSINESS OWNERS are fighting battles on all fronts with the STORMTROOPERS from the federal, state, and local TAX AUTHORITIES. This article is about one such ongoing battle: the REBELS versus the CITY OF LA!
The REBELS are vastly outnumbered, but they're fighting tooth-and-nail for their lives. Recent cannabis audits by the CITY OF LA'S Office of Finance have clarified the City's position. These results are preliminary and will probably change as companies pursue administrative hearings and possibly take the City to court.
CITY VICTORY #1 (preliminary): Tax on Tax
The Office of Finance takes the position that receiving payment from customers for city cannabis taxes is a type of gross revenue which cannot be excluded. In other words, tax is being charged on tax. If you charge your adult use customer $120.45, $100 + $10 city cannabis tax + $10.45 sales tax, they want you to pay the cannabis tax on $110.00, not $100.
The Office of Finance is saying, “The State of California counts the $10 city tax as income when it has you calculate state sales taxes, so we're treating it as taxable income as well.”
The fact that the state has you charge sales tax on the city's tax is another controversial issue, since the California sales and use tax law allows you to exclude gross receipts based on local taxes and the cannabis guide does not. Last we checked, you're supposed to follow the law rather than a tax guide but what do we know, we're just accountants!
Here's what the California law says: Section 21.00 (a) “GROSS RECEIPTS” (capitalization and bold type is from the actual municipal code) as used in this article shall not include… (3) … any California State, City, or city and county sales or use tax required by law to be included in or added to the purchase price and collected from the consumer or purchaser. Grammatically it looks like you don't have to include any of various taxes whether they are California taxes, City taxes, or City and County sales taxes. The Office of Finance believes this section of the law only allows you to exclude sales taxes.
CITY VICTORY #2: Retail sales default to adult use
Retail sales are charged at the 10% retail rate unless you can prove the sales were medical sales. In practice, the auditors will accept a point of sale report separating medical and adult use sales, however you may potentially have to provide the supporting documentation (i.e. a copy of a recommendation or your state valid County Medical Marijuana Identification Card) for a sample of sales to prove the sales are in fact medical sales.
CITY VICTORY #3: Excise Tax
The language from Section 21.00 seems to imply that a tax on a consumer such as an excise tax would be excluded from taxation. Again, the office of finance defaults to sales tax returns which charge a tax on excise taxes.
The REBEL CANNABIS BUSINESS OWNERS have won a few victories however:
REBEL CANNA-BUSINESS VICTORY #1:Transportation Tax
The 1% City Transportation Tax only applies to the service fee charged to deliver cannabis products, not the gross receipts from the sale of the product. The Office of Finance is taking the position that this will be a rarely used tax item, specifically for transportation only distributors.
REBEL CANNA-BUSINESS VICTORY #2: Only One City Tax Per Transaction
The City charges a 2% tax on cultivation, a 2% tax on manufacturing, and 5%/10% taxes on medical or adult use retail sales.
However, if you grow your own product, and/or manufacture your own product, and then sell it at retail, you don't have to pay City taxes at every step of the process. You are only charged on the retail medical or adult-use tax (the 5% or 10% taxes). For example, if you cultivate and then manufacture a concentrate which you retail to an adult-use customer for $100.00 (in this example, you're not charging the customer any city tax), you only have to pay the $10.00 adult use tax. You don't have to pay $2.00 for cultivating, another $2.00 for manufacturing, on top of the $10.
THESE RESULTS FROM THE BATTLEFIELD ARE PRELIMINARY! It will take some time to refine how the taxes are implemented, and hopefully pushback from business owners (legal and otherwise), combined with a more enlightened view from our government officials, will see some positive changes in the tax environment.
DO NOT GIVE UP, REBEL CANNABIS BUSINESS OWNERS! THE BEST ATTITUDE TO HAVE IS: KEEP CALM AND KEEP ON SELLING!