Cannabis Taxes: What is a Cannabis Resale Certificate?

Posted by Margolin & Lawrence on February 14, 2018

As recreational “adult-use” cannabis is officially legalized across California, cannabis taxation is more important than ever for legal cannabis operators. Our Los Angeles Cannabis attorneys are often asked about the new state tax system and what is new since January 1, 2018. As of a few months ago, the BOE became the CDTFA. For California, there are three different state-level taxes on cannabis business: the Cultivation Tax, the Cannabis Excise Tax, and the Sales and Use Tax. The new state tax agency has released an educational series to explain the new tax regime. Cannabis manufacturers and distributors need to become familiar with the resale certificate. As its name implies, a resale certificate relates to the Sales and Use tax.

The Sales and Use Tax applies to sales of cannabis or cannabis products (flowers, plants, hash, bud, vape pens, edibles, oils, etc.) to consumers – in other words, the “final sale” of cannabis before the product is used/consumed. However, there are circumstances in the cannabis supply chain where these products are sold to a cannabis business for resale, rather than to a consumer. For instance, if a licensed distributor sells cannabis to a licensed retailer, they’re making a sale, but the purchaser doesn’t intend to use or consume the product themselves. In order to prevent the distributor from being liable for taxation on this type of sale, the retailer can give the distributor a resale certificate. If timely and valid, this certifies that the purchaser intends to resell the product and therefore exempts the distributor from the tax.

Without a resale certificate, both the seller and the purchaser are liable for Sales and Use Tax. In the example above, the distributor would need to pay it for their sale to the retailer, while the retailer would need to pay it for the sale they make to the final consumer. The same goes for other sales of cannabis between licensed cannabis businesses. For instance, when a cultivator sells cannabis flower to a manufacturer, the cultivator is liable for a Sales and Use Tax unless the manufacturer gives them a resale certificate for the purchase.

One important thing for distributors to keep in mind is the distinction between “transport” and “sale”. If one licensed cannabis business purchases cannabis products directly from another, e.g. a retailer buying flowers from a cultivator, the distributor who is contracted to transport the products from the cultivator’s operation to the retailer’s isn’t making a sale, and therefore doesn’t need to pay a Sales and Use Tax, regardless of whether they’re given a resale certificate.

Even if all their business’ sales are for resale and exempt from Sales and Use Tax, all cannabis operators are still responsible for filing a tax return and reporting their activities to the California Department of Tax and Fee Administration. Remember, a resale certificate only applies to the Sales and Use Tax, not the Cultivation or Excise taxes.

Market Volatility & new Cryptocurrency Regulations on the Horizon? 

Posted by Margolin & Lawrence on February 6, 2018

Market volatility sent many investors reeling yesterday, with the dow plunging over 1,000 points. Cryptocurrency, a digital asset that is popular with cannabis entrepreneurs, was not spared. As of today, Bitcoin is trading at $7,049 per USD, down from over $18,000 a few weeks ago. Those familiar with cryptocurrency know that Bitcoin is only one type of asset, and that in fact there are multiple currencies available. One in particular, may be a potential solution to the cannabis industry’s banking crisis: PotCoin. Our Los Angeles cannabis attorneys are following developments in cryptocurrency closely and monitoring progress as regulations catch up with technology, and the state works towards a banking solution for cannabis operators. In fact, just this week, the U.S. Senate in conjunction with the SEC and the CFTC held a discussion titled “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” We will cover the results of this discussion in a future post.

One of the first cryptocurrencies to ever enter the market as a cannabis coin, PotCoin, was launched on January 21st, 2014. Back then, cryptocurrencies and their applications were widely regarded by the public as a space that catered to the underground, illicit economy of the world. Potcoin describes itself as “the first digital currency created to facilitate transactions within the legalized cannabis industry.” Established around the same time as cannabis legalization in Colorado, PotCoin positioned itself as an alternative to banking, even going so as far as to installing PotCoin ATM machines at a few locations. Now that the marijuana revolution in our country has garnered more support than ever, these cannabis cryptocurrencies will undoubtedly be brought up for legitimate discussion once again. Currently, PotCoin is valued much lower than Bitcoin at $0.129 USD at the time of publishing this article.

