Cannabis sales tax is one of the most important items that cannabis retailers MUST pay attention to.
In this episode, Jim & Peter discuss how to accurately calculate your cannabis sales tax by accounting for both the origin and destination taxes where that is applicable.
If you’re in California, this is a MUST-LISTEN episode. If you’re a delivery service, then watch it twice because you’re at the biggest risk!
If you need help with cannabis industry sales tax, then please reach out to us today at https://GreenGrowthCPAs.com/get-started or call 800-674-9050.
Hey everyone, Jim Breese here from GreenGrowth CPA’s and thank you for taking the time to join us. The second part of our three part webinar series today on sales tax last week we covered the basics of sales tax and why it’s important that you accurately calculate your tax burden. Peter even drop some insider knowledge about the CDTFA, potentially doing some audits in 2021 the stuff you were dropping on you and the tax authorities, they’re just waiting for enough liability to build up so that when they do audit you, they’ll actually be able to find some pennies and dollars to get back from you. One thing about sales tax is this is something you can not get rid of. Is this something that you collect from a consumer and you remit and you are the just the custodian of the cash to give it back to the local tax authority. So today we’re going to cover a nuance. It’s very, very important about destination versus origin calculations, important for the delivery services out there. And then lastly I’d like to invite into just introduce Peter Mantell. Peter, thank you for coming on today and sharing your deep knowledge of cannabis sales tax. We had a great time last week.
Thank you Jim. Uh, hello all the way from sunny Las Vegas from MJ biz con where we are at.
All right, well let’s go ahead and hop right in. I’ll just start having the discussion here. Peter, if you want to walk us through kind of all of the things, I’ll hop in if I have any questions. If you have any questions and you’re watching the broadcast here, go ahead and drop your questions into the chat as we go through. We’ll hit the Q and a at the end of this discussion.
So our conversation today is going to be around origin versus destination based sales tax. Um, and, and to be completely transparent, um, this is probably one of the most difficult, uh, types of sales tax to, to deal with in the entire U S uh, telephony. IA doesn’t make things easy, especially when it comes into the tax room. So, um, we’re going to help you, my, you know, understand how to maneuver in this space and as either an accountant that supports, uh, dispensary’s or as a dispensary or wreaking lunar, how to protect your business or what you need to be thinking about when it comes to the sales tax calculations, especially for California. Now, first and foremost, one of the big things that comes out of the gate is understanding what does origin versus destination mean. So some States have elected to uh, the way they wish to charge sales tax and we discovered the fundamentals of sales tax in the last conversation.
Um, some States when they want to run the calculations or how they want the sales tax to be implied by the local constituency, um, meaning that the buyers directly in FC, some will say, okay, we want to charge sales tax based off of where this product is coming from. And that kind of environment. We call that origin base. And then other and majority of the rest of the United States really is more centric and focused towards what they call, where are you going to charge sales tax? We’re shipping to and that’s called destination based. So in other words, what this means is that depending on the state, um, you may have a responsibility to collect sales tax, not only on where it’s coming from, but where it’s going to as well. Now, for those that have, that are CBD, uh, dispensary’s, you know, or CBD retailers that are on the econ space right now because that’s a very hot and upcoming product right now that isn’t as tightly regulated as, uh, the cannabis is in various different States.
Uh, you know, this is where you have a lot of freedom and this is really where you could lose your shirt because CBD is becoming such a popular product right now as a health product, as we speak. Uh, that people are just kind of buying wherever, you know, investors are dumping the funds into that industry, et cetera. And this is not any type of investment advice or anything of that nature. Um, but just kind of talking about the overall encompassing industry. So to that degree, we go into California’s case on what’s going on there in the state and what California requires. Is there required both, uh, origin and destination based on what that means is that in California’s case, and we’ll have the PowerPoint, uh, attached to a later time. Uh, what they want you to do is when you have a sale, and let’s just say you, you know, as this industry continues to grow, the demand for delivery will also grow.
Um, because people want accessibility kind of like door dash or you know, you want your food, you want it now, you don’t want to have to go out of it or, uh, perhaps the, the consumer has indulge a little bit of chronic disease, not properly equipped to be able to go to get more whatever have you. So in these kinds of environments, uh, you know, we want to make sure, uh, that however you’re accommodating to your clientele, that you’re also protecting your business as part of the aspect. And so, uh, understanding this is critical. So first and foremost, let’s talk about, let’s, let’s just kind of run the, um, a scenario. So let’s say as a hypothetical, um, you know, Jane DOE owns a dispensary operating out of, uh, San Jose, California. And Jane DOE has this unique type of product that for whatever reason, the entire machine to stages loves it. Three popular. I don’t know why it’s, it’s just a good product. Uh, and so, uh, she’s getting demand Jane DOE from, uh, out of her San Jose location for product two to Los Angeles or to other jurisdictions outside.
