Emergency Regulation Addresses Tax Puzzle

As California scrambled to get rules in place for its new state-legal cannabis market, one welcome, if imperfect, feature of has been flexibility with respect to pre-existing inventory. For example, Section 5029 of the Bureau of Cannabis Control’s emergency regulations allows businesses to sell goods in inventory that do not comply with labeling requirements under Business & Professions Code section 26120 until July 1, 2018, as long as certain warning labels are affixed to goods prior to sale.

By allowing retailers to sell goods in their pre-2018 inventory, however, these transitional measures also created a conundrum: Such goods never went through a licensed distributor, so it was not clear how the retailers would remit the excise taxes collected on such goods.

The California Department of Tax and Fee Administration (“CDFA”) addressed this puzzle in an emergency regulation providing the following:

“A cannabis retailer that possesses or controls cannabis or a cannabis product at 12:01 a.m. on January 1, 2018, and makes a retail sale of that cannabis or cannabis product on or after January 1, 2018, shall remit the cannabis excise tax due based on the average market price to a distributor licensed pursuant to division 10 (commencing with Section 26000) of the Business and Professions Code that the retailer purchased or acquired cannabis or cannabis product from on or after January 1, 2018. The cannabis excise tax shall be remitted by the cannabis retailer to the licensed distributor on or before the fifteenth day of the calendar month following the close of the calendar month in which the tax was collected.”

In other words, once a licensed distributor provides any cannabis to a retailer, that distributor may collect excise taxes from the retailer for the sale of goods that were in the retailer’s inventory at the start of the year.

Distributors collecting taxes from such retailers should be sure to comply with the requirements set forth in the regulation, located at Title 18, Section 3701 of the California Code of Regulations.

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