How does PotCoin differ from Bitcoin? PotCoin runs on a “proof of stake” system, as opposed to Bitcoin, which runs on a “proof of work” system. This means that the individual or entity mining for PotCoin does not need an all-powerful computer with intense graphics cards, but a certain stake or ownership of the currency to mine it. This eliminates all the expensive hardware associated with the “proof of work” system, and validates the blockchain more efficiently. Through blockchain technology, PotCoins are verified while still efficiently eliminating the double-spending problem. The largest issue that PotCoin faces is one of network scalability and transaction speeds. These are both issues that the development team for PotCoin are fervently trying to solve. Whether or not PotCoin will make its mark on the economy of cannabis is contingent on how the development team addresses these key issues.

With a multitude of states on the path towards the legalization of cannabis, it will be interesting to see whether or not the cannabis industry will adopt PotCoin as a potential solution to the banking quandary and certainly the development issues above will be determinative of whether PotCoin is up to the challenge. 

All About California Cannabis Taxes

Posted by Margolin & Lawrence on February 1, 2018

Many are excited about California’s new era of legalized marijuana. For the first time, state and local governments are allowing marijuana sales to all adults. There is also a new licensing system for all sectors of the industry. The new system creates many new opportunities for businesses and consumers.   But is also comes with new taxes that have caused sticker shock for many California cannabis operators and customers visiting dispensaries this month. Governments are eager for the new tax revenues, although some predict that if taxes are too high, a black market will persist as people opt out of the licensed system. One of the questions our Los Angeles cannabis attorneys are most frequently asked is about the new cannabis taxes and how they will affect California cannabis businesses.

To sum it up, effective tax rates for marijuana operators are high. Not only do cannabis businesses have to pay corporate taxes like any other business (except that they can't take deductions on their federal taxes due to 280E), but there are also additional city and state taxes specifically for cannabis operators that need to be factored in as well.  Just as Federal, State and Local law apply to cannabis operators, those governments all also apply their own taxes to cannabis.

Here is a chart that gives you an overview of the effective tax rates for different cannabis businesses, using Los Angeles as an example for factoring in local taxes as well:

NOTE that the Excise Tax (15%) and Sales Tax (8.5%) imposed on retailers is passed directly on to the consumer. So the effective tax rate is similar to the other activities when you factor that in, but overall the tax rates are very high for operators. 

One of the reasons cannabis operators must pay so much in taxes is that cannabis is still a Schedule I controlled substance under Federal Law. Section 162 of the U.S. Tax Code allows for businesses to deduct Ordinary and Necessary expenses from their taxes. An exception to this section is 280E, which prevents deductions from Federal Taxes for businesses involved in selling Schedule I controlled substances. You can read the text of 280E here and check out a seminal 2007 Tax Court decision -- CHAMPS v. Commissioner (2007) which allowed an operating dispensary to separate out product-touching deductions and deductions for a separate ancillary business. A related 2015 ruling in U.S. Tax Court held that unlike CHAMPS, an operator running an activism business and selling cannabis could not separate the two businesses and take deductions under 280. These two cases apply to retailers. Other cases have found that cultivators and manufacturers can take certain deductions for costs of production. We will cover this in a future post. 

Here are the individual maximum tax rates that apply:

  Federal Corporate Tax Rate*** California Cannabis Taxes California Business Taxes 8.84% Los Angeles Cannabis Taxes Los Angeles Business Taxes (.425%) Payroll Taxes (Estimated effective rate) Estimated Effective Tax Rate
Retail 21% 23.5% -- 15% excise tax + 8.5% sales tax 8.84% 10% in LA for adult use; 5% in LA for medical 0.43% 3%**** 57%
Cultivation* 21% 12% estimated ($9.25/ounce tax on flower = $148 per pound) + $0 sales tax 8.84% 2% 0.43% 3% 45%
Manufacturing 21% Collect Cultivator Tax + $0 sales for resale 8.84% 2% 0.43% 3% 35%
Distribution 21% Pay CDTFA Cultivator Tax + $0 sales for resale 8.84% 1% 0.43% 3% 35%
Testing 21% + Deductions = Estimated 15% - 8.84% 1% 0.43% 3% 34%
Microbusiness 21% per activity 8.84% per activity 0.43% 3% Varies per microbusiness activity
               
               
*(flower - different tax rates for stems and fresh plants; clones are not taxed by state)          
**280E likely does not apply to testing labs          
***280E prevents deductions for businesses trafficking cannabis          
****Social Security, Medicare, Calif & Fed. Unemployment - this is a percentage of employees' salaries, for purposes of the chart it is converted to be tied to revenue consistent with the other percentages          

 

These are the required California state cannabis taxes by activity: 

Cultivators must pay a $9.25/ounce tax on all dried cannabis flowers (and a lower rate per ounce for cannabis leaves or fresh cannabis plant).

