Cannabis sales tax is one of the most important items that cannabis retailers MUST pay attention to.
Quite simply, if you calculate cannabis sales tax wrong (which a majority of operators are), then you will surely have an auditor at your door getting ready to dig through ALL of your reports and paperwork.
So that’s why we invited a special guest (Peter Mantell) to give this presentation so that you can learn how to protect your cannabis business from unnecessary sales task risks.
In this episode series, Jim & Peter will give you a full Understanding Cannabis Sales Tax.
If you need help with cannabis sales tax, please reach out to us or call 800-674-9050.
Transcript
Everyone. Thank you for joining us today. My name is Jim Breese here from GreenGrowth CPAs. And today we’re going to talk about cannabis sales tax. Now I know it’s not the most fun topic is, but it should be top of your mind, especially if you’re a dispensary owner. And really much so if you are a delivery service in the cannabis space, we’re gonna review information about California, but it also applies to everything around the country. So, and lastly, I want to introduce our special guest today, Peter mantel. And thank you for joining us today. I’ve enjoyed our past conversations and that’s why we kind of had this webinar going on today. So Peter, please tell the audience a little bit about yourself and why you’re the right person to be talking about this topic today.
Well, first and foremost, thank you for the time and a lot of needs to be able to speak to your group of followers. So, uh, my background is a sales tax expert. We use the terminology salt. Uh, I’ve worked on all types of cases, uh, from e-commerce to brick and mortars. Uh, we’ve done audit defense with various different States from New York to California, to Illinois, to Florida, Texas, et cetera. And we started out getting to the industry when we were in the eCommerce space about three years ago. Uh, and then we quickly kind of begun to pivot and adapt as we’ve seen some of the legal writ, uh, starting to move their focus towards the cannabis industry. So we jumped into this and kind of began to identify some potential issues and problems that we can assist with. The first and foremost, the kind of recap owners talking about.
We’ve been dealing with sales tax in various different States and sales tax it to begin with it, we’re going to kind of take an initial dive into what sales tax is to start. Uh, we, this is a three part series that we’re going to be doing together, with Jim and Peter and we’re going to discuss distinctly the implications. What does it mean? So we’re gonna pretty much encompass the who, what, where, when, and why when it comes to sales tax. So first and foremost, sales tax has become a much more popular topic for several reasons. One, from a political standpoint, you’re finding that it’s much easier to raise sales tax rates than it is to actually raise the interest tax. And so it’s a much easier way politically for a government institutions to gain more money without the actual civilian or consumer paying much attention to the extra the pay.
Now, now, specifically what tax sales tax is, is a, as you’re gonna read the slides here, so it’s a tax that’s laid on on retail goods or sir and some services, not many today, some States are looking to broaden that scope to make us a services are required to like state of Utah as an example, uh, is currently looking in, I think HB 44 is the, is the bill and they’re looking to expand so that, uh, accounting firms and lobbyists and lawyers will also be subject to sales tax in that state now and the environment here. We’re going to stay a little bit more centric towards California for this conversation, uh, for the series a, but you know, one of the biggest things that we’d like to discuss, especially if you’re a retailer and you don’t have any experience or knowledge on what sales taxes, uh, the purpose of sales tax is meant to fund, uh, various different components of, of your jurisdiction, your state, et cetera.
So think, uh, the police, fire departments, libraries, MTA or public transportation school systems. Um, for some places it’s does children’s health insurance, uh, parks and rec, medical facilities, environmental aspects, et cetera, roadways. And this money is meant to be delegated towards assisting in the infrastructure of where you live, making it a better place. So what really is occurring when you pay that sales tax is that revenue is supposed to go towards, uh, increasing the land value to, to where you’re located, uh, by various different things. And a portion of that also gets a sensitive state, obviously a large portion of that as well. So it’s all meant to benefit the local constituency, the local inhabitants. Uh, so then great. I know what those taxes, why is that relevant to me? So as a business owner, if you want to retail dispensary, uh, or, or whatever have you, or if you’re selling CBD online, et cetera, depending on when in hair, when and where you’re selling, uh, you may have a responsibility to collect them.
It’s sales tax. Now this is [Tax]. This is a binding responsibility. In other words, you can’t, uh, there are no exemptions from the requirement of collector meeting sales tax. Now, some products may not be substances, facts, I E medicinal products and many States will not be subject to sales tax. But, uh, you still have to report, uh, the volume of sales even on the tax against products. Uh, when it comes to, uh, for the retailers, I’m going to stay more centric towards the dispensary’s aspect here. Uh, if you don’t properly count and collect the sales tax, you as a business owner or liable for that amount, that’s not collected. My, one of the things that we did was, uh, an in the final bullet here and I’m going to tell a quick story on this front. Um, if you have sales tax, that superstar that’s there, let me rephrase this.
