How California’s messy cannabis taxes are hurting businesses

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As one of the largest cannabis markets in the world, California’s thriving marijuana industry has every product imaginable for the casual user and connoisseur alike.

The state has had a legal medical cannabis industry for more than two decades now accompanied by the recreational market legalized at the beginning of 2018.

Also accompanying one of the largest legal cannabis markets in the world is a thriving black market, which has recently been attributed in headlines as the number one reason the state hasn’t seen the tax revenue they were initially expecting from the new, legal market--the second quarter revenue reporting from April 1 to June 30 was $74.2 million. The total reporting for the first two quarters is $134 million total, falling short $41 million from the original projection of $175 million in tax revenue. 

What these headlines fail to acknowledge however, is another creeping issue the market faces: tax compliance, or in California’s case, a huge lack of compliance.

When the state legalized cannabis, cities and counties were given jurisdiction over how to tax the businesses in their respective areas, and with nearly 600 different regulations across the state, tax compliancy has become a daunting endeavor for cannabis businesses along the chain.

“It’s such a mess here that it’s become really difficult for businesses to get the right information and apply it at the point of sale,” Bill De Zenzo, VP of Business Development at Taxnexus told 420 Intel. “It’s so archaic and new for a lot of these businesses that they’re not able to calculate or file their taxes properly.”

Taxnexus is an automated transaction to treasury cannabis tax compliance solution for the recreational and medical cannabis markets.

Earlier this year, Taxnexus conducted a survey where customers from jurisdictions across the state submitted their sales receipts from recent cannabis purchases. The receipts were collected and the taxes were applied and calculated accordingly to the regulations within their jurisdiction. It can become a very complicated thing to do when certain taxes need to be applied before others and should only be applied to certain products.

Once the receipts were calculated properly, the results showed that a startling zero percent of taxes on each purchase were calculated properly at their original point of purchase.

“There’s a myriad of reasons as to why they’re getting it wrong and the most surprising thing is that these are businesses that are trying to get it right,” said De Zenzo. “We were expecting that at least half of them would be calculated correctly, and that’s just the calculation part. This doesn’t even include the tax filing.”

Examples of graded receipts from Taxnexus' receipt research survey. The survey found that zero percent of taxes are being calculated correctly at the point of sale.

Within the last four months since the survey was conducted, De Zenzo says that he has seen some point of sale (POS) software systems that do have the ability to calculate taxes correctly, but without a preset location and its taxes, and without any notification about new tax regulations as they occur, these systems hardly make being compliant any simpler.

These systems still rely on the user to know what the tax percentages are in their jurisdiction and how to calculate them properly, leaving a lot of room for human error which is what has led to such a low percentage of businesses able to calculate and file their taxes properly. The end result is that the state, cities and county jurisdictions are not collecting the correct amount of revenue.

The effort in going after non-tax compliant businesses is still rather minimal because the focus right now is on non-licensed growers and retailers as well as the non-product compliant businesses. Since the new packaging and testing regulations that took effect July 1, the state is coming down heavily on businesses that have yet to meet these new regulations, with very little focus on tax compliance.

“It’s an issue that isn’t so directly attached to the product and that’s where all the focus is right now,” said De Zenzo. “The concern right now is with the product and product compliance.”

But while tax compliance may not be the sexiest issue in the industry right now, awareness is important as businesses will likely face penalties in the not so distant future if they fail to be compliant.

“There could be fines to start and I wouldn’t be surprised if the state went hard on them in the beginning to sort of weed out the weak,” said De Zenzo. “They’re working on getting rid of the non-licensed guys first to get rid of the low hanging fruit.”

Some businesses who have been nabbed for non-tax compliance have seen penalties as harsh as being charged 100% of the taxes owed on top of the actual taxes owed.

“We have a window here of about a year where we can help these businesses before the state really comes down in mass quantities on people with a real spearheaded effort on their part,” said De Zenzo. “So we don’t have a lot of examples of this happening yet, but it’s sure to happen.”

Taxnexus has a variety of products available to businesses along the distribution chain, from cultivators to storefronts to assist the tax payers in becoming and remaining compliant in their jurisdiction.

The research has found that while California’s market has some of the best growers in the world, and some of the most experienced dispensary owners, they don’t necessarily know all of the ins and outs of calculating and filing taxes properly in an industry so convoluted by hundreds of different regulations.

A Taxnexus system comes fully automated with all of the necessary information for a business’ jurisdiction as well as a timetable so that if there’s a new tax being implemented on a certain date, it will be put into the system, so that any customer within that jurisdiction will automatically be compliant to that new tax percentage.

Taxnexus’ filing capabilities are available to also ensure businesses are filing their tax information properly.

“What we have is what we refer to as a transaction to treasury system,” said De Zenzo. “So not only are we taking care of the calculation efforts that are difficult, we’re also taking care of the storage of the information in compliant fashion and then we’re also filing the forms for them.”

Tax compliance in California is a complex issue with a limited number of professionals that are focused enough on the industry, so an automated system provided by Taxnexus is a huge step toward getting the state on track to receiving the proper revenue.

“It takes the burden off the tax payer, so in this case the dispensary owner, from having to worry about their taxes and can instead concentrate on how to get people in and out the door quickly with a good sale.”

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