California Cannabis Tax Collection and Penalty Nightmares

California’s cannabis taxes are a disaster, with no end in sight. I’ve written about the state’s tax problems extensively, but today I want to talk about what the state can do when it comes to tax collection.

Late cannabis taxes? Get used to hefty penalties

If a licensed cannabis business fails to timely or fully pay its cannabis taxes, it will owe a substantial amount higher than the actual tax amount. Specifically, the state’s cannabis laws mandate a penalty of 50 percent of the unpaid amount, on top of the 10 percent general penalty payable for late tax payments. The same licensees will also be required to pay interest on the unpaid amounts. If you’ve ever seen a California Department of Tax and Fee Administration (CDTFA) statement of account, you may have noticed an additional charge listed as “other,” which allegedly includes miscellaneous collection fees.

Imagine a company owed $100,000 and failed to timely pay. Given the above, that same company would owe at least $160,000 (and probably closer to $170,000 or more) considering the penalties. Additionally, when I say “timely,” I mean it literally – we’ve seen the CDTFA impose penalties when a licensee was a day late.

Now you may point out that the CDTFA does entertain payment plans, and may even waive some of the penalties in some cases. But – and this is a big “but” – waivers are never guaranteed, payment plans take time and resources (i.e., money) to negotiate, and failing to follow a payment plan to the letter could result in it being revoked.

The bottom line is that if a licensee fails to pay the state’s absurdly high cannabis taxes by even a day, the licensee will be in a world of pain.

Threatening notices and demands

Now let’s say the oppressive tax penalties are not enough to get a licensee to pay. What next? The licensee can expect to receive a “notice of state tax lien” that is filed with the California Secretary of State. The notice will tell the license that the assessed liability constitutes a lien on all personal property of the licensee. This will make it very difficult for the licensee to secure financing, given that its assets are encumbered.

The CDTFA may also issue a “notice of possible disciplinary action” threatening to report the licensee to the Department of Cannabis Control (DCC – the licensing authority) which can discipline a licensee for failing to pay taxes. And of course that discipline can include license revocation.

Threats of individual liability are possible

Let’s say a cannabis business faced with these demands decides to close up shop and wind down. Are the taxes discharged? Nope. In fact, if a cannabis business dissolves, terminates, or is abandoned, the persons who were in control of the business can be personally liable for the cannabis taxes of the former business. I’ve seen the CDTFA even demand that owners of a cannabis business negotiating a payment plan acknowledge in writing that they can be liable for unpaid taxes if the business folds before the tax is paid.

This puts businesses owners and operators in a real bind. On one hand, these folks know that they cannot continue to operate — bankruptcy is not a viable option and receiverships and other non-bankruptcy processes don’t go nearly far enough. The DCC may prevent them from operating and making money to pay back taxes, to boot. On the other hand, these owners can’t simply walk away without being personally liable.

When the state comes to collect

Sometimes, all of the above things fail to work, and the state comes to collect. The issue is that there may not be a whole lot for the state to collect and sell off, and you may end up with absurd situations like the state auctioning off seized bongs and snow cone machines for a whopping $2,075 in proceeds. This is a true story!

California’s cannabis taxes and penalties are way, way too high, and basically guaranty that the state will not be able to collect and will have to spend good money chasing licensees. Licensees and the state are essentially designed to be in an endless game of negotiations, with licensees hoping that the law will change or that some of their penalties will be forgiven.

None of this is tenable. If the state wanted to change things, it could. But it hasn’t, and it’s failure to act speaks volumes.