If you owe sales tax to the state, so let’s just say a state shows up at your doorstep and audits you and they assessed that you owe back amounts, sales tax, your taxes period supersede any form of bankruptcy or dissolvement. And the state is fully empowered to be able to say, um, to leaner Libby your assets. And then they can also garnish your wages. They can do a lot of other things and it can follow you even if you close that in your businesses. So when it comes to taxes, generally it’s guilty until proven innocent for starters. And secondly, it’s, uh, they have no sense of humor in the States. So you can’t claim gross negligence, you can’t claim you didn’t know Statesville care. Uh, we saw this big time on e-commerce side. Uh, California was one of the most aggressive States where external retailers to the state and they just started reaching out to people in New York, in Virginia or wherever have you in and leaning and letting their assets because they’re not responding to this.
So you really have to be very careful about the subject. Now, one of the things that we did when we started to first investigate this whole area, uh, we got in contact with, uh, California’s, uh, tax arm. Uh, the division is called CDC EFA. And we actually sat down with the lead auditor, uh, of the cannabis division and kind of did a couple of Q and a session with him and asking, all right, what are you observing? What are you seeing? What should our clients know, et cetera. Now one of the things that was very interesting in this conversation with CDTF, they said on record that they’re currently awaiting the first and foremost. They know that a vast majority of dispensaries aren’t properly accounting for sales tax right now and the property counts where we will be discussing that and the part two session next week.
Um, and that’ll be covering origin versus destination based sales tax. But the state from their opinion is well aware that they feel that many of the retailers today aren’t in full compliance with the sales tax side. Uh, now from there, what they’re doing and the reason why, you know, the next question is, well then how come nobody’s contacted our clients yet or contacted us directly? Uh, the answer is very simple. They are currently waiting for the three year de minimus threshold. The past, what I mean is that the recreational got enacted, uh, last year and January 1st. And so they’re waiting for January 1st, 2021 to start handing out auto. That’s when the boogeyman is going to start showing up and keep the stores. Uh, and what’ll happen is ideally you’ll get some kind of letter notification in the mail saying that you’ve been randomly selected for an audit and the cannabis side, I don’t think it’s going to be as random as they’re going to claim.
I think there’s going to be head’s gonna be very, very centric and focused towards the dispensary. So, um, right now if you have liability kind of properly accounted for sales tax, you still have time to get it straight. Um, get right with this one. Because come January 1st, 2021, all bets are off. And remember, if you do end up blowing money back, owed sales tax to the state, they will also additionally to add additional fines, penalties, interests, all kinds of fun stuff just because they can. And then when it comes to the cannabis overall industry, because it’s such a monitored market and it’s so restrictive, there’s also the possibility that you may lose your licensing, um, as a chemist retailer. So these are things that you need to keep an eye on and you can’t take lightly because it could impact your business going forward in the future. We’ve also been speaking a lot with investors and investors are actually reaching out to us directly and asking us to analyze, uh, dispensary portfolios to see how they are from a compliance standpoint. So even even now, the investors are starting to get savvy onto the subject and starting to realize that they need to pay attention to it. Uh, let’s go onto the next slide, which has
to Yale, you have the CD, the metric, then people don’t have to sign up for metric and they’re losing their license or getting their license suspended in California. So, and that’s got nothing to do with cash. That’s just track and trace. So this is a real thing you guys like this is not like just a scare tactic to sell, you know, services. This is real life. This will be here in, you know, very soon sooner than we think.
Yup. And you know, if you, if you’ve never dealt with a state before, um, you know, they’re generally pretty cold and they’re very matter of fact. So, you know, one of the things that we discussed with the state previously and on this venture side, we said, look, 2021 comes around this way. A lot of dispensaries that aren’t ready for this because they don’t know about this. And the state just pretty much said, we don’t care, not our problem. They said the California state’s interpretation is next man, if he would. So if a dispensary closes, they feel pretty confident in new dispensary, will will come in this day. And so they really don’t have a care whether the backer liability impacts your business going forward or not. They feel that’s your problem. If not, somebody else would take your profit or your business. So, um, again, and this isn’t hearsay, this is actually factual.
You can, you know, you can talk to counsel. I’ve done audit defense before or dealt with the state. They’ll, they’ll generally agree with that. So now, um, you know, the next part about this is that it can be very, very complicated and one things, one little trail of breadcrumbs that wanna leave for you for the next fall. You know, we discussed this a little bit about, uh, delivery based sales. Uh, one thing that you need to pay attention to, especially if you’re using a point of sale system, something like that. Um, it’s not sufficient if you’re doing deliveries to just account for the sales tax with where your business is located, depending on where you deliver to depending on the zip code. Um, that next location, which could only be half a mile away from your business, maybe something’s in different rates. And then also from a filing perspective will require you to break it down for, from a jurisdictional standpoint