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

 

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?

Ask An LA Cannabis Attorney: Do I need a cannabis water permit?

Posted by Margolin & Lawrence on January 4, 2018

The complex cannabis regulations that have been rolled out by local and state governments across California means that as a cannabis operator you will be working with a number of different regulatory agencies. The rules for many of the cannabis activities are promulgated by different agencies - for example, the Bureau of Cannabis Control regulates retail, distribution and delivery in the state of California, while CalCannabis (a division of the CDFA) regulates cannabis cultivation in the state. One area of great confusion for many cannabis cultivators that our Los Angeles cannabis attorneys have been fielding questions on is the issue of obtaining a state water license. The regulations for water were passed in October, and the application portal is currently open to apply for a water permit. The water policy aims to protect California's natural streams and bodies of water from pollution and prevent diversion of water for cannabis cultivation. 

On October 17, 2017, the State Water Board adopted a state-wide policy establishing strict environmental standards for cannabis cultivation. The state-wide policy is designed to protect water flows and water quality in the state of California. All cannabis cultivators will need to comply with this state-wide policy. In addition to complying with the Water Board’s state-wide policy, cultivators will need to comply with all other state, federal and local laws.

The state-wide policy will be implemented through a water quality permit known as the Cannabis General Order and through conditions for cannabis-related water rights known as Cannabis Small Irrigation Use Registration.

All cultivators will need to register their water right and water discharge using the Water Board’s online portal. The Water Board’s online portal can be found here. Depending on the cultivator’s water source, the state-wide policy may or may not apply to them.

To see the cannabis cultivation policy, click here. If you are a cannabis cultivator and have questions relating to the state-wide policy, Contact us to speak with one of our cannabis attorneys. 

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.

Breaking News: LA County Releases Proposed Cannabis Regulations

Posted by Margolin & Lawrence on December 19, 2017

L.A. County released long-awaited draft cannabis regulations yesterday. The Board of Supervisors, which creates laws that govern all of the unincorporated areas of the county (any area that is not part of an incorporated city) has been listening to the findings of the Cannabis Advisory Group over many months and has released the zoning requirements that will apply to commercial cannabis in the county, as well as the activities that will be licensed.The County will be issuing for Adult-Use (recreational) and Medical cannabis uses. Our LA cannabis attorneys have reviewed the proposed cannabis regulations and our findings are below. 

A Macro-Overview of Cannabis Microbusiness Laws In California

Posted by Margolin & Lawrence on December 13, 2017

Our Los Angeles Cannabis Attorneys are constantly fielding questions about a popular license category called microbusiness. The Type 12 license allows you to engage in multiple cannabis activities on the same premises. For example, you could cultivate up to 10,000 sq. ft. of canopy, and distribute, and deliver under one license for microbusiness. The chance to diversify your business and conduct multiple activities under one license is appealing to many existing and prospective cannabis business owners.

The Bureau of Cannabis Control (BCC), released their final regulations for cannabis microbusiness licensees last week, after revising them post SB-94 (you can read more about the process here). Here’s what they have to say about the restrictions on cannabis microbusinesses:

  • Microbusinesses must engage in at least 3 different commercial cannabis activities
  • Microbusiness applicants have to describe operating procedures as required for each activity
  • If a microbusiness license is revoked or suspended, it affects every activity done using that license
  • Microbusiness license fees range from $5,000 to $120,000 depending on size of operation (up to $5 million)
  • Retail operations & Microbusinesses with retail sales can give out free samples to medicinal marijuana customers, as long as it meets the same conditions as normal retail sales
  • Sales at events are allowed
  • Retailers & Microbusinesses with retail will have to employ security guards

If you’re interested in learning more about cannabis microbusiness or retail, Contact us to speak to a Los Angeles Cannabis attorney. 

 

L.A. City Council Voting on Cannabis Ordinances TODAY

Posted by Margolin & Lawrence on December 5, 2017

Cannabis attorney Allison Margolin addressing the LA City Council on the new zoning regulations on Monday:

Today  the LA City Council will vote to determine all of the City's.  the city's new restrictions on where a cannabis business may be located. The current California cannabis law requires that cannabis businesses be located more than 600 feet from all schools.

Los Angeles cannabis attorney

On top of that, LA's most recent draft of its location ordinance required businesses intending to conduct on-site retail sales to be located 750 feet away from sensitive-use areas, including schools, public parks, libraries, and drug treatment facilities, as well as any existing marijuana retail business.

While this is a more lenient approach to sensitive-use areas than LA's previous zoning restrictions, which called for an 800-foot buffer zone, some cannabis businesses and marijuana advocates, including our Los Angeles Cannabis lawyers, argue that introducing two different distancing standards will only complicate the already-opaque standards for marijuana zoning.

The City Council's vote will take place at 10 A.M. tomorrow, December 5th, at 200 N. Spring St.

Update on the L.A. Cannabis Social Equity Program

Posted by Margolin & Lawrence on November 29, 2017

Yesterday, the Los Angeles City Council met to discuss cannabis issues before voting on the final ordinance next month. Our Los Angeles Cannabis attorneys were present and are closely following developments on the path to a final LA Cannabis Ordinance and Social Equity Program. Broadly, the Los Angeles Social Equity Program aims to prioritize applicants who were disproportionately impacted by the war on drugs and criminalization of cannabis, and give them an opportunity to participate in the now legal, newly regulated market. 

The discussion yesterday centered around the social equity program and the tier system, which establishes priority to individuals with a criminal history. The social equity program will benefit disadvantaged communities. As a reminder, Tier 1 applicants are those who have a prior cannabis related conviction, a cumulative household income below the federal poverty line and have at least five years residence in an area impacted by the War on Drugs. So the question becomes, should priority be given to individuals with a criminal history? 

Opinions were heard on both sides of the controversial issue. The purpose of the social equity program is to help remove barriers for persons with a criminal history to equitable ownership and employment opportunities. Concerns were raised the criteria for Tier 1 was limited to cannabis only related crimes. The LA Dept. of Cannabis Regulation reasoned the purpose is to provide legitimate business opportunities in a now legalized industry. Oppositions were raised that the tier system did not distinguish between the level of offense such as, a misdemeanor or felony and excludes low income neighborhoods not impacted by the War on Drugs. This suggests person(s) convicted of a minor cannabis crime will have priority over person(s) who have been established in a disproportionately impacted community for many years. Recommendations were made to the Dept. of Cannabis Regulation to define distinct requirements to qualify as a Tier 1 applicant. For more information on the social equity program click here.

In addition to the Social Equity Program, the Council is also considering the revised Location Ordinance which introduces new distancing requirements. An important change to the proposed zoning ordinance is the addition of a 600 foot buffer to sensitive use areas for all activities including cultivation and manufacturing. Make sure you check the location

of your business is compliant with the land use ordinance. The vote is next week so make your voice heard and submit your comments to the City Council by December 4th

If you have questions about the Social Equity Program or the new zoning changes,Contact us to speak with one of our Los Angeles Cannabis Attorneys.

Los Angeles Introduces Cannabis Social Equity Program Criteria

Posted by Margolin & Lawrence on November 20, 2017

As we approach the Thanksgiving holiday, Los Angeles is one step closer to cannabis licensing. Here is the latest from our Los Angeles cannabis attorneys who attended today's City Council meeting. Today the Council further discussed the Social Equity Program and the 4 Tiers of priority that will be given to eligible applicants. Tier 1 will get the highest priority for Los Angeles cannabis licensing (after Measure M Retail priority which you can read more about here), and Tier 4 will get the lowest of the Social Equity applicants.

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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.