Retailers must pay both a 15% excise tax on all their purchases of cannabis, as well as a sales tax on all their taxable retail sales, which varies by locality but can be close to 10%.

Manufacturers must collect cannabis cultivation taxes from cultivators from which they receive unprocessed cannabis, and pay these cultivation taxes to the distributors.

Distributors must collect cultivation taxes from cultivators and manufacturers from which they receive cannabis, and collect cannabis excise taxes from retailers they supply with cannabis.

In addition to these taxes, localities are free to impose their own cannabis business taxes, and many impose substantial taxes on both cultivation and all business proceeds.

It is important to note that the cannabis specific taxes are in addition to standard taxes like Federal and State corporate tax, and local business taxes for businesses operating in cities like Los Angeles.

While distributors, testing facilities and manufacturers appear to pay less taxes than cultivators or retailers, they will no doubt share the costs of taxation as cultivators increase their prices to account for the cultivation tax.

If these taxes are passed directly on to consumers, that could mean a retail outlet previously charging $60 per 1/8 of an ounce of marijuana would increase their price to $90. On the other hand, many have predicted that the pre-tax prices of cannabis will drop over time, as more large-scale cultivation, distribution, and retail operations reduce their overhead costs and margins, would could counteract some of the higher taxes.

For operators, these effective tax rates are extremely high and it is important to consult with a tax attorney and a qualified accountant who can help you with tax planning and preparation to set up your business for success. For more information and worksheets to calculate your California cannabis taxes, refer to the CDTFA’s website

 

Ask a Cannabis Lawyer: Which license do I need for cannabis events? 

Posted by Margolin & Lawrence on January 30, 2018

With the rise in popularity of cannabis related events in California such as Kush Stock, Chalice, High Times' Cannabis Cup, Hempcon, and the Secret Sesh; many event organizers and vendors are uncertain as to the new laws relating to cannabis events now that marijuana is legal in California. Our Los Angeles Cannabis attorneys are often asked about events and licensing. The Bureau of Cannabis Control recently issued guidance on just this topic. 

In short, everyone must be licensed. All cannabis event organizers will be required to obtain a cannabis event organizer license from the Bureau of Cannabis Control. The one exception to this is if you are hosting a private event. If your event is open to the public and you are selling tickets to the public, you need an event license. 

The Bureau recently clarified what will be expected of event organizers moving forward in order to comply with all regulations. If you want to sell cannabis products at your event, you will either need vendors who have a retail license there to do the sales, or you will need a retailer license yourself.

The State license fees will be determined by the number of events the organizer plans to produce during that year. However, this event license does not authorize the event organizer to cultivate, distribute, manufacture, or sell cannabis or cannabis products. In order to participate in the sale, cultivation, distribution or manufacturing or cannabis, the organizer must obtain separate licenses to engage in those commercial cannabis activities. This also means that compensation to a cannabis event organizer may not be tied to the sale of cannabis goods.

Once an event organizer obtains their event organizer license from the Bureau, the organizer must then ensure that all cannabis goods transported to the event site are transported by a licensed distributor and that the only vendors permitted to sell at the event to retail customers are a licensed retailer or microbusiness. To further ensure compliance by all participants, event organizers will be required to provide to the Bureau with a list of all licensees selling cannabis on-site at the event.

All cannabis goods sales at the event and access to the area where cannabis consumption is allowed must be limited to individuals 21 years of age and older, and cannabis products and cannabis consumption can’t be visible from any public place or non-age- restricted area. Food trucks are still allowed, but the consumption of alcohol and tobacco is not at cannabis events.

Currently, the State of California is issuing temporary cannabis event licenses for cannabis events that last no longer than four consecutive days. To obtain a temporary cannabis event license, the cannabis event organizer licensee must submit an application to the Bureau at least 60 days before the first day of the cannabis event and must obtain a license for each individual cannabis event from the Bureau for the specific dates and location of the event. Finally, the event organizer must obtain written approval from the local jurisdiction authorizing on-site cannabis sales and consumption by individuals 21 and older. This leaves it up to each individual municipality to determine whether they will allow cannabis events to take place. For example, the Orange County Fair Board members recently voted to prohibit marijuana-related events at the Costa Mesa Fairgrounds. The first cannabis event State license was issued to the Burn Out Music, Art and Cannabis festival scheduled to take place in Tulare County, but was subsequently cancelled by City Officials just two days before the event.