Um, and so what this means is that, uh, now the complexity from a sales staff’s perspective has not changed and in a landscape for gene and also change, um, remember, everything we do is with an eye towards an auditor showing up and looking at your books. So when we evaluate proper techniques, so maintaining data or handling it, we’re doing it with the eye towards Sunday. The big announcement show up at your door. And if you hear me say, Vicky made me an auditor. So, uh, first and foremost, let’s talk about the origin aspect. So Jane is selling from San Jose. Uh, she’s fulfilling her dispensary in San Jose actually grows there directly, uh, her product in any manufacturer there at that location. And so the, the first couple of things we’re going to look into is what does Jane have to charge for John, who’s in Los Angeles who wants to buy product.
Again, this is just a hypothetical. I know there’s some other laws about it, transportation, et cetera. But for the example today, we’re just going to use this. So first and foremost, what Jane’s going to have to do is Jane is going to have to um, make sure she’s accounting for first origin her. I just where she should fill in from. So she has some, uh, dispensary location in San Jose, California and some main street, et cetera. So what Jane’s going to charge to get to Joanne to Los Angeles? She’s been charged the state, which is going to be a flat rate of 6% in California. Uh, then she’s going to go through the County and city of San Jose where she’s fulfilling. So wherever she’s gonna, you know, so that orders you, that can be fulfilled from San Jose. It’s either going to be driver or some kind of delivery method to the guy down in Los Angeles.
So she’s been charged on top of the state sales tax, um, the San Jose County and district tax. Then now the product is shipping to, to John over Los Angeles. So then Jean is going to add also the Los Angeles district tax. So what we’re going to looking at as a hypothetical, let’s just say, um, you know, 6% for the state of California, the County for centers area is that goal is 0.25% in the city for the San Jose area is also a 0.25%. The district talks, and I apologize, I’m getting a little nerdy here. Um, is as a hypothetical philosophy, I’m just, let’s just say 3.25%. So we have all of these numbers. What are we going to do with them? We’re going to add them. So we’re going to, we’re going to, let’s say the six plus 0.25 plus 0.25 plus 3.25 and that accounts for both your origin and definition, uh, which is going to give you a grand total of 9.75%.
Now this is what’s going to be collected from the client at the end. Now I’m not accounting for also the excise and all the other components. We’re just talking to sex right now. Um, so that 9.75% is what needs to be on the sales tax side collected by Jean in San Jose from a client in Los Angeles. And then that’s only one part of the whole algorithm here or, or the process. Uh, the next thing that’s going to happen is that gene, uh, is also gonna have to, uh, not only collect the various thing, but then at the time of filing she’s going to go into the CTFA form and she is going to file, uh, since those tax form with the information broken down. Uh, so this is a CDP FFA, uh, for [inaudible], uh, that you’d be using this kind of environment. We’ll have an example that to send MCL to look at as well.
Uh, but in this environment, what’s going to happen is gene is going to have to break down, uh, a bunch of different components, both the sales tax and use tax based off of what, uh, the client Callow had paid and it had remitted and then also accounting for when it shipped, where to ship to. And so within the form itself, uh, to what Jim was mentioning a couple of minutes ago, uh, the breakdown gets very complex very fast. I mean, you’re getting to the schedule a to publication and a breakdown for the district tax, uh, in the long form. Uh, and the jurisdictions get broke down pretty heavily, very fast in the state of California. Now what happens if you don’t properly account for these calculations? Well, if you over collect and remit the full amount of money, um, you know, then the student will be satisfied as far as getting the revenue that was owed.
