What Can Taxpayer Rely – Authority?
What Can Taxpayer Rely – Authority?
We have a 1,800-word detailed article here.
The purpose of this memorandum is to issue guidance to remind examiners that frequently asked questions (FAQs) and other items posted on IRS.gov that have not been published in the Internal Revenue Bulletin are not legal authority. The FAQs and other items should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin
California Franchise Tax Board says
On October 12, 2009, we issued two FTB Notices, 2009-08, Franchise Tax Board Ruling Guidelines, and 2009-09, Reliance upon Written Advice – Relief under Taxpayers’ Bill of Rights. These notices were issued to update communications on guidelines relating to the issuance of written advice by us and reliance upon that written advice under the Taxpayers’ Bill of Rights.
California Dept. fo Tax and Fee Administration says
The California Board of Equalization [“BOE”] and California Dept. of Tax and Fee Administration [“CDTFA”] says [In Article 18, Section 1705]
(a) IN GENERAL. A person may be relieved from the liability for the payment of sales and use taxes, including any penalties and interest added to those taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the Board to be due to reasonable reliance on:
(1) The written advice was given by the Board under the conditions set forth in subdivision (b) below, or
(2) The written advice in the form of an annotation or legal ruling of counsel under the conditions set forth in subdivision (d) below; or
(3) The written advice was given by the Board in a prior audit under the conditions set forth in subdivision (c) below. As used in this regulation, the term “prior audit” means any audit conducted prior to the current examination where the issue in question was examined.
Written advice from the Board may only be relied upon by the person to whom it was originally issued or a legal or statutory successor to that person. Written advice from the Board which was received during a prior audit of the person under the conditions set forth in subdivision (c) below, may be relied upon by the person audited or a person with shared accounting and common ownership with the audited person or by a legal or statutory successor to those persons.
Who perform compliance audit cannabis business?
Compliance audit cannabis business
Compliance audit cannabis business
Simple answer – three letters – CPA or Certified Public Accountant.
We happen to read through the website for a vendor that had produced a very high-quality piece of compliance software for the cannabis industry. They had written about internal use for the software, and having “Third Party Auditors” perform “audits”, and right where they got into big trouble.
“Third Party Auditors” was defined as the performance of an “audit” that is a task that could be performed by an attorney, a consultant or a generic “accountant”.
Compliance Audit Cannabis Business
Specifically, their website stated:
“You focus on developing and enhancing your audit practice, which means empowering your auditors with a tool that makes them both efficient and proficient. You could create your own compliance checklists, even build your own audit software, but it’s expensive and time-consuming. There’s little reason to do that when you can use Brand X to conduct your audits, produce your reports, and still maintain control of your client engagements for a small fraction of the expense and time.”
We encourage clients to supplement regular self-audits with third party audits to get an independent view from an experienced consultant. This best practice is built into our software. When a client wants to engage a TPA for an audit, they make a one-step, in-app request to one of our registered auditors.”
The language which has been used to describe who is performing what task clearly in violation of the California Accountancy Act. The performance of independent audits of financial statements, elements of financial statements, reports on internal accounting controls and other types of regulatory compliance reviews is reserved exclusively for Certified Public Accountants [“CPA’s]. The practice of public accountancy which is the exclusive purview of CPA’s is contained in Section 5051 or the California Accountancy Act [“CAA”] which states
California Accountancy Act Section 5051.
“Except as provided in Sections 5052 and 5053, a person shall be deemed to be engaged in the practice of public accountancy within the meaning and intent of this chapter if he or she does any of the following:
(a) Holds himself or herself out to the public in any manner as one skilled in the knowledge, science, and practice of accounting, and as qualified and ready to render professional service therein as a public accountant for compensation.
(b) Maintains an office for the transaction of business as a public accountant.
(c) Offers to prospective clients to perform for compensation, or who does perform on behalf of clients for compensation, professional services that involve or require an audit, examination, verification, investigation, certification, presentation, or review of financial transactions and accounting records.
(d) Prepares or certifies for clients reports on audits or examinations of books or records of account, balance sheets, and other financial, accounting and related schedules, exhibits, statements, or reports that are to be used for publication, for the purpose of obtaining credit, for filing with a court of law or with any governmental agency, or for any other purpose.
(e) In general, or as an incident to that work, renders professional services to clients for compensation in any or all matters relating to accounting procedure and to the recording, presentation, or certification of financial information or data.
(f) Keeps books, makes trial balances, or prepares statements, makes audits, or prepares reports, all as a part of bookkeeping operations for clients.
(g) Prepares or signs, as the tax preparer, tax returns for clients.
(h) Prepares personal financial or investment plans or provides to client’s products or services of others in implementation of personal financial or investment plans.
(i) Provides management consulting services to clients.”
As a clear consequence of that definition, attorneys, Enrolled Agents, “consultants” and “generic accountants” are expressly prohibited from performing the tasks which are specifically for reserved for CPA’s.
There are no restrictions on a non-CPA using the software to verify, document and confirm that a business is following the guidelines mandated by the agencies in California that regulate the cannabis industry and oversee tax compliance. There is another level of complexity that should be highlighted, and that is the requirement under the CAA, as well as AICPA Professional Standards which requires that a CPA meet applicable Professional Standards with respect to independence.
Compliance audit cannabis business
 Section 5033. of the California Accountancy Act defines -“Certified public accountant” means any person who has received from the board a certificate of a certified public accountant and who holds a valid permit to practice under the provisions of this chapter.
 The agencies which regulate the cannabis industry in California are – [ Bureau of Cannabis Control [“BCC”], Dept. of Public Health – Manufactured Cannabis Safety Board [“CDPH”], Dept. of Agriculture – CalCannabis Cultivation Unit [“CDFA”].
 The agencies which oversee the application of tax statutes are the US Department of the Treasury – Internal Revenue Service [“IRS”], the California Franchise Tax Board [“FTB”], the California Dept. of Tax and Fee Administration [“CDTFA”] and the US Dept. of the Treasury – Financial Crimes Enforcement Network [“FinCEN”] for Title 31 violations.
 See 16 CRR §65. Independence. A licensee shall be independent in the performance of services in accordance with professional standards. A detailed analysis of the definition of independence and the accompanying restrictions on services that a CPA may provide to an “attest client is clearly beyond the scope of this letter.
While well-written compliance software is a good start, it is not a substitute for the skilled judgment of a CPA. You can read more of our thoughts on that topic at Software Never Substitute for CPA Judgment.
Compliance audit cannabis business
Must IRS Accept US Currency – Cash?
Must IRS Accept US Currency – Cash?
Must IRS Accept US Currency – Cash?
The very simple answer is YES the IRS must accept US currency in payment of tax obligations.
The United States Code provides that
“United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.” 31 U.S.C. § 5103. Thus, it seems clear that the IRS is required to accept U.S. coins and currency for the payment of taxes. The Department of Treasury’s website also includes a frequently asked question regarding the requirement of accepting cash as legal tender for a debt. The response clarifies that a private party (i.e., a non-government entity) is not required to accept cash payments.
See https://www.ustreas.govJeducationJfag/currency/legal-tender.shtml. While the U.S. government is required to accept cash in payment of taxes or other debts. there is no statute or regulation requiring the United States to accept cash payments at each and every location that accepts payments. The Service has approximately 400 Taxpayer Assistance Centers (TACs). Taxpayers are able to make payments at each of the TACs.
As a security measure, the Service has implemented specific procedures to be followed when a taxpayer makes cash payment at one of the TACs. This procedure intentionally involves more than one employee.
First, a taxpayer desiring to make a cash payment must provide exact change.
Second, this taxpayer must be provided a receipt for the payment. The taxpayer is given Part 2 of Form 809 as a receipt for the cash payment See IRM 188.8.131.52.2.1. The employee who is authorized to receive the payment and to issue the Form S09 receipt is not authorized to make any adjustments to the taxpayer’s account on IDRS. See IRM 184.108.40.206.2(4).
This limitation precludes an employee from accepting a cash payment, adjusting the taxpayer’s account to reflect the payment, and then converting the cash payment to the employee’s personal use. The mandatory separation of duties protects the employee, taxpayers and the IRS.
In those locations where there are a very limited number of employees, is not feasible to accept cash payments. Minimal staffing at a location generally necessitates having employees with more than limited authorities. Having an employee with limited IDRS access in a TAC of this size severely restricts the services that can be provided to other taxpayers at that location. Therefore, it seems reasonable that the Service accept cash payments only at the TACs with greater staffing.
The IRM incorporates this reasoning and authorizes the Director, Field Assistance or the Area Director to grant a deviation from accepting cash payments to TACs with fewer than three employees.
The exception provided for cash payments at small TACs is reasonable, but care needs to be taken to ensure that the exception does not become the rule. That is, the Service cannot eliminate its obligation to accept cash for the payment of taxes by staffing the TACs so that no centers have sufficient personnel to accept cash payments.
Must IRS Accept US Currency – Cash?
How do I pay my taxes?
CPA Engagement Letter Content – Read Carefully?
CPA Engagement Letter Content – Read Carefully
CPA Engagement Letter Content – Read Carefully as part of our efforts to expose this community to some information that you may never have
thought of, or cared about, but you REALLY need to understand, I thought it would be helpful to start a discussion about what is in [or should be in] the Engagement Letter you get from your attorney or CPA. I respect the attorney’s territory and hope our of our legal colleagues will chime in. I will begin by noting that our Engagement Letter is monster. It has cost us > $125K to produce and update and is derived from four principal sources:
- Engagement Letters share with colleagues at Big 4 FIrms
- AICPA Tax Section Engagement Letters and Checklists
- CNA and Travelers Professional Liability Counsel For CPA Firms
- Our own thoughts as reviewed by counsel.
There is a base Engagement Letter with General Terms and Conditions and five specific riders for types of services we provide.
In the interest of brevity, we are providing a link to a Dropbox Showcase which will permit you to view all of the documents in PDF format, but you will not be able to share the links or download the documents. We trust you understand that we are sharing materials that have cost us a tremendous amount of money to produce. We are doing so, not with the intention of selling anything [thought we would certainly welcome the chance to working with anyone. We have also included a number of other documents that are relevant to the commercial cannabis industry in California just to provide some insight with respect to how we assist our clients in conducting business.