To start the process of applying for your event, you can do so directly on the Bureau of Cannabis Control’s website. For legal advice to ensure the success of your cannabis event, Contact us

How Do I Find a Compliant Cannabis Property in Los Angeles?

Posted by Margolin & Lawrence on January 25, 2018

As cannabis entrepreneurs and investors learn about the legal requirements to operate a compliant cannabis business, the next question many arrive at is - so how do I find a compliant property?

Culver City To Begin Cannabis Licensing

Posted by Margolin & Lawrence on January 23, 2018

 

Last night at a packed City Council meeting, Culver City approved a new cannabis public health regulatory ordinance. The vote was unanimous, 5-0, which seemed to take some councilmembers by surprise.  The new ordinance amended Culver City’s Municipal Code Chapter 11.17 on commercial cannabis businesses, adding a new subchapter which adopted, by reference, Los Angeles County’s ordinance on the subject. In other words, Culver City basically adopted the ordinance that L.A. County already had researched and implemented.

One speaker pointed out at last night’s meeting that Culver City took a smart procedural shortcut in adopting L.A. County’s well-thought-out ordinance. Perhaps this is something the other 85 or so cities in Los Angeles County who have not passed cannabis ordinances yet should consider. 

It is Time to Reform Asset Forfeiture

Posted by Margolin & Lawrence on January 18, 2018

After Jeff Sessions’ January 4 Memo on Marijuana Enforcement, many property owners and business people are wondering if federal asset forfeiture could become a growing problem. The asset forfeiture laws allow the federal government to seize assets (e.g., bank accounts, cash, vehicles, homes, or other buildings) that the government alleges are tied to the distribution or production of controlled substances, including cannabis. They remain a problem for all cannabis businesses, although some recent reforms have reduced the impact of asset forfeiture. 

Ask A Cannabis Trademark Lawyer: How Do I Apply For A State Trademark?

Posted by Margolin & Lawrence on January 9, 2018

 As of January 1st, 2018, the long wait is over: cannabis business owners can apply for California state trademarks. The application form can be obtained here: http://bpd.cdn.sos.ca.gov/ts/forms/tm-100.pdf. Because cannabis is still federally illegal and cannabis products themselves cannot be trademarked, this is a viable avenue for many California cannabis brands that will protect your business marks within the state. You can read our prior post about USPTO Trademarks here.

According to the website for the Office of the California Secretary of State:

“Beginning January 1, 2018, customers may register their cannabis-related Trademark or Service Mark with the California Secretary of State's office so long as:

1.The mark is lawfully in use in commerce within California; and 

2.Matches the classification of goods and services adopted by the United States Patent and Trademark Office.  

If the application submitted to register a Trademark or Service Mark is found deficient, the application will be returned to the registrant for correction.

Note: Not all cannabis-related products can be registered under current law due to the inability to meet federal classifications.”

This means that in order to obtain your state marks, you must be lawfully using the marks in commerce at the time of the application. Therefore, you will need to be licensed in compliance with SB 94,  both at the local and state level, before you’re eligible for trademark approval. Otherwise, if you claim an unlicensed use, you may run into issues with the Secretary of State. Further, once your license is obtained, you must also show that you’re making actual, bona fide use of the trademarks on your products in the stream of commerce. That means that customers are identifying you by your brand when they purchase your goods or services in the marketplace.

Ask an LA Cannabis Attorney: Can Existing LA Dispensaries Stay Open?

Posted by Margolin & Lawrence on January 2, 2018

2018 is here, and there is a lot of confusion in Los Angeles about the new cannabis laws. The question causing the most confusion is whether existing operators can stay open. Under Measure M, existing dispensaries with BTRCs who comply with Proposition D still have limited immunity until they are licensed. Under state law, a retailer needs a state and local license in order to conduct commercial cannabis activity. The City is currently holding a press conference on the issue and we will update our blog as this issue develops. Our LA cannabis attorneys give their opinion on the matter below. 

Update: At 1pm today, the City confirmed via a press conference that EMMD cannabis retailers in Los Angeles can remain open through the licensing process. 