But it isn’t the event that you under collect it. You didn’t properly count for the destination aspect of the sales tax. Uh, so you didn’t account for the Los Angeles component of that district. Uh, and that kind of environment if under audit and, and Jane had not properly collected it or put it to the seat, that liability now falls on the shoulders squarely of Jane and her dispensary. And you know, do that long enough, do that over a certain period of time amongst six months a year. And that member gets pretty, uh, aggressive, pretty fast and pretty hefty. Uh, and so you could see a six figure amounts or seven figure amount owed to the state after a certain period of time depending on the quantity of transactions, uh, that Jane May have. So addressing this as critical and making sure that if you’re conducting any type of, of, uh, deliveries and that includes CBD, cannabis, uh, edibles, any of those other things that you’re properly accounting for, both the origin and destination, uh, especially with California and another state that will have some similar complexity, uh, for any of your accounts as outside of California would be Illinois.
They also have an origin component as well. Um, they’re not as complex as California system, um, but they can tend to be a bit of a pain in the surface. So, uh, you know, I don’t know if we want to come over upper air for a minute or two here to let people ask you random questions. Uh, Jim, your, you know, let me know what you’re thinking here.
Yeah, I mean, if you guys have any questions about this. So let me just repeat back with what I’m hearing correctly is that not only do you have to calculate sales text of where the product is shipping out from, but also where you’re delivering it to and you on the, as a business owner, you know, you need to be able to calculate that tech specifically. So if there’s 88 different jurisdictions in LA County, you need to make sure you hit each jurisdiction specifically. And as you go to do your filings every quarter for sales tax, right? It’s quarterly filings, I believe for sales tax, you need to break it down into a table of like, alright, $12 goes to this city and $3 here and this and that. I’m making a mistake on that can essentially, uh, create a huge under collection, which is in that penalty happens.
Um, when you were kind of alluding to was at Fresno, you know, the six plus 2.2 5.25 and almost a 50% increase in tax by just bringing it into LA County. Uh, that’s a very popular County to be in, in California. And I’m sure there’s a lot of people that are in orange or in Riverside or up in Ventura that are delivering to LA counting. This can be big, big money, right? So a delivery service can do with say a hundred K top line. Uh, we’re looking at 3000, $4,000 a month, you know, times 12, that’s like 50 K right off the bat. That’s just collecting. And if you do it the right way and then you do it the wrong way, what are penalties for something like this if you miss
upwards of upwards of 40% proper filings. Yeah,
yeah. And now you’re looking at another what, $25,000 in, in fines and penalties right there. So again, just one year
plus interest too. Yeah. Plus depending how long it’s been that you know, at the standard rate, I can’t remember like six. It’s between six and 8%. Generally they charge but maybe be on everything else.
Gotcha. Okay. Cool. Let’s just hop back. Keep going down the uh, the slide down here.
Okay, cool. So the next piece that we’re going to discuss then is what to do if in the event you haven’t properly counted for the origin and destination B cells. Uh, first and foremost, if it’s not properly calculated by your clientele, um, then the burden at that point, uh, rest squarely on your clientele shoulder. So that at that point there’s really two options. Your, your, your retail client if your CPA, um, and then if you’re a retailer, you um, you been attempt to recruit the additional sales tax that was not collected by going directly to the clientele. Um, though this is very unlikely that they’re going to pay cause once the transaction is completed and then we’re just gonna respond back to any queries or questions or issues. This happened, a lot of them commerce side with Amazon retailers where they didn’t know they’re supposed to be collecting sales tax.
Um, and then they find out from the States they should have. And then of course they’re contacting their clientele saying, Hey, can you please share with the sales tax and clients? I was just saying, you know, pound sand, we don’t care about you. So, um, you know, this is one of those things again that again, the state’s not going to enforce that the, that the buyers of the clientele have to pay the sales tax if you didn’t get at the time of the transaction, then arrests squarely on your shoulders. So what this means is if you’re an accountant or if you’re a retailer and you’re currently today not properly accounting for these things, uh, you know, first and foremost stop the bleeding. And, and that’s the most critical thing is to stop the bleeding. And that means start turning on the sales tax on the destination aspect as well as origin. [inaudible]
both of those are being accounted for before you do anything else because the worst thing you can do is continue to compound and go into analysis paralysis mode. Um, you don’t want to do that. You want to stay focused, calm and your head of this again because really we’re not expecting to see a lot of [inaudible] involvement in California until January 1st, 2021. So there’s time to correct this. The next thing is that the very next component is begin to run the calculations. So what that means is go back and look at uh, all your transactions. You probably most likely everyone got the origin aspect, but people were probably lacking the destination. So then you know, to be aware and to be informed and your clients or if you’re the retailer as regionally you need be aware, informed what’s going to be critical on all this is making sure that as far as your business is concerned, okay.