CPA Engagement Letter Content – Read Carefully
Just to provide a couple of “teasers” to pique your interest, this is the Cannabis Industry Rider which we append to our Engagement Letter for Cannabis Industry clients.
This is the Cannabis Industry Rider – Incorporated Business Engagement Letter.
Due to the nature of the industry in which you are involved and the fact that the business activity violates certain Federal laws, it is important that you provide us with the following representations in a written document at the conclusion of our engagement and prior to our filing of the tax returns:
All information provided for the preparation of the client’s tax returns, either verbal or written, is true and correct to the best of the client’s knowledge and belief. All items pertaining to gross income are reported without offset or reduction. No items of expense or liability are overstated.
If any of this information is later found to be in error, the client will
(1) notify our firm immediately and
(2) assume full responsibility for any discrepancies.
In the event that our firm is unable to provide tax returns due to delays arising from the untimely response or lack of documentation, the client will hold the firm harmless for any penalties that may incur.
The client acknowledges that a tax provision, known as “Internal Revenue Code Section 280E,” is applicable and that it may potentially limit claimed deductions for business expenses incurred. The client acknowledges that advice has been rendered by our firm regarding the non-deductibility of certain expenses reported on the tax returns and the subsequent tax consequences of these
The client represents that they are not affiliated with any law enforcement agencies. The client further represents that none of the interactions with our firm have been for the purposes of gathering evidence for any court, criminal or civil. If the client is found to be so associated with law enforcement, the client hereby acknowledges that all of the actions taken constitute “entrapment.”
The client asserts that no requests have been made for illegal services or requests to “launder money” or to misrepresent facts to any person, including outside financial institutions. Further, the Client will indemnify, save and hold harmless, our firm and its members and employees from any loss, cost or expense or liability arising out of, or on account of any and all court proceedings, criminal or civil, on actions taken involving the Client
Finally, this is the indemnification language contained in our Engagement Letter…and admittedly is very aggressive in protecting us.
CPA Engagement Letter Content – Read Carefully
To the extent permitted by law, the Client agrees that aBIZinaBOX/JSZCPA, and its employees shall not be liable to the Client for any actions, losses, damages, claims, liabilities, costs or expenses in any way arising out of or relating to this engagement for an aggregate amount in excess of the fees paid by them to aBIZinaBOX for the services performed pursuant to this engagement. Further, in no event will aBIZinaBOX or its employees, agents, or representatives be liable for consequential, special, indirect, incidental, punitive, or exemplary loss damage, or expense (including, without limitation, lost profits and opportunity costs).
To the extent permitted by law, the Client shall indemnify and hold harmless aBIZinaBOX and its employees from and against any and all actions, losses, damages, claims, liabilities, costs and expenses (including, without limitation, reasonable legal fees and expenses) brought against, paid, or incurred by any of them at any time, in any way arising out of or relating to aBIZinaBOX services provided in connection with this engagement, except to the extent finally judicially determined to have resulted from intentional misconduct by aBIZinaBOX.
> The Limitation on Liability and Indemnification provisions of this engagement letter shall apply regardless of the form of action, loss, damage, claim, liability, cost or expense, whether in contract, statute, tort (including, without limitation, negligence), or otherwise. These provisions, as well as the other agreements and undertakings of the Client, shall survive the completion or termination of this engagement.
There are some that will assert that we are going too far in seeking to protect ourselves…and that’s too bad. It what we do for ourselves, and seek to do for our clients every day. If there is sufficient interest, we are willing to go through our entire twenty-page Engagement Letter and explain what does what to whom. Our view is that the best kind of clients we would ever wish to have, particularly in a tough highly regulated industry like the cannabis industry is clients that are aware and informed about the issues.
As we stated before, we would much rather contribute high-quality content to a forum that gets up on a soapbox and tries to sell something.
CPA Engagement Letter Content – Read Carefully
How does the DEA’s DCD operate
How does the DEA’s DCD operate
Application for Registration Under Controlled Substances Act of 1970
(New Applicants Only)
What authority medical sales tax exemption?
Medical Sales Tax Exemption
The medical sales tax exemption – November 8, 2016, the passage of Proposition 64 (The Control, Regulate and Tax Adult Use of Marijuana Act) exempts certain sales of medical marijuana from sales and use tax.
Sales of medical cannabis to those who have a medical marijuana identification card (MMIC) issued on a county-by-county basis by the California Department of Public Health (CDPH) and a valid government-issued identification card are now exempt from sales and use tax. Consumers can obtain the CDPH-issued cards at their county health department, at a cost that varies by county. A paper recommendation from a physician is not sufficient to qualify for this sales tax exemption.
This county-issued MMIC will have the State of California seal and indicate whether the cardholder is a “patient” or “caregiver.” The card will also contain the patient’s or primary caregiver’s photo, a nine-digit ID number, a CDPH website to verify the ID number, an expiration date, and the county that issued the card, as shown below. Cards are valid for the duration of the physician recommendation or up to one year, at which time the card must be renewed. Retailers should retain the purchaser’s nine-digit ID number and expiration date, along with the related sales invoice or other records of sale, to support the exempt sale.
Exempted products include medical cannabis, medical cannabis concentrate, edible medical cannabis products, and topical cannabis. These terms are defined in Business and Professions Code section 19300.5.
Retailers should not collect sales tax reimbursement on qualifying exempt sales of medical marijuana. They should claim a deduction on their sales and use tax returns for their qualifying exempt medical marijuana sales. Retailers may verify the validity of a nine-digit ID number on the CDPH website
Sales of recreational marijuana will not start until January 1, 2018. Such sales will be subject to sales tax and an excise tax. A cultivator tax will also apply to marijuana beginning on that date.
What is the procedure for cash payments to CDTFA
Procedure For CDTFA Cash Payments
The California Department of Tax and Fee Administration (CDTFA) has updated its procedure for CDTFA cash payments. The procedure requires that all cash payments be made by appointment
only at designated offices. You must call your local office for an appointment to make your payment at least 3 business days in advance. You will be given the date, time and location to transact your payment. If you do not have an appointment, your payment will not be accepted.
If you will be making a payment for an amount greater than $20,000, you must follow the additional instructions provided below.
Payments of Over $20,000
In addition to scheduling an appointment with the CDTFA to make your payment, you must do all of the following:
1. The payment must be placed in a clear, tamper-resistant, bank-deposit-type payment bag that is not larger than 9” x 12”. Do not overstuff the bag. Use more than one bag if your payment does not fit in one. Please contact your local office if you have any questions or need to see a sample bag. Bags may be purchased at office supply stores or online.
2. Complete CDTFA-705, Currency Deposit, and include a copy inside of the payment bag. If your payment requires multiple bags, a payment voucher must be included in each bag.
3. Cash should be sorted by denomination and all bills should face the same direction. Any mutilated, contaminated, worn, or counterfeit currency will not be accepted. The currency counter will be unable to read these notes. You will be contacted for bills that cannot be counted and they will be returned. Bills that are found to be counterfeit will not be returned.
4. Each payment bag must include the account name and account number on the outside of the deposit bag.
If making payment to multiple accounts, a separate bag must be used for each account. When making a payment in person, cash must be enclosed in a sealed bag before entering our lobby.
When you present a cash deposit bag to transact at a CDTFA office, you will receive a conditional receipt which states the amount you listed on the deposit voucher. The payment will be counted at a later time for verification.
You will be contacted if a discrepancy is found during the verification process. Your account will only be credited for the amount that has been verified and accepted by the CDTFA. See CDTFA Notice 245-CPI
How is withholding calc Bonus Sup. Pay?
Bonus, Commission, Supplemental Payments – Withholding
Bonus & Commission payments are considered by the IRS as “supplemental wages”. Meaning they are supplements to an employees regular wages. The IRS says this about supplemental wages,
“They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan.”
How Taxes are Calculated – Bonuses or Supplemental Wages
How they are taxed largely depends on how they are paid; if you pay a bonus on a single check along with an employee’s other regular wages then you can allow the standard payroll tax tables which are driven by an employees W4 election to dictate the withholding. However, if you separate the supplemental wage payment out from the employee’s regular wages then the IRS says to withhold Federal income taxes at a rate of 25%. Therefore, if you pay someone a $5,000 bonus you would withhold $1250.00 for Federal income tax alone. In addition, you would still be required to withhold State/local income taxes (Colorado at 4.63%), Social Security at 6.2% and Medicare at 1.45% (for YTD wages below $118K annually).
Why is this? At this point, we can only theorize as I’ve never seen anything from the IRS detailing the rationale for this rate. My assumption has always been that the tax rule is designed to ensure sufficient withholding is taken out of supplemental payments so that employees don’t have a tax surprise on their hands the following April. The impact for many employees of this supplemental tax rate can be an over funding of their personal income taxes which leads to a tax refund personally. For an employer, there is zero impact from an expense standpoint. An employer should NOT deviate from the IRS tax guidance on supplemental wages and should choose one of the two common options for taxing.
Net Bonus Amounts
When an employer wishes to give an employee after-tax net bonus things get complicated. Since the IRS supplemental tax rate is 25% and can lead to an employee’s earning being over-withheld for the year; we advise employers to shy away from Net bonuses and instead settle on a gross amount for the bonus. If you wish to give an employee a $1,000 net bonus, using the supplemental rate you would need to pay a gross bonus of $1594.39 (25% fed, 4.63% state, 6.2% social security, 1.45% Medicare). That’s 37.28% you as an employer would be covering in addition to the net bonus payment and not including another 7.65% or more in employer taxes. Frustrating? Yes, in particular, if you know your employee is in a relatively low or middle-class personal tax bracket and may have various dependents and other tax breaks personally. But remember you do not want to give your employees personal tax advice. At some point you the employer must settle on a gross amount for the bonus and determine if the payment should be combined with the employee’s salary/hourly wages or tax using the flat rate percentages. Either way, the employee is being rewarded with a bonus make sure you discuss with them the gross amount as that is their true reward not the net result after taxes.
Supplemental Wages Combined with Regular Wages
If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.