For years under California state law, commercial marijuana activity has been limited to medical dispensaries and cultivation sites organized as non-profit collectives or cooperatives.  The City of Los Angeles has allowed medical marijuana dispensaries to operate in the City under various sets of rules, most recently under Proposition D, which passed in 2013 and provided immunity from a general ban on commercial cannabis activity to a specific group of medical marijuana dispensaries that have been in operation since 2007 and met various other requirements.

Under California’s Proposition 64, which passed in 2016, starting January 1, 2018, Californians are allowed to commercially grow, distribute, and sell both medical and non-medical marijuana, but only to the extent allowed by local governments (cities, or for those in unincorporated areas, counties).   The City of Los Angeles has a new system for regulating commercial cannabis activity, Measure M and portions of the Los Angeles Municipal Code implementing Measure M, which will allow for both medical and non-medical commercial cannabis.  It is expected that Los Angeles will begin open up its applications on January 3, and begin issuing licenses within a few weeks after that.  Under the terms of Measure M, the provisions of Proposition D were repealed beginning January 1, 2018.

Many have asked whether existing commercial cannabis businesses are allowed to continue operating under the old system of rules, until they are able to secure licenses in the new system.  Existing commercial marijuana dispensaries will retain their legal protection under state and local law, so long as they submit their applications for the new system within the time window provided by the City.  Los Angeles has announced that, for the first 60 days after opening its applications, only existing commercial cannabis businesses will be able to apply for licenses, in a “priority” round, and after this 60-day period, new commercial cannabis businesses will be eligible to apply for licenses.  Measure M makes clear that  existing medical dispensaries can continue operation after January 1, 2018, and need not shut down before applying for licenses, as long as they operate as non-profit collectives, follow all the rules set forth in Proposition D, and submit their applications for licenses within the 60-day priority period.

 Measure M describes this protection as follows: “An existing medical marijuana dispensary (“EMMD”) that is operating in compliance with the limited immunity provisions (Los Angeles Municipal Code Section 45.19.6.3) and tax provisions (Los Angeles Municipal Code Section 21.50) of Proposition D, may continue to operate within the City at the one location identified in its original or amended business tax registration certificate until such time that the EMMD applies for and receives a final response to its application for a City permit or license for commercial cannabis activity being conducted at that location. The City's designated licensing or permitting agency shall give priority in processing applications of EMMDs that can demonstrate to the City’s designated licensing or permitting agency that the EMMD has operated in compliance with the limited immunity and tax provisions of Proposition D. To avail itself of the terms of this Section, including the priority processing, an EMMD must apply for a City permit or license within sixty calendar days of the first date that applications are made available for commercial cannabis activity. If the City issues the EMMD a license or permit for commercial cannabis activity, the EMMD shall continue to operate at its location within the City in accordance with the rules and regulations set forth by the City."

California state law also provides that the provision giving legal protection to medical marijuana patient collectives and cooperatives, Health & Safety Code section 11362.775, will sunset one year after the State begins issuing cannabis licenses.  Until this law goes away, patients will still receive protection under state law for non-profit, collective cannabis activity.

 Accordingly, existing medical marijuana dispensaries in Los Angeles may continue operating  under California’s medical marijuana non-profit collective laws, and Los Angeles’s Proposition D, as long as they submit their applications for licenses during the 60-day priority period.

 For medical marijuana cultivators, manufacturers, and distributors not located at one of the Proposition D dispensaries, there is no explicit protection under Los Angeles law for continued operation pending licensing.  Los Angeles has, however, provided a priority licensing system for these existing  non-retail businesses that have been around since before 2016 and supplying a Proposition D dispensary since before 2017.  This suggests that the City does not intend to prosecute such businesses in current operation, but until these businesses retain licenses from Los Angeles, they face some risk of being prosecuted. 

If you are confused Contact usto speak with one of our cannabis attorneys who can provide clarity on these issues and the cannabis licensing process. 

CA Cannabis Licensing Explained in 2 Minutes - Video

Posted by Margolin & Lawrence on December 31, 2017

As we prepare for January 1 and recreational cannabis in California, many legal questions remain for cannabis businesses. In this video, Los Angeles Cannabis Attorneys Margolin & Lawrence explain the local and state licensing process for cannabis businesses in California. If you are looking for a high level overview of what you will need to do to start a cannabis business, or get your existing cannabis business into compliance, this is the place to start.

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.