I know that I didn’t account for $5,000 in sales tax because I hadn’t captured the origin aspect. But because I figured this out now from the webinar I had with the green growth CPAs, uh, I know to stop the bleeding if you would. Uh, and so now I’ve now turned down that that destination-based component, uh, and then going forward, now I’m saying, okay, I’m collecting remitting it. Now you’re one thing. You’ve then you stopped the bleeding. You, you stopped any potential issues. If the client, the retailer doesn’t have the money today. Um, you know, there’s a couple different ways you can approach this. You can go directly to the state and they may call box. Uh, I made mistake and always do these things under the guidance of a seat of an accountant or state local tax expert. Don’t just randomly go to see yourself cause they’ll take advantage of you that way.
Um, you want to have a professional that knows the inner workings of their law, but you can always proactively go to a state and say, look, make hope that I didn’t properly account for some components of all this. Um, what do I need to remedy it? Um, you know, and I can go in and correct it. Some students will go and say, um, you need to do amended returns. So they’ll have you go back and do the prior filings, um, with the, with the corrected amounts. And then at that time they’ll hit you with a little bit of pee. And I kind of the an interest, uh, other States will say, well, because you came forward, um, you know, confirm the amount under what they call a voluntary disclosure agreement, uh, for your client’s health. And then, uh, we’ll accept that and remove the PNI.
You’ll just have to pay it to the backyard and out under that environment. And as the state’s being friendly and willing to cooperate with you, they’ll even offer, sometimes offer a payment plan. So let’s just say you accumulate it and $20,000. Um, right now we’re in Q four for, you know, coming up on Christmas and then in the holidays and in the new year and everything else, um, consumption may up. And so you need that free liquidity of capital right now in the short term to handle the demand you have. And then after you get through the cycle, um, you know, you can use the extra capital to pay off whatever debt you have. So this then comes down to how do you wish to handle that debt? Do you want to deal with it immediately? And then that’ll stop any potential for interest or you know, because of liquidity issues. Do you want to go and take your time and pay it off? Uh, you know, over a 11 month plan if you will. Uh, so those are, you know, again, steps as far as if you get, you know, if you realize that you have a problem, first thing is recognizing it. I’m going to come back up for air for a second here. Uh, just see if there are any questions about what to do if you realize that there’s a discrepancy in the sales tax information that you’ve been doing so far.
You said that the, you know, the States, why don’t you to be as truthful as possible. He said there’s like an NST kind of program like, Hey, you know, tell us and report to us. You know, what has actually been under reported, uh, do you see that they, you said they, they stopped the PNI if you do that, if you kind of just come clean on your own accord,
it varies state from state by state. So some States will, um, you know, we’ve dealt with States like Illinois, uh, Texas and et cetera, where even though you may have a licensure registration there for whatever reason, um, you know, you just miss something and then that’s where what an accounting firm will do or, or state and local taxes for salt, they will approach the state director and say, I have a client and this is generally done anonymously. Unfortunately, California’s case, you can’t do it anonymously, so it requires you to turn it in in advance. But in most other States, what you do is you come in and you say, okay, I have a client X and client X recognizes that they have an overage of an unremitting sales tax of $5,000 and they wish to come forward. So what the state will say is, cool, we got what you’re saying.
We understand. Um, so then what you do that they’re gonna say send over the transaction of the Delta. And it’s almost like, you know, the way they, they run through a voluntary disclosure room is almost like a mini audit. Uh, they go through the data points, you work with them and kind of confirm things, finding out what is sales tax, somebody the sales tax and what isn’t, uh, breaking it all down properly. And then once that’s all done, uh, the state will then come back to you with an assessment and saying, uh, based off of the findings, uh, we feel that with X, Y and D, your job then in dispute if you have any questions over that, um, if you don’t, then the next point is you, you accept it, then you move into non California seasons. It’s a little different because they require, as part of the volunteers agreement, you actually have to remit the name of the retailer at the time that you’re requesting a what the state.
So that’s a little bit more scary, a little spookier. Um, then the other thing associated with that, um, in California’s cases that after, um, they still assess the P and I penalties and interests at the time of the voluntary disclosure agreement or the amnesty. Uh, but what they do is once you complete the entire process, the state will lock for you to then apply for exemption, uh, for the amount that you had previously remitted to the state and Englishness within the penalty and interest. And the reason why they do that is to maintain and preserve control. So if for any reason, at some point during the voluntary disclosure agreement process or amnesty process, if you disagree, to cooperate in the state reserves the right to be able to then pack on the sexual component.