Supplemental Wages Identified Separately from Regular Wages
If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee’s regular wages
1. If you withheld income tax from an employee’s regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages
a. Withhold a flat 25% (no other percentage allowed).
b. If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax withheld from the regular wages. Withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.
2. If you did not withhold income tax from the employee’s regular wages in the current or immediately preceding calendar year, use method 1-b. This would occur, for example, when the value of the employee’s withholding allowances claimed on Form W-4 is more than the wages.
Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes.”
What are Mgt Svc products you offer?
Cannabis Management Services Products
What products do you offer as part of CPA Services?
The CPA Services accounting and tax products we offer include:
What is the History of the CHAMPS litigation on IRC Sec. 280E ?
CHAMPS Litigation on IRC Sec. 280E (The ‘Two Business” rule)
The CHAMPS Litigation on IRC Sec. 280E use of IRC 263A alone to increase Cost Of Goods Sold may still leave the legal marijuana business with a punitive effective tax rate after application or IRC §280E. Absent any regulations to guide the practitioner, we look to relevant U.S. Tax Court cases for guidance. It is well established that a taxpayer can have more than one trade or business36. In Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner (CHAMPS)37. the Tax Court expanded IRC §280E to permit the deduction of ordinary and necessary expenses to the extent two businesses are conducted at the same business location.
Some states, including California, operate using a caregiver model. It is important to understand the differences in this business model. Some dispensaries in this model offer palliative care,
which is specialized medical care for people with serious illnesses. It focuses on providing patients with relief from the systems and stress of a serious illness. The goal is improving the quality of life for both the patient and the family. CHAMPS was in the business of providing counseling and other caregiving services to its members, who were individuals with debilitating diseases.
Under the California Compassionate Use Act of 1996, the taxpayer provided marijuana to members who requested it. The business charged its members a membership fee that generally reimbursed the business for its costs of the caregiving services and its costs of the medical marijuana. This left the business substantially in compliance with California law, since in the caregiver model the caregiver is reimbursed for costs, but should not generate a profit on an ongoing basis. At audit, the Service disallowed the expenses as non-deductible under IRC §280E because they were incurred in connection with the trafficking of a controlled substance under the federal CSA.
47% of the of the CHAMPS members suffered from AIDS, while the remainder suffered from cancer, multiple sclerosis or other terminal or chronic diseases. The primary purpose the entity was to provide caregiving services to its members. The secondary purpose was to provide members with medical marijuana pursuant to the provisions of California law and instruction in the use of the marijuana to benefit their health. The most important aspect of this case is that the palliative care services provided by CHAMPS were extensive. Support group sessions were held for members including those with AIDS, addiction, and emotional development problems.
Low-income members were provided with hearty daily lunches and hygiene supplies were also available. Counseling benefits related to life-coping issues were available. In short, CHAMPS was a palliative care entity that happened to dispense marijuana, rather than simply a marijuana dispenser.
On its tax return, CHAMPS did not make any allocation subject to IRC §280E. All ordinary and necessary business expenses were deducted. At trial, CHAMPS argued they had two businesses: a primary trade or business of palliative care (caregiving) and a secondary trade or business as a marijuana dispenser. CHAMPS argued and the Court agreed, that the deductions for the non-trafficking business should not be subject to IRC §280E. The Service accepts the characterization that two or more undertakings are separate activities unless the characterization is ‘artificial or unreasonable”. Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances. They do not express intent to deny the deduction of all of a taxpayer’s business expenses simply because the taxpayer was involved in trafficking in a controlled substance.
We hold that section 280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petitioner also is involved in the trafficking in a controlled substance. It is important to note that CHAMPS had contemporaneously created records which clearly showed the costs spent on each activity, including detailed time records of employees’ time spent in each of the two businesses.
Absent §280E regulations pertaining to two distinct businesses operating from the same location, we look to the guidance under IRC §183 and the supporting regulations. Reg. §1.183–1(d)(1) provides that “(t)the taxpayer’s characterization will not be accepted, however, when it appears that his characterization is artificial and cannot be reasonably supported by the facts and circumstances of the case.”
Most significant facts and circumstances in making this determination are:
- The degree of the organizational and economic interrelationship of various undertakings.
- The business purpose which is (or might be) served by carrying on the various undertakings separately or together in a trade or business or in an investment setting.
- The similarity of various undertakings.
The Tax Court later expanded facts and circumstances test in Rupp v. Commissioner, which provides nine factors for use in determining whether the two undertakings share a close relationship to one another:
- Whether the undertakings are conducted at the same place;
- Whether the undertakings were part of a taxpayer’s efforts to find sources of revenue from his or her land;
- Whether the undertakings were formed as separate activities;
- Whether one undertaking benefited from the other;
- Whether the taxpayer used one undertaking to advertise the other;
- The degree to which the undertakings shared management;
- The degree to which one caretaker oversaw the assets of both undertakings;
- Whether the taxpayers used the same accountant for the undertakings
- The degree to which the undertakings shared books and records.
The Tax Court subsequently applied the nine factors of Rupp in Olive v. Commissioner 139 T.C.No 2.. While not cannabis industry-friendly, Olive helped further frame the outer limitations of the ‘two business rule’. Olive operated “The Vapor Room”, purportedly a medical marijuana dispensary and a caregiving activity. The Court found that the taxpayer was not operating two businesses and was therefore not entitled to a portion of its IRC 61 ordinary and necessary business expenses.
Some of Olive’s patrons suffered from AIDS, HIV, cancer and other terminal diseases. Taxpayer felt CHAMP applied here. The court applied the nine factors from Rupp and found that the taxpayer operated only one business. Contrary to CHAMPS, where the Court found two businesses existed, in Olive the Court determined that there was one activity, trafficking in a controlled substance.
How Do IRC Sec. 263A UNICAP Rules Apply To CA Cannabis?
IRC Sec. 263A UNICAP Rules Apply To CA Cannabis
IRC Sec. 263A UNICAP Rules Apply To CA Cannabis. The rules require more indirect costs to be allocated to inventory than the full absorption rules under IRC §471. The UNICAP rules require a producer of inventory to include in the cost of its inventory the direct costs of such property and such property’s proper share of those indirect costs, part or all of which is allocable to such property. Under UNICAP, direct costs include direct material costs and direct labor costs. UNICAP is required for most manufacturers and resellers with the exception of businesses with less than $10 million in gross receipts on a three-year rolling average basis.
Most cannabis businesses that do not produce products will not be required to comply with UNICAP. A reseller which is not subject to the UNICAP rules is usually required to include only direct costs in the cost of its inventory.28 A marijuana business would be well advised to comply with the UNICAP rules, whether or not it is required to do so. First, this would allow it to maximize the costs allocated to cost of goods sold. Potentially, it could minimize the number of disallowed business expenses.
Nothing in the code or regulations states taxpayers cannot voluntarily follow the UNICAP rules. For growers of marijuana, not all expenses will be allowed as the cost of goods sold, but many wills. Examples include rent, electricity, water, nutrients, security, insurance, scales, grinders, packaging materials, delivery vans, labor, excise taxes, accounting software, and traceability software.
Generally speaking, a state-licensed marijuana retailer is ‘trafficking’ in the sale of marijuana in violation of the federal CSA and will NOT be allowed a deduction for ordinary and necessary business expenses. The solely written guidance from the IRS comes in the form of a Chief Counsel’s Advice (CCA). This CCA addresses two questions:
- First, how is a cost of goods sold determined for a taxpayer subject to IRC §280E? Taxpayers should calculate Cost of goods sold “using the applicable inventory-costing regulations under §471 as they existed when §280E was enacted.30 Therefore, Reg. §1.471-3(b) for resellers, and Regs. §1.471-3(c) and 1.471-11 for producers are applicable for computing COGS.
- Second, may the IRS require the taxpayer to use an inventory method for the controlled substance? “Yes, unless the taxpayer is properly using a non-inventory method to account for the…controlled substance pursuant to the Code, Regulations, or other published guidance.” It is interesting to note that the author is aware of no other circumstances where an interpretation of a law is restricted to other laws in effect at that time of passage.
What is Cost Goods Sold [“COGS”], how is it calculated?
Cannabis Cost Goods Sold Calculations
Cannabis Cost Goods Sold Calculations is not a deduction but actually, an adjustment is taken into account in arriving at gross income. Regulation §1.61-3(a) provides, “gross income” means “…the total sales, less the cost of goods sold.” Although IRC §280E disallows any deduction for a marijuana seller’s ordinary and necessary business expenses, the legislative history fails to include the cost of goods sold in this rule. The literature suggests that Constitutional concerns of the Sixteenth Amendment, which taxes ‘incomes’, are the reason for this exclusion.
In the Senate hearings prior to passing IRC §280E, discussion suggested including the cost of goods sold in the ‘disallowed’ expenses for drug traffickers. However, the feeling that this could create a constitutional issue leading to court challenges (and delays) prevailed, and cost of goods sold remained an available adjustment to drug traffickers.
Although the Service has not issued regulations related to IRC §280E, the Service allows the adjustment for Cost of Goods Sold (COGS) on the tax returns of businesses engaged in drug trafficking. On November 24, 2010, U.S. Representatives Fortney Pete Stark, Barney Frank, Jared Polis, Linda Sanchez, Raul Grijalva, and Sam Farr wrote to the office of the Chief Counsel of the IRS, asking the service to create guidance for regulations related to deductions for state-licensed marijuana businesses.
The Chief Counsel’s Office replied to the Congressman on December 16, 2010, stating that the IRS is unable to issue regulations for IRC §280E since neither the Controlled Substances Act nor IRC §280E makes the exception for medical marijuana. Further, the Chief Counsel places blame on Congress to change either IRC §280E or the Controlled Substances Act.
Cost Method for Cost of Goods Sold
A business must use an inventory method of accounting whenever “the production, purchase or sale of goods is an income-producing factor. Under an inventory method, costs related to producing, acquiring, storing, and handling goods are not currently deductible. These costs must be included in the costs of inventory and deducted when inventory is sold. In the typical business, tax professionals look to minimize current income by taking deductions during the current period. IRC §263A does not magically transform otherwise disallowed costs under IRC §280E into allowed capitalized costs, although the tax professional should look to maximize the number of deductions which can be justifiably capitalized. Much billable work exists for tax and accounting professionals who possess the skills to wade through client inventory records and classify expenses to maximize the cost of goods sold deduction and support the conclusions at an examination.
Generally, the current year inventory costs are added to the beginning of the year inventory amount and reduced by the costs of inventory on hand at the end of the year to calculate costs of goods sold for the year.
Section 471 and methods required by Section 263A provide that marketing, advertising and selling expenses are “not required” to be treated as inventory costs. Under Reg. §1.471–11, 6(a), taxpayers must include as inventoriable costs all direct (e.g., the cost of inventory and delivery, and the cost of materials and labor for manufactured inventory) and indirect production costs (e.g., rent and utilities related to inventory).
How report cash pmt > $10,000 to IRS?
Report cash payment over $10,000 to IRS
Form 8300 – Is Your Business Filing the Proper Cash Transaction Forms?
Has your business ever received a large cash payment, and you were not quite sure what your reporting obligations were regarding that large payment? The general rule is that you must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if your business receives more than $10,000 in cash from one buyer as a result of a single transaction or two or more related transactions.
The Form 8300 provides valuable information to the Internal Revenue Service and the Financial Crimes Enforcement Network (FinCEN)
in their efforts to combat money laundering. This is an important effort, since money laundering is a tool used to facilitate various criminal activities, ranging from tax evasion to terrorist financing to drug dealing, to hide the proceeds from their illegal activities.
Filing Form 8300
Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file a Form 8300. Persons includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate. Persons must file a Forms 8300 with the IRS if any part of the transaction occurs within any of the 50 states, the District of Columbia, or a U.S. possession or territory (American Samoa, The Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico and the U.S. Virgin Islands).
If you are required to file Form 8300, you must do so by the 15th day after the date the cash transaction occurred. A person can file Forms 8300 electronically or by mailing the form to the IRS at: Detroit Computing Center, P.O. Box 32621, Detroit, Michigan 48232.
In addition to filing Forms 8300 with the IRS, companies need to furnish a written statement to each person whose name is required to be included in the Form 8300 by January 31 of the year following the transaction. This statement must include the name, address, contact person, and telephone number of the business filing Form 8300, the aggregate amount of reportable cash the business was required to report to the IRS from the person receiving the statement, and that the business provided this information to the IRS.
Meeting the proper filing requirement and the requirement to furnish a written statement to each person named on the Form 8300 is very important, because there are potential civil and criminal penalties for failure to file Form 8300. Penalties for violation of the Form 8300 filing and furnishing requirements have been increased by the Trade Preferences Extension Act of 2015. Increased penalties apply to Forms 8300 and related notices requiring filing or furnishing after December 31, 2015. In addition, penalty amounts are now adjusted annually for inflation.
Electronic Filing of Form 8300
On Sept 19, 2012, FinCEN announced that businesses may electronically file their Forms 8300 using the Bank Secrecy Act (BSA) Electronic Filing (E-Filing) System. E-filing is free, and is a quick and secure way for persons to file Forms 8300. Filers will receive an electronic acknowledgment of each submission. For more information about Form 8300 e-filing, see the FinCEN news release.
How file a complaint about a tax pro or return preparer?
File Complaint – Tax Pro Return
If you need to File Complaint – Tax Pro Return
- IRS OPR Circular 230 Tax Professional Complaint – is submitted in a letter to OPR.
Internal Revenue Service
Office of Professional Responsibility
SE:OPR – Room 7238/IR
1111 Constitution Avenue NW
Washington, DC 20224
- IRS Return Preparer Complaint
- IRS Return Preparer – FRAUD or CRIMINAL CONDUCT
- IRS Identity Theft Affidavit
- IRS CPE Provider Complaint
- IRS Impersonation Scam Reporting
- IRS Waste and Abuse Reporting
- Whistleblower Retaliation Reporting
- Government Contractor Fraud Reporting
The Internal Revenue Service’s [“IRS’s”] Office of Professional Responsibility [“OPR”] is the point of contact for Circular 230 tax practitioner professional discipline and regulation.
OPR’s organizational structure includes three major segments: Office of the Director, Legal Analysis Branch, and Operations and Management Branch.
OPR is committed to:
- Independent, fair and equitable treatment of all tax practitioners consistent with our Title 31 authority and principles of due process.
- Rendering fair and independent determinations regarding alleged misconduct in violation of Circular 230, Regulations Governing Practice before the Internal Revenue Service.
- Educating/maintaining tax professionals’ knowledge of relevant Circular 230 provisions.
- Providing guidance and feedback to field/agency sources regarding essential referral criteria for each relevant Circular 230 provision.
- Strengthening partnerships with other parts of the IRS and with external practitioner organizations.
- Developing procedures that ensure timely case resolution.
- Developing policies and regulations that ensure fair and equitable disposition of Circular 230 cases.
- Developing and implementing proactive strategies for identifying violations of Circular 230.
OPR maintains a FAQ for Circular 230 Tax Professionals that can be found here.
Treasury Inspector General for Tax Administration [“TIGTA”]
audits, investigations, and inspections and evaluations protect and promote the fair administration of the Federal tax system and work to ensure that the Internal Revenue Service (IRS) is properly doing its job.
TIGTA reports directly to the Secretary of the Treasury and has oversight and review responsibility that extends to the IRS Office of Chief Counsel, the IRS Oversight Board, and the Taxpayer Advocate Service.
A maintains a highly skilled, proactive, and diverse Inspector General organization dedicated to working in a collaborative environment with key stakeholders to foster and promote fair tax administration.
How much can I contrib. to my SEP plan?
Calculating SEP Contribution Limits
There are rules to consider in calculating SEP contribution limits. The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:
- 25% of compensation, or
- $55,000 for 2018 ($54,000 for 2017 and subject to annual cost-of-living adjustments for later years).
These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Compensation up to $275,000 in 2018 ($270,000 in 2017 and subject to cost-of-living adjustments for later years) of an employee’s compensation may be considered. If you’re self-employed, use a special calculation to determine contributions for yourself.
Contributions must be made in cash; you cannot contribute property.
If you’ve contributed more than the annual limits to your SEP plan, find out how to correct this mistake.
How much can I contribute if I’m self-employed?
The same limits on contributions made to employees’ SEP-IRAs also apply to contributions if you are self-employed. However, special rules apply when figuring the maximum deductible contribution. See Publication 560 for details on determining the contribution amount.
Must I contribute the same percentage of salary for all participants?
Most SEPs, including the IRS model Form 5305-SEP, require you to make allocations proportional to your employees’ salary/wages. This means that everyone’s contribution is the same percentage of salary.
If you haven’t made contributions to participants’ SEP-IRAs equal to the same percentage of each participant’s compensation, find out how you can correct this mistake.
If you are self-employed, base your contribution on net profit – minus one-half of the self-employment tax – minus your SEP contribution. See IRS Publication 560 on determining the contribution amount.
If I participate in a SEP plan, can I also make tax-deductible traditional IRA contributions to my SEP-IRA?
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
What are the record-keeping and reporting requirements for Cultivation?
Article 5. Records and Reporting
§ 8400. Record Retention. For the purposes of this chapter, “record” includes all records, applications, reports, or other supporting documents required by the department. (a) Each licensee shall keep and maintain the records listed in subsection 8400(d) of this chapter for at least seven (7) years from the date the document was created. (b) Licensees shall keep records, either electronically or otherwise, identified in section 8400(d) of this chapter on the premises of the location licensed. All required rRecords shall be kept in a manner that allows the records to be examined provided at the licensed premises or delivered to the department, upon request. (c) All records are subject to review by the department during standard business hours or at any other reasonable time as mutually agreed to by the department and the licensee. For the purposes of this section, standard business hours are deemed to be 8:00am – 5:00pm (Pacific Time). Prior notice by the department to review records is not required. (d) Each licensee shall maintain all the following records on the licensed premises, including but not limited to: (1) Department issued cultivation license(s); (2) Cultivation plan; (3) All records evidencing compliance with the environmental protection measures pursuant to sections 8304, 8305, 8306, and 8307 of this chapter; (4) All supporting documentation for data or information entered into the track-and-trace system; (5) All UIDs assigned to product in inventory and all unassigned UIDs. UIDs associated with product that has been retired from the track-and-trace system must be retained for six (6) months after the date the tags were retired; (6) Financial records related to the licensed commercial cannabis activity, including but not limited to, bank statements, tax records, contracts, purchase orders, sales invoices, and sales receipts; (7) Personnel records, including each employee’s full name, social security number or individual tax payer identification number, date of employment, and, if applicable, date of termination of employment; (8) Records related to employee training for the track-and-trace system or other requirements of this chapter. Records shall include, but are not limited to, the date(s) training occurred, description of the training provided, and the names of the employees that received the training; (9) Contracts with other state licensed cannabis businesses; (10) All Ppermits, licenses, and other authorizations to conduct the licensee’s commercial cannabis activity; (11) Records associated with composting or disposal of cannabis waste; (12) Documentation associated with loss of access to the track-and-trace system prepared pursuant to section 8402(d)
of this chapter. (e) All required records shall be prepared and retained in accordance with the following conditions: (1) Records shall be legible; and (2) Records shall be stored in a secured area where the records are protected from debris, moisture, contamination, hazardous waste, fire, and theft. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013, 26055, 26060, 26060.1, 26067, 26069, 26160, and 26161, Business and Professions Code. § 8401. Sales Invoice or Receipt Requirements. The licensee shall prepare a sales invoice or receipt for every sale, or transfer of cannabis or nonmanufactured cannabis product to another licensee. Sales invoices and receipts may be retained electronically but must be readily accessible for examination by the department, other state licensing authorities, any state or local law enforcement authority, and the California Department of Tax and Fee Administration. Each sales invoice or receipt shall include all of the following: (a) Name, business address, and department or other licensing authority issued license number of the seller; (b) Name, business address, and department or other licensing authority issued license number of the purchaser; (c) Date of sale or transfer (month, day, and year). The date of any sale or transfer of cannabis and nonmanufactured cannabis products shall be the date of transfer to the licensee receiving it; (d) Invoice or receipt number; (e) Weight or quantity of cannabis and nonmanufactured cannabis products sold or transferred; (1) Weight. For the purposes of this section a licensee must use wet weight or net weight. Wet weight and net weight shall be determined following weighing device requirements pursuant to section 8213 of this chapter and measured, recorded, and reported in U.S. customary units (e.g., ounce or pound); or International System of Units (e.g., kilograms, grams, or milligrams). (2) Weighing Devices. A licensee shall follow weighing device requirements pursuant to section 8213 of this chapter. (23) Count. For the purposes of this section, “count” means the numerical count of the individual plants or units. (f) Cost to the purchaser, including any discount applied to the total price, shall be recorded on the invoice; (g) Description for each item, including strain or cultivar, and all of the applicable information below: (1) Plant; (2) Flower; (3) Leaf; (4) Shake; (5) Kief; and Page 42 of 76 (6) Pre-rolls. (h) Signature of the seller, or designated representative of the seller, acknowledging accuracy of the cannabis and nonmanufactured cannabis products being shipped; (i) Signature of the purchaser, or designated representative of the purchaser, acknowledging receipt or rejection of the cannabis or nonmanufactured cannabis products. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013 and 26161, Business and Professions Code. § 8402. Track-and-Trace System. Except as provided in section 8405(e) of this chapter, each licensee shall report in the department’s track-and-trace system the disposition of immature and mature plants, nonmanufactured cannabis products on the licensed premises, any transfers associated with commercial cannabis activity between licensees, and any cannabis waste pursuant to this chapter. (a) The licensee is responsible for the accuracy and completeness of all data and information entered into the track-andtrace system. Data entered into the track-and-trace system is assumed to be accurate and can be used to take enforcement action against the licensee if not corrected. (b) Each licensee shall use the track-and-trace system for recording all applicable commercial cannabis activities. (c) Pursuant to section 8109 of this chapter, each licensee shall identify an owner, a designated responsible party, or a designated agent in the licensee’s organization to be the licensee’s track-and-trace system account manager. The licensee’s designated track-and-trace system account manager shall be responsible for all the following: (1) Complete track-and-trace system training provided by the department. If the designated account manager did not complete the track-and-trace system training prior to the licensee receiving his or her annual license, the designated account manager will be required to register for the track-and-trace system training provided by the department within five (5) calendar business days of license issuance; (2) Designate track-and-trace system users, as needed, and require the users to be trained in the proper and lawful use of the track-and-trace system before the users are permitted to access the track-and-trace system; (3) Maintain an accurate and complete list of all track-and-trace system users and update the list immediately when changes occur; (4) Within three (3) calendar days, Immediately cancel the access rights of any track-and-trace user from the licensee’s track-and-trace system account if that individual is no longer authorized to use the licensee’s track-and-trace system account; and (5) Correct any data that is entered into the track-and-trace system in error within three (3) calendar business days of discovery of the error.; and
(6) Notify the department immediately for any loss of access that exceeds three (3) calendar days. (d) The licensee is responsible for all access and use of the licensee’s track-and-trace system account. (e) If a licensee loses access to the track-and-trace system for any reason, the licensee shall prepare and maintain comprehensive records detailing all required inventory tracking activities conducted during the loss of access. (1) Once access to the track-and-trace system is restored, all inventory tracking activities that occurred during the loss of access shall be entered into the track-and-trace system within three (3) calendar business days. (2) A licensee shall document the date and time when access to the track-and-trace system was lost, when it was restored, and the cause for each loss of access. (3) A licensee shall not transfer cannabis or nonmanufactured cannabis products to a distributor until such time as access to the system is restored and all information is recorded into the track-and-trace system. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013, 26067, 26069, and 26160, Business and Professions Code. § 8403. Track-and-Trace System Unique Identifiers (UID). (a) Within five (5) calendar business days of the date the licensee’s designated account manager(s) was credentialed by the department to use the track-and-trace system, the designated account manager shall request UIDs using the track-andtrace system as prescribed by the department. (1) The licensee shall only use UIDs provisioned and distributed by the department, or the department’s designee. (2) The licensee shall maintain a sufficient supply of UIDs in inventory to support tagging in accordance with this section. (3) The licensee shall use the track-and-trace system to document receipt of provisioned and distributed UIDs within three (3) calendar business days of physical receipt of the UIDs by the licensee. (4) Except as provided in section 8407 of this chapter, all cannabis shall be entered into the track-and-trace system by the licensee starting with seed, cannabis which has been propagated onsite or purchased from a licensed nursery, or seedling purchased from a licensed nursery pursuant to this chapter. (b) The UID shall accompany the cannabis products through all phases of the growing cycle, as follows: (1) Licensees with immature plants shall assign a UID to each established lot respectively. The lot UID shall be placed in a position so it is visible and within clear view of an individual standing next to the immature lot to which the UID was assigned, and all UIDs shall be kept free from dirt and debris. For the purposes of this subsection, each lot of immature plants shall be uniform in strain or cultivar and shall not have more than one hundred (100) immature plants at any one time. All immature plants in a lot shall be labeled with the corresponding UID number assigned to the lot and shall be contiguous to one another to facilitate identification by the department. Page 44 of 76 (2) Immature plants transferred from a licensed nursery, via a distributor, to a licensed cultivator shall meet requirements of subsection (b)(1) above. Each immature plant intended for retail sale shall have a UID affixed, or be labeled with the corresponding UID number of the lot, and be recorded in the track-and-trace system prior to transfer from the licensed nursery. (3) The licensee shall apply a UID to all individual plants at the time any plant is moved to the designated canopy area or when an individual plant begins flowering, as defined in section 8000(l) of this chapter. The licensee may tag individual immature plants prior to movement to the designated canopy area or prior to flowering. (4) UIDs are required for each mature plant. UIDs shall be attached to the main stem, at the base of each plant. The UID shall be attached to the plant using a tamper evident strap or zip tie and placed in a position so it is visible and within clear view of an individual standing next to the mature plant to which the UID was assigned and UIDs shall be kept free from dirt and debris. Licensees are prohibited from removing the UID from the mature plant to which it was attached and assigned until the plant is harvested, destroyed, or disposed. (c) Each harvest batch shall be assigned a unique harvest batch name which will be associated with all UIDs for each individual plant, or portion thereof, contained in the harvest batch. (d) UIDs are required for all cannabis and nonmanufactured cannabis products and shall be associated with the corresponding harvest batch name from which the cannabis and nonmanufactured cannabis products were derived. (e) Upon destruction or disposal of any cannabis or nonmanufactured cannabis products, the applicable UIDs shall be retired in the track-and-trace system by the licensee within three (3) calendar business days of the destruction or disposal and be performed in accordance with the licensee’s approved cannabis waste management plan. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013, 26067, 26069, and 26160 Business and Professions Code. § 8404. Track-and-Trace System User Requirements. (a) All track-and-trace account managers or users, as identified by the licensee pursuant to section 8402 of this chapter, shall enter all commercial cannabis activities in the track-and-trace system. (b) Each track-and-trace account manager and user shall have a unique log-on, consisting of a username and password, which shall not be used by or shared with any other person. (c) No track-and-trace account manager, user, or other licensee, employee, or agent shall intentionally misrepresent or falsify information entered into the track-and-trace system. (d) The account manager shall monitor all notifications from the track-and-trace system and resolve all issues included in the notification in the timeframe specified in the notification. An account manager shall not dismiss a notification from the track-and-trace system until the issue(s) included in the notification has been resolved. Page 45 of 76 Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26012, 26013, 26067, and 26069, Business and Professions Code. § 8405. Track-and-Trace System Reporting Requirements. (a) Except as provided in subsection (e) below, the track-and-trace account manager or users shall report in the track-andtrace system any and all transfers of cannabis or nonmanufactured cannabis products to another licensee prior to the movement of the cannabis or nonmanufactured cannabis products off the licensed premises. (b) The track-and-trace account manager or users shall report in the track-and-trace system any and all cannabis or nonmanufactured cannabis products physically received or rejected from another licensee within twenty-four (24) hours of receipt or rejection of the products. (c) The track-and-trace account manager or users shall report in the track-and-trace system information related to the disposition of cannabis and nonmanufactured cannabis products, as applicable, on the licensed premises. All applicable information for each event listed below shall be reported in the track-and-trace system within three (3) calendar business days of the applicable event: (1) Creating a planting of an immature plant lot; (2) Moving immature plants to a designated canopy area, or when an individual plant begins flowering, or when applying a UID to an immature plant, in accordance with section 8403(b)(3) of this chapter; (3) Destruction or disposal of an immature or mature plant; (4) Harvest of a mature plant, or portion thereof. The following information must be reported into the track-and-trace system for each harvested plant, or portion thereof, or harvest batch: (A) The wet weight of each harvested plant, or portion thereof, which must be obtained by the licensee immediately after harvest of the plant, or portion thereof; (B) The net weight of each harvest batch, obtained pursuant to section 8406(b) of this chapter;. (C) The weight of cannabis waste associated with each harvest batch.; (D) The unique name of the harvest batch and the initiating date of the harvest. For the purposes of this section, the initiating date of the harvest is the month, day, and year the first mature cannabis plant(s) in the harvest batch were cut, picked, or removed from the soil or other growing media. The initiating date of the harvest shall be recorded using the MM/DD/YYYY. For example, January 1, 2018 would be recorded as 01/01/2018. (5) Packaging.
(d) The account manager or user shall be required to report information in the track-and-trace system for each transfer of cannabis or nonmanufactured cannabis products to, or cannabis or nonmanufactured cannabis products received from, another licensee. Required information to be entered includes, but is not limited to: Page 46 of 76 (1) Name, business address, and department or other licensing authority issued license number of the seller; (2) Name, business address, and department or other licensing authority issued license number of the purchaser; (3) Name and department issued license number of the distributor; (4) Date of sale, transfer, or receipt (month, day, and year) of cannabis or nonmanufactured cannabis products; (5) Weight or count of individual units of cannabis or nonmanufactured cannabis products sold, transferred, or received; (A) Weight. For the purposes of this section a licensee must use wet weight or net weight. Wet weight and net weight shall be determined following weighing device requirements pursuant to section 8213 of this chapter and measured, recorded, and reported in U.S. customary units (e.g., ounce or pound); or International System of Units (e.g., kilograms, grams, or milligrams). (B) Weighing Devices. A licensee shall follow weighing device requirements pursuant to section 8213 of this chapter. (BC) Count. For the purposes of this section count means the numerical count of the individual plants or units. (6) Estimated departure and arrival time; (7) Actual departure time; (8) Description for each item, including strain or cultivar, and all of the applicable information below: (A) Plant; (B) Flower; (C) Leaf; (D) Shake; (E) Kief; and (F) Pre-rolls. (9) UID(s). (e) Temporary Licensees. A licensee operating under a temporary license, issued by the department pursuant to section 8100 of this chapter, is not required to record commercial cannabis activity in the track-and-trace system as otherwise required by this chapter. Temporary licensees shall record all commercial cannabis activity in accordance with section 8401 of this chapter. (f) Any commercial cannabis activity conducted between a temporary licensee and an annual licensee shall be reported in the track-and-trace system by the annual licensee based upon the documentation prepared pursuant to section 8401 of this chapter. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013, 26067, and 26160, Business and Professions Code. Page 47 of 76 § 8406. Track-and-Trace System Inventory Requirements. Licensees shall use the track-and-trace system for all inventory tracking activities at a licensed premises, including, but not limited to, all of the following: (a) Reconciling all on-premises and in-transit cannabis or nonmanufactured cannabis products inventories at least once every thirty (30) calendar fourteen (14) business days; and (b) Recording the net weight of all harvested cannabis once the majority of drying, trimming, and curing activities have been completed, or within sixty (60) calendar days from the initial harvest date, whichever is sooner; (c) Licensees shall close out their physical inventory of all cannabis and nonmanufactured cannabis products and UIDs, if applicable, prior to the effective date of any of the following changes to their license: (1) Voluntary surrender of a temporary license or annual license; (2) Expiration of an annual license; (3) Revocation of a license. (d) Close-out of physical inventory includes, but is not limited to, all of the following items: (1) Immature plants and their corresponding lot UID(s); (2) Mature plants and their corresponding plant UID(s); (3) Harvest batches and their corresponding UID(s); (4) Nonmanufactured cannabis products and their corresponding UID(s); and (5) UIDs in the licensee’s possession which have not been assigned in the track-and-trace system. (e) All transfers and sales shall be documented pursuant to sections 8401 and 8405 of this chapter. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013 and 26067, Business and Professions Code. § 8407. Track-and-Trace System Requirements for Cannabis and Nonmanufactured Cannabis Products in Temporary Licensee Possession at the Time of Annual License Issuance. (a) Within thirty (30) calendar business days of receipt of the UIDs ordered pursuant to section 8403 of this chapter, the licensee shall enter into the track-and-trace system and assign and apply a UID to each existing immature plant lot, each individual mature plant, and all nonmanufactured cannabis products physically located on the licensed premises. (b) After the thirty (30) day time frame referenced in subsection (a) above expires, all cannabis at the licensed premises shall be entered into the track-and-trace system starting with seed, clone propagated onsite or purchased from a licensed nursery, or seedling purchased from a licensed nursery pursuant to this chapter. This section shall remain in effect until July 1, 2019. Page 48 of 76 Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013 and 26067, Business and Professions Code. § 8408. Inventory Audits. The department may perform an audit of the physical inventory and inventory as reported in the track-and-trace system of any licensee at the department’s discretion. Inventory audits of the licensee shall be conducted during standard business hours or at other reasonable times as mutually agreed to by the department and the licensee. For the purposes of this section, standard business hours are 8:00am – 5:00pm (Pacific Time). Prior notice of an inventory audit is not required. Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013, 26015 and 26067, Business and Professions Code. § 8409. Notification of Diversion, Theft, Loss, or Criminal Activity. Licensees shall notify the department and law enforcement authorities within three (3) calendar business days of discovery of any diversion, theft, loss of, or criminal activity related to licensee’s cannabis or nonmanufactured cannabis products.
Authority: Sections 26012 and 26013, Business and Professions Code. Reference: Sections 26013 and 26015, Business and Professions Code.
What are the Manufacturer Track and Trace requirements?
§40510. Track-and-Trace System General Requirements.
(a) A licensee shall enter all commercial cannabis activities into the track-and-trace system within 24 hours of occurrence.
(b) Within ten (10) calendar days of notification from the Department that the annual license application fee has been processed, a licensee shall register for track-and-trace system training provided by the Department of Food and Agriculture or its designee.
(c) If a licensee has not registered for track-and-trace system training pursuant to subsection (b), the licensee shall register for training within five (5) business days of notification from the Department that the annual license has been approved.
(d) A licensee shall designate at least one owner to be the track-and-trace system account manager. The track-and-trace system account manager shall have the following responsibilities:
(1) Designate authorized track-and-trace system users and require designated users to be trained in the proper and lawful use of the track-and-trace system before the designated user can access the system;
(2) Maintain an accurate and complete list of all track-and-trace system account managers and users and update the list within three (3) business days upon any change;
(3) Ensure that each track-and-trace account manager and user has a unique login, consisting of a username and password, which shall not be shared with or used by any other person;
(4) Immediately cancel any track-and-trace system account manager or user from a track-and-trace system account if the individual is no longer a licensee representative;
(5) Obtain UID tags from the Department of Food and Agriculture, or its designee, and ensure that a sufficient supply of UIDs is available at all times;
(6) Ensure that all inventory is tagged and entered in the track-and-trace system as required by Section 40512;
(7) Correct any information that is entered into the track-and-trace system in error within three (3) business days of discovery of the error;
(8) Monitor all notifications from the track-and-trace system and resolve all issues identified in the notification. The notification shall not be dismissed by an account manager until the issue(s) identified in the notification has been resolved.
(e) No person shall intentionally misrepresent or falsify information entered into the track-and-trace system. The track-and-trace system shall be the system of record. The licensee is responsible for the accuracy and completeness of all data and information entered into the track-and-trace system. Information entered into the track-and-trace system shall be assumed to be accurate and may be used to take enforcement action against the licensee if not corrected.
(f) The licensee is responsible for all actions that a track-and-trace system account manager or user acting as a licensee representative takes while logged into the track-and-trace system or otherwise conducting commercial cannabis activities.
Authority: Sections 26012; 26013; and 26130, Business and Professions Code. Reference: Sections 26067; and 26160, Business and Professions Code
§40512. Track-and-Trace System Reporting Requirements.
(a) A system account manager or user shall record all of the following activities in the track-and-trace system within 24 hours of the activity:
(1) Receipt of cannabis material;
(2) The transfer to or receipt of cannabis products for further manufacturing from another licensed manufacturer; and
(3) All changes in the disposition of cannabis or cannabis products. A change in disposition includes, but is not limited to:
(A) Processing of the cannabis or further processing of the cannabis product; and
(B) The packaging of the cannabis products.
(4) Transfer of cannabis products to a distributor.
(b) The following information shall be recorded for each activity entered into the track-and-trace system:
(1) The licensed entity from which the cannabis material or product is received, including that entity’s license number, and the licensed entity to which the cannabis product is transferred, including that entity’s license number.
(2) The name and license number of the distributor that transported the cannabis material or cannabis product.
(3) The type of cannabis material or cannabis product received, processed, manufactured, or transferred.
(4) The weight or count of the cannabis material or cannabis product received, processed, packaged, or transferred.
(5) The date and time of receipt, processing, packaging, or transfer.
(6) The UID assigned to the cannabis material or cannabis product.
(7) Any other information required by other applicable licensing authorities.
Authority: Sections 26012; 26013; and 26130, Business and Professions Code. Reference: Sections 26067; and 26160, Business and Professions Code
§40513. Track-and-Trace System – Loss of Access.
(a) If a licensee loses access to the track-and-trace system for any reason, the licensee shall prepare and maintain comprehensive records detailing all required inventory tracking activities conducted during the loss of access.
(b) Upon restoration of access to the track-and-trace system, all inventory tracking activities that occurred during the loss of access shall be entered into the track-and- trace system within three (3) business days.
(c) A licensee shall document the date and time when access to the track-and-trace system was lost and when it was restored and the cause for each loss of access.
(d) A licensee shall not transfer cannabis products to a distributor until such time as access to the track-and-trace system is restored and all information is recorded into the track-and-trace system.
Authority: Sections 26012; 26013; and 26130, Business and Professions Code. Reference: Sections 26067; and 26160, Business and Professions Code
§40515. Track-and-Trace System – Temporary Licenses.
(a) A licensee operating under a temporary license issued pursuant to Section 40126 is not required to record commercial cannabis activity in the track-and-trace system as otherwise required by this article. Temporary licensees shall track all commercial cannabis activities on a paper sales receipt or invoice that includes the following information:
(1) Name, address, and license number of the seller;
(2) Name, address, and license number of the purchaser,
(3) Date of sale or transfer and invoice number;
(4) Description or type of cannabis or cannabis product;
(5) Weight or quantity of cannabis or cannabis product sold or transferred;
(6) The cost to the purchaser of the cannabis or cannabis product.
(b) After issuance of an annual license, the licensee may continue to conduct commercial cannabis activities with temporary licensees in accordance with subsection (a). Any commercial cannabis activity conducted between annual license holders shall be recorded in the track-and-trace system.
Authority: Sections 26012; 26013; and 26130, Business and Professions Code. Reference: Sections 26067; 26160; and 26161 Business and Professions Code.
§40517. Track-and-Trace System – UID Tag Order.
(a) A licensee shall order UID tags within five (5) business days of receiving access to the track-and-trace system. The receipt of the UID tags by the licensee shall be recorded in the track-and-trace system within three (3) business days of receipt.
(b) Any licensee in operation at the time access to the track-and-trace system is granted shall input all inventory into the track-and-trace system no later than 30 calendar days after receipt of the UID tags.
Authority: Sections 26012; 26013; and 26130, Business and Professions Code. Reference: Sections 26067; 26160; and 26161, Business and Professions Code.
What are the track and trace requirements?
§ 5048. Track and Trace System
Track – Trace Compliance Reporting Requirements – (a) A licensee shall create and maintain an active and functional account within the track and trace system prior to engaging in any commercial cannabis activity, including the purchase, sale, test, packaging, transfer, transport, return, destruction, ar disposal, of any cannabis goods.
(b) A licensee shall designate one individual owner as the track and trace system account manager. The account manager may authorize additional owners or employees as track and trace system users and shall ensure that each user is trained on the track and trace system prior to its …..access or use:
(1) The account manager shall attend and successfully complete all required track and trace system training, including an orientation and continuing education.
(2) If the account manager did not complete the required track and trace system training prior to receiving their annual license, the account manager shall sign up for and complete state-mandated training, as prescribed by the Bureau, within five business days of license issuance.
(d) The account manager and each user shall be assigned a unique log-on, consisting. of a username and password. The account manager or each user accessing the track and trace system shall only do so under his or her assigned log-on and sha11 not use or access log-on of any other individual. No account manager or user shall share or transfer his or her log-on, username, or password, to be used by any other individual for any reason.
(e) ‘The account manager shall maintain a complete, accurate, and up-to-date list of all track and trace system users, consisting of their full names and usernames.
(f) A licensee shall monitor all compliance notifications from the track and trace system, and timely resolve the issues detailed in the compliance notification.
(1) A licensee shall keep a record, independent of the track and trace system, of all compliance notifications received from the track and trace system, and how and when compliance was achieved.
(2) If a licensee is unable to resolve a compliance notification within three business days of receiving the notification, the licensee sha11 notify the Bureau immediately.
(g) A Licensee is accountable for all actions its owners or employees take while logged into or using the track and trace system, or otherwise while conducting track and trace activities.
Proposed Regs. – October 19, 2018
Subsection (b)(2) is revised, by amending the requirement for a track and trace system account manager to sign up for and complete state mandated training, within five business days of license issuance, to five calendar days. This is necessary to keep consistent the training requirement among the licensing authorities.
Subsection (e)(2) has also been amended to incorporate by reference a form to be used by licensees to provide the required notification under this section. This is necessary for licensees to have clear guidance on how to provide to the Bureau the notification required under this section. The form also streamlines the notification process by assuring that applicants are able to fulfill its notification requirements without having to complete additional paperwork.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26067, 26070, 26160 and 26161, Business and Professions Code.
§ 5049. Track and Trace Reporting
(a) A licensee shall record in the track and trace system all commercial cannabis activity, including:
(1) The packaging of cannabis goods.
(2) Sale of cannabis goods.
(3) Transportation of cannabis goods to a licensee.
(4) Receipt of cannabis goods.
(5) Return of cannabis foods.
(6) Destruction and disposal of cannabis goods.
(7) Laboratory testing and results.
(8) Any other activity as required pursuant to this division, or by any other licensing authority.
(b) The following information shall be recorded for each activity entered in the track and trace system:
(1) Name and Type of cannabis goods.
(2) Unique identifier of the cannabis goods.
(3) Amount of cannabis goods, by weight or count.
(4) Date and time of the activity or transaction.
(5) Name and license a number of other licensees involved in the activity or transaction.
(6) If the cannabis goods are being transported:
(A) The licensee shall transport pursuant to a shipping manifest generated through the track and trace system, that includes items (1) through (5) of this subsection, as well as
(i) The name, license number, and premises address of the originating licensee.
(ii) The name, license number, and premises address of the licensee transporting the cannabis goods.
(iii) The name; license number, and premises address of the destination licensee receiving the cannabis goods into inventory or storage.
(iv) The date and time of departure from the licensed premises and approximate date and time of departure from each subsequently licensed premises, if any.
(v) Arrival date and estimated time of arrival at each licensed premises.
(vi) Driver license number of the persons transporting the cannabis goods, and the make, model, and license plate number of the vehicle used for transport.
(B) Upon pick-up or receipt of cannabis goods for transport, storage, or inventory, a licensee shall ensure that the cannabis goods received are as described in the shipping manifest, and shall record acceptance and acknowledgment of the cannabis goods in the track and trace system.
(C) If there are any discrepancies between the type or quantity specified in the shipping manifest and the. type or quantity received by the licensee, thelicensee shall record. and document the discrepancy in the track and trace system and in any relevant business record.
(7) If cannabis goods are being destroyed or disposed of, the licensee shall record in the track and trace system the following additional information:
(A) The name of the employee performing the destruction or disposal.
(B) The reason for destruction or disposal.
(C) The name of the entity being used to collect and process cannabis waste, pursuant to section 5055 of this division.
(8) Description for any adjustments made in the track and trace system, including, but not limited to:
(A) Spoilage or fouling of the cannabis goods.
(B) Any event resulting in exposure or compromise of the cannabis goods.
(9) Any other information as required pursuant to this division, ar by any other applicable licensing authorities.
(c) Unless otherwise specified, all transactions must be entered into the track and trace system within 24 hours of occurrence.
(d) Licensees shall only enter and record complete and accurate information into the Crack and trace system and shall correct any known errors entered into the track and trace system immediately upon discovery.
Proposed Regs. – October 19, 2018
Subsection (b)(3) is revised to remove the term “sale price” and replace it with “wholesale cost.” This change is necessary to establish consistency in terms used in the Bureau’s regulations and terms used in regulations promulgated by CDTFA.
Subsection (b)(6)(A)(i) is revised, to make consistent and clarify that the premises address on the shipping manifest is the licensed premises address. This is necessary to avoid any confusion or ambiguity as to the address that needs to be included.
Subsection (b)(6)(B) is revised, by adding “receipt” to the activity to be recorded in the track and trace system, to clarify and specify that the licensee receiving cannabis goods for transport, storage or inventory, shall record either acceptance or receipt in the track and trace system. This is necessary to avoid any confusion or ambiguity as to whether one type of transfer is exempt from the track and trace system, and to clarify that either type of transfer, which may have different considerations, is subject to such requirements.
Subsection (b)(6)(C) is revised, by adding “cannabis goods” to clarify that the discrepancy between type or quantity in the shipping manifest pertains to cannabis goods. This is necessary to avoid any confusion or ambiguity as to the types of goods that need to be identified in the shipping manifest.
Subsection (b)(7)(B) is revised, to clarify and specify that the licensee is required to record both destruction and disposal of cannabis goods in the track and trace system. This is necessary to ensure that both activities are properly recorded in the track and trace system, and one activity does not obviate the need to record the other activity.
Subsection (b)(7)(C) is revised, to clarify and specify that the name of the entity collecting and processing cannabis waste is the entity disposing of cannabis waste, and to reflect the removal of section 5055 of the division.
Subsection (b)(8)(B) is revised, to clarify and specify damage of cannabis goods is an event for which the licensee is required to record in the track and trace system, and to align with proposed section 5052.1, allowing for the return of cannabis goods damaged during transportation.
The reference section was amended to identify the accurate reference sections in the Business and Professions Code.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26067, 26070, 26160 and 26161,
Business and Professions Code. § 5050. Loss of Access
(a) If at any point a licensee loses access to the track and trace system for any reason, the licensee shall prepare and maintain comprehensive records detailing all commercial cannabis activities that were. conducted during the loss of access.
(b) The licensee shall both document and notify the Bureau immediately:
(1) When access to the system is lost;
(2) When access to the system is restored; and
(3) The cause for the loss of access. (c) Once access is restored, all commercial cannabis activity that occurred during the loss of access shall be entered into the track and trace system within three business days of access being restored.
(d) A licensee shall not transport, transfer or deliver any cannabis goods until such time as access is restored and all information recorded in the track and trace system.
Proposed Regs. – October 19, 2018
Section is revised by amending “access” to “connectivity,” to clarify and specify that loss of access is specific to connectivity and the licensee’s ability to connect to the track and trace system. This is also necessary to keep track and trace provisions consistent among the licensing authorities, and the California Department of Food and Agriculture, the lead agency in establishing the track and trace system, under Business and Professions Code section 26067.
Subsection (b) is revised, by removing the old subsection (b), and splitting the requirement to notify the Bureau, into a new subsection (b), and adding the requirement to document the cause for the loss of connectivity, and the date and time for when connectivity was lost and restored, into subsection (c)(2). Additionally, “transfer” has been removed from the section, to allow for certain commercial cannabis activities, such as retail sale to customers. Additionally, the Bureau has incorporated by reference a form to provide guidance on how to provide the required notification. The inclusion of a form was necessary to guide applicants and ensure they provide sufficient information for the Bureau to consider. The form also streamlines the notification process by assuring that applicants are able to fulfill its notification requirements without having to complete additional paperwork.
Subsection (c) is revised, to specify that licensees are required to enter into track and trace all commercial cannabis activity occurring during a loss of connectivity within three calendar days. The subsection has also been amended to require licensees to document the cause for the loss of connectivity and the dates and times when connectivity was lost and when it was restored. This will provide clarity to licensees on the requirements and is necessary to keep track and trace provisions consistent among the licensing authorities, and the California Department of Food and Agriculture, the lead agency in establishing the track and trace system, under Business and Professions Code section 26067. It also assures that licensees update all cannabis activity in the track and trace system in a timely manner.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26067, 26070, 26160 and 26161,
Business and Professions Code. § 5051. Track and Trace System Reconciliation.
(a) In addition to other inventory reconciliation requirements under this division, a licensee shall reconcile the physical inventory of cannabis goods at the licensed premises with the records in the track and trace database at least once every 14 days.
(b) if a licensee finds a discrepancy between its physical inventory and the track and trace system database, the licensee shall conduct an audit, and notify the. Bureau of any reportable activity pursuant to section 5036.
Proposed Regs. – October 19, 2018
Subsection (a) is revised, from requiring a track and trace system inventory reconciliation every 14 calendar days, to every 30 calendar days. This revision was necessary to provide licensees more time in which to conduct a reconciliation of inventory in the track and trace system, while assuring that reconciliation happens on a regular basis.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26067, 26070, 26160 and 26161,
Business and Professions Code. § 5052. Temporary Licenses; Licensees in (3peration at Time of Licensure
(a) A licensee operating under a temporary license issued pursuant to section 5001 is not required to record commercial cannabis activity in the track and trace system as otherwise required by this article.
(b) Temporary licensees shall track and record all cannabis commercial activities and information required pursuant to this division and any other provision of law, at a minimum, on paper receipts, invoices, or manifests.
(c) Any commercial cannabis activity conducted between aimual license holders shall be recorded in the track and trace system.
(d)’Any licensee in operation at the time the annual license is issued shall enter all inventory into the track and trace system no later than 30 days after the track and trace system account manager attends the training required pursuant to section 5048.
Proposed Regs. – October 19, 2018
Subsection (b) is revised, to correct a typing error and clarify commercial cannabis activities, as defined under Business and Professions Code section 26001. The section has also been amended to add Section 26161 of the Business and Professions Code to the reference section. These changes were necessary for accuracy.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26050.1, 26067, 26070, 26160 and 26161, Business and Professions Code.
Proposed Regs. – October 19, 2018 – New Section
§ 5052.1 Acceptance of Shipments
Subsection (b) is revised, to allow for additional circumstances in which a licensee may reject a partial shipment of cannabis goods. Subsection (b)(2) has been added to allow for a licensee to reject a partial shipment of cannabis goods when those cannabis goods were damaged during transportation; subsection (b)(3) has been added to allow a licensee to reject a partial shipment of cannabis goods when it is non-compliant with labeling requirements or is expired. This is necessary to account for circumstances beyond the control of a licensee, necessitating return of a cannabis good.
Subsection (c) is added to specify and clarify that these activities, including the specific reasons for rejection, must be recorded in track and trace system. This is necessary to ensure that licensees are compliant with track and trace system provisions, which include all commercial cannabis activities, which in turn ensures that cannabis goods are properly tracked, as required by statute.
The section has also been amended to add Section 26067 of the Business and Professions Code to the reference section. This change was necessary for accuracy.
What are record retention requirements?
§ 5037. Record Retention
(a) Each licensee shall keep and maintain the following records related to commercial cannabis activity for at least seven years: title(1) Financial records including, but not limited to, bank statements, sales invoices, receipts, tax records, and all records required by the California Department of Tas and Fee Administration (formerly Board of Equalization) under Title 18, California Code of Regulations, sections 1698 and 4901.
(2) Personnel records, including each employee’s full name, social security or individual tax payer identification number, date employment begins, and date of termination of employment if applicable.
(3) Training records including, but not limited to, the content of the training provided and the names of the employees that received. the training.
(4) Contracts with other licensees regarding commercial cannabis activity.
(5) Permits, licenses, and other local authorizations to conduct the licensee’s commercial ……cannabis activity.
(6) Security records, except for surveillance recordings required pursuant to section 5044 of this division.
(7) Records relating to the composting or destruction of cannabis goods:
(8) Documentation for data or information entered into the track and trace system.
(9) All other documents prepared or executed by an owner or his employees or assignees in connection with the licensed commercial cannabis business.
(b) The Bureau may make any examination of the books and records of any licensee as it deems necessary to perform its duties under the Act.
(c) Records shall be kept in a manner that allows the records to be produced for the Bureau at the licensed premises in either hard copy or electronic form, whichever the Bureau requests. (A licensee may contract with a third party to provide custodial or management services of the records. Such a contract sha11 not relieve the licensee of the licensee’s responsibilities under this section.
Authority: Section 26013, Business and Professions Code. Reference: Sections 26160 and 26161, Business and Professions Code.
Do you have a Contact Directory for California FTB?
Contact Directory for California FTB
Tax Practitioners Only
Tax Practitioner Hotlineor fax your question to 916.845.9300.e-file Help Desk
Application for Cannabis Business to Make Tax Deposits in Cash
Electronic communication and data transmission
Secure Email Service
- Secure email is an efficient, secure, and easy method for FTB to communicate confidential information with our customers, without having to install software on the recipient’s computer. Secure email encrypts the data sent to our customers because regular email fails to meet FTB security standards to email confidential data. Secure email must be initiated by an FTB employee sending a secure email message to the recipient. First time recipients will be prompted to register. Returning customers only need to enter their passwords to view secure email messages. If a customer responds to a secure email message, the response is also encrypted.
- Secure Web Internet File Transfer System (SWIFT)
- This is the Franchise Tax Board’s preferred secure file transfer system. SWIFT provides an alternate secure method for transferring large files to and retrieving files from FTB. It is designed to meet the file transfer needs of government agencies and external business customers
FTB Practices & Procedures
- Audit Branch Procedure Statements — Audit reference material.
- Bank and Financial Handbook (PDF, 883 kB) — Overview of the inancial industry, issues, techniques and department position on issues.
- Collection Procedures Manual — Describes the desired culture and philosophy for the Collection Program.
- Disclosure Manual — Provisions Prohibiting the Disclosure of Confidential Information.
- Economic Development Areas Manual — Tax related incentives for taxpayers conducting business activities.
- Manual of Audit Procedures (PDF, 3.1 MB) — This manual replaces the:
- Best Audit Practices — Tools and techniques for auditors.
- General Tax Audit Manual — Procedures and guidelines for completing general tax audits.
- Multistate Audit Procedure Manual — Procedures and guidelines pertinent to Multistate Tax Audits.
- Multistate Audit Technique Manual — Aid for auditors performing multistate audits.
- Partnership Technical Manual (PDF, 3.78 MB) — Technical partnership information.
- Residency and Sourcing Technical Manual — Residency and source of income audit aid.
- S Corporation Manual — S Corporation audit aid.
- Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) — Volunteer Coordinators’ Manuals.
- Water’s Edge Manual — Water’s-edge information manual.
- Workforce Planning Guide (PDF, 676 kB) — A step-by-step guide to evaluate and project workforce needs.
California Office of Tax Appeals
Beginning January 1, 2018, the new Office of Tax Appeals (OTA) will hear and determine all appeals that involve corporate income tax, corporate franchise tax, personal income tax, sales tax, and use tax. If a taxpayer disagrees with us or the California Department of Tax and Fee Administration (CDTFA) on a Notice of Action or a Notice of Determination, the taxpayer may appeal with the new OTA by the “appeal date” listed on the notice. As of October 1, 2017, we include an insert in all notices containing information about appeal rights and OTA’s contact information. As of October 1, all appeals need to be filed with OTA, and beginning January 1, 2018, OTA’s three-member panels will hear and determine all appeals. The OTA may be contacted through email at [email protected] or mail:
STATE OF CALIFORNIA
OFFICE OF TAX APPEALS
P.O. BOX 98880
WEST SACRAMENTO, CA. 95798-9880
How does a Cannabis Seller Register for Sales Tax with CDFTA?
Seller Registration – Sales Tax with CDFTA
Cannabis Tax Permits/Seller’s Permits: Cannabis retailers, cultivators, manufacturers, and distributors making sales must register with the CDTFA for a seller’s permit. Distributors must register with the CDTFA for a cannabis tax permit to report and pay the cultivation tax and cannabis excise tax. A microbusiness licensee is licensed to act as a distributor, among other things, and must comply with all the same requirements as a distributor. If you make sales for resale, you must obtain a valid resale certificate.
Sales and use tax permit registration are available online. Beginning November 20, 2017, you can register for all the proper tax permits for your cannabis business on our website at www.cdtfa.ca.gov (click the Register link, and follow the prompt). When registering your business activity, make sure to select box number 3, Cannabis business activities.
More information about the permits necessary to collect these new taxes is available in this special notice and in theTax Guide for Cannabis Businesses. If you have additional questions, you may call our
A complete copy of the Formal Paper on Sales Tax for Cannabis and Regulation 3700 can be found here.
In 2015, the Legislature enacted the Medical Marijuana Regulation and Safety Act (MMRSA), a package of legislation that established a comprehensive licensing and regulatory framework for the cultivation, manufacturing, transportation, distribution, and sale of medical marijuana. The MMRSA consists of three bills: SB 643 (Ch. 719, McGuire), AB 243 (Ch. 688, Wood), and AB 266 (Ch. 689, Bonta).
Among its provisions, the MMRSA established the Bureau of Medical Marijuana Regulation2 2 (Bureau) within the Department of Consumer Affairs to oversee and enforce the state’s medical marijuana regulations, in collaboration with the California Department of Public Health (CDPH) and the California Department of Food and Agriculture (CDFA).
On November 8, 2016, California voters approved Proposition 64 which established the Control, Regulate and Tax Adult Use of Marijuana Act (the Adult Use of Marijuana Act) (AUMA). Among other things, AUMA added Division 10 (commencing with Section 26000) to the Business and Professions Code (BPC), Marijuana Regulation and Safety (MRS), which establishes nonmedical marijuana regulatory and licensing provisions, and added Part 14.5, Marijuana Tax, to Division 2 of the Revenue and Taxation Code (RTC) (commencing with RTC section 34010).
In 2017, SB 94 repealed the MCRSA, included certain provisions from MCRSA into MRS, now known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), and made further amendments to AUMA. Concerning taxes, SB 94, section 162, amended Part 14.5 to ease and streamline cannabis tax collection and remittance to the Department. As relevant here, SB 94: (1) changes the law throughout to be the Cannabis Tax Law instead of Marijuana Tax Law; (2) revises the cannabis excise tax to be imposed upon purchasers at a rate of 15 percent of the average market price, instead of retail selling price, to be collected by a distributor from a cannabis retailer; (3) requires a distributor or a manufacturer to collect the cultivation tax from a cultivator, and a manufacturer to remit any cultivation tax collected from a cultivator to a distributor, for distributor remittance of those taxes to the Department; and (4) makes other corrections and other conforming changes.
The CTL was further amended by AB 133 in 2017 to, in part: remove the requirement that a cannabis retailer display the cannabis excise tax separately from the price of cannabis and cannabis products when sold to consumers; remove the requirement that a cannabis retailer state on the purchase invoice that the cannabis cultivation tax is included in the total amount of the invoice; and authorize the Department to prescribe other means to display the cannabis excise tax on an invoice, receipt, or other document from a cannabis retailer given to the purchaser. AB 133 also defines manufacturer and authorizes the Department to relieve a person of the penalty for failure to pay the cannabis cultivation and excise tax if the Department finds that the person’s failure to make a timely payment is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect
For reference, the staff has included the text of the underlying statutes (RTC sections 34010, 34011, 34012, and 34013) which are the basis for the proposed regulation (Exhibit 3).