Free Advice – Everyone knows the maxim “Free advice is worth what you pay for it” There are, however, exceptions. Everyone knows a second maxim “The exception that proves the rule” In this article, we provide free advice to the California Department of Tax and Fee Administration (“CDTFA”). We are providing free advice which we believe is valuable. Hence, our free advice in this article is an exception that proves on some occasions free advice should be followed. We can summarize this article with a simpler statement. “Wake up CDTFA…You are leaving money on the table!”
We have severely criticized CDTFA in the past. See Missing or Uncollected? and Key to Success for California Cannabis Businesses – Managing Tax Liabilities. Our criticisms were justified. We are appalled when we see that taxes are not being collected because tax laws are not effectively administered. The failure of CDTFA to effectively administer California’s tax laws punishes responsible taxpayers because the irresponsible taxpayers do not pay their share. California spends the tax money that it plans to collect. When some taxpayers do not pay the share of tax that California expected to collect from these taxpayers, California collects the shortfall from those responsible taxpayers who pay all they are asked to pay.
As anyone interested in California’s cannabis industry is aware, cannabis tax collections are lagging behind projections. Why? The answer to this question is simple. Cannabis tax collections are lagging behind projections because CDTFA has not collected the cannabis taxes it was expected to collect. Why? Drilling down makes answering the “why question” more difficult. There are a number of reasons CDTFA has not collected the full amount of the cannabis taxes it was expected to collect.
As we mentioned above, we have already described several reasons CDTFA failed to collect all of the cannabis taxes California expected it to collect. We are writing this article to describe yet another reason for the shortfall – one we have not previously pointed out. We will also suggest a simple solution – one that will please all who are interested. Governor Newsom should be particularly pleased.
First, we must provide some foundational information relating to the cause of this particular reason for the cannabis tax shortfall. This background is necessary because this particular cause for the shortfall appears to have occurred because no one noticed an obvious oversight.
As part of MAUCRSA, the Legislature established a new form of California corporation – Cannabis Cooperative Associations (“CCAs”). The Legislature created this new form of corporation in order to give groups of small cannabis cultivators the benefits of an agricultural cooperative. See Cannabis Cooperative Associations and Licensing Cannabis Cooperative Associations
The enabling legislation for CCAs is codified in Chapter 22 of Division 10 of the California Business and Professions Code (“B&P”). The Legislature created CCAs for the express purpose of giving small cannabis cultivators an organizational vehicle to enhance their ability to effectively compete in California’s commercial cannabis industry.
The legislation that created CCAs was applauded by many who are interested in California’s cannabis industry. There was a good reason for this applause. This legislation is truly worthwhile. The conduct of business in California’s cannabis industry through a properly organized and operating CCA creates substantial financial advantages over conventional business structures. Numerous advisors and consultants recognized the benefits of CCAs both before and after the passage of MAUCRSA. See Longtime head of California cannabis growers group steps down to head new MJ venture. The benefits of CCAs continue to be extolled. See Smaller California marijuana farmers form co-ops to save on costs, compete with large growers. Unfortunately, there are some flies in the ointment.
MAUCRSA requires all commercial cannabis activities to be conducted between licensed businesses. MAUCRSA expressly states there are exceptions to this requirement, but we cannot find an exception that applies to a CCA. Commercial cannabis activity is defined in MAUCRSA to include “cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery, or sale of cannabis and cannabis products.” One of the principal benefits of a CCA is the marketing power of a represented group of growers. This gets us to, “Oops”! CCAs are organized to engage in most of the listed activities, but the Legislature neither specified a CCA is required to have nor exempted a CCA from any licensing requirement based solely on its organization as a CCA.
California law vests in the Bureau of Cannabis Control (“BCC”) the “power, duty, purpose, responsibility, and jurisdiction to regulate commercial cannabis activity” as a bureau operating under the supervision of the Department of Consumer Affairs. BCC has overall supervisory authority over the regulation of commercial cannabis in California.
The licensing of California cannabis businesses is allocated among three agencies. BCC has delegated the licensing for certain business activities to other agencies. The licensing of the cultivation of cannabis is in the hands of the California Department of Food and Agriculture, through its CalCannabis division. We thought CCAs should be licensed by CalCannabis as a cooperative consisting of cannabis cultivators. CalCannabis disagrees. CalCannabis believes it lacks the requisite authority to license CCA’s unless the organization is engaged in cultivation or processing activities as an entity. The licensing of manufacturing is in the hands of the California Department of Public Health (“CDPH”). BCC licenses all other cannabis businesses, although BBC has taken no action with respect to the licensing of CCAs.
Neither BCC, nor CalCannabis, nor CDPH has assumed responsibility for licensing CCAs. At least, none of the agencies has established a procedure for the licensing of a CCA to engage in commercial cannabis activities. The failure of any of these three agencies has little impact on these agencies. It actually means less work for each of these agencies. Fewer licenses to issue mean less effort processing licenses. Of course, such an arrangement hurts CDTFA because CCAs appear to be prohibited from engaging in commercial cannabis activities for lack of a license.
The preceding analysis gets us to our elegant solution to facilitate the conduct of commercial cannabis activities by a CCA. CDTFA has the ability to issue Cannabis Permits for Cannabis Taxes in addition to Seller’s Permits for Sales Tax to CCAs. A public announcement by CDTFA that a Cannabis Permit issued to a CCA by CDTFA with an additional designation that the Permit is issued to a CCA is all of the identification that is required for such a duly organized CCA to engage in commercial cannabis activity would eliminate any question regarding the need for the licensing of such CCAs except in those instances in which a license is required for a specific activity. Such an announcement should be made with the approval and concurrence of BCC. A joint announcement by BCC and CDTFA would be even better.
While simple and straight-forward, the preceding is inadequate. However, with a little elaboration relating to the issuance of a Cannabis Permit to a CCA, an elegant solution can be created by CDTFA. If CDTFA requires each CCA to register its organization and ownership with CDTFA when it secures the issuance of a Cannabis Permit, CDTFA will track all of the regulatory information related to every CCA including all of the licensing information, if any, relating to BCC, CalCannabis, and CDPH.
CDTFA and Governor Newsom should be pleased. More taxes will be collected. The Legislature, the public, and the small cannabis cultivators should be pleased. California’s cannabis industry will take a positive step forward. BCC should also be pleased. CDTFA will have solved a problem for BCC that BCC appears to have not known existed.