That makes sense. That makes sense. All right, cool. I ask any questions in the chat. So let’s just keep going down the next portions here then.
Awesome. So kind of to conclude this, uh, entire conversation then and to close it all out, bring it full three 60, we discussed last week, uh, the, the sales tax one-on-one, what it means. Uh, this week we discussed the difference between, uh, the Delta in origin versus destination and what needs to be counted for at the time when you’re doing that. Uh, the next week we’re going to then continue onwards as far as discussing, um, the, uh, what do you call in the whole, what do you do if you get contacted by the state? So let’s just say hypothetically an auditor shows up at your doorstep is after January 1st, 2021 in California or another States like Massachusetts that are just coming out or know Illinois in the future. Uh, you know, they’re, they’re just slamming out audits just to make examples out of people. Uh, on the next webinar we’re going to actually go onward and continue to discuss what to do in that kind of environment and how to handle it.
And a couple of pointers in advance. Uh, I will tell you prior to this call next week, um, you treat the state as an accountant or as a retailer, you treat them as if I’m a police officer going up at your doorstep asking random questions. If you don’t want to answer, you always reserve the right to not have to respond or answer to them. Uh, and in those types of environments and what we’re going to be discussing is the power of the power of attorney. Uh, so in other words, what does that mean for the, uh, accountant or the audit defender, whoever’s doing it in your, in your representation, in your stead, how to protect your business from accumulating any greater liability if under audit. Uh, and then what things you should consider, especially in regards to, um, you know, if you’ve done something wrong or you know, there’s, there’s area, what do you do proactively versus reactively responding to set issue. So a lot of that stuff we’re going to cover in the next webinar. Uh, I think that’ll be really super informed, especially if you’re in the accounting world as to what the deal when dealing with the States. And what their power is.
That’s it. Good deal. Good deal. So anything else for today then?
I think we’re good. Um, if there are any other questions and relationship is origin destination, the last one I’ll close out with the same, uh, for any accountants or retailers. Um, you know, a lot of people right now currently using point of sale systems, uh, you know, just to name a few trees, uh, MJ freeway, uh, you know, bleeds, et cetera. Uh, and, and one critical piece here, when, when using whatever system, using flow hub, et cetera, um, a lot of them will bolster in their marketing saying that we calculate sales tax and to a degree they do. What they do is they allow you to manually input the sales tax data, uh, into the actual point of sale system that they’re using for filing purposes. But if in the event, um, you know, if for any reason those, any type of, um, the, you know, any type of issue whatsoever in relationship to, um, I don’t know, uh, they, they, uh, don’t, you know,
you indemnify them pretty much. You’re, you’re putting your numbers in yourself, right?
Yeah. So, so if they, if they, their whole thing is we’re not responsible for the actual calculations. So one thing to also make sure of, and this is a critical area, and then you know, solutions like can attacks where, uh, we’ll assist with something that’s cause it allow for realtime rates call. Um, but always make sure when it comes to the calculations that you’re using a solution that has the exact rates. Because even if you thought you properly calculate it and it didn’t have the right rate and you can choose the doing that calculation at the wrong rate, now your business has exploded. So some things to think about in the origin destination or some homework for everyone here listening to this presentation today, make sure that you are at any given time checking the calibrated tools and making that whatever you’re charging from a rate perspective is accurate. Uh, and those rates can fluctuate from month to month. So it’s critical that you are, uh, keeping an eye on that.
Yeah, I put in the chat here, green growth cpas.com/can attacks where C, a,N ,N , a, T, a, X, w a R E linking onto their site and you can do a little bit more about how their software application can plug into and pull information from your POS system to make sure things are being calculated exactly or as close to exact as possible on your end, but surely exactly on Kenneth tax where and then you can final discrepancies sooner rather than later. You don’t want to be six months in and be like, Oh man, we have really expose ourselves to a lot of penalties. It’d be better to find out, Oh well two days we’ve met under collected $27 let’s just, you know, get, keep that going forward. So gringo, CPA’s dot com slash Ken attacks where there should be a little pop up as well during the presentation. You’ll see that as well. And then in the email that I’ll send out tomorrow to everyone that’s joined as well as to our list, check out Ken attacks where see what they can do to help out and move your business forward in calculating the proper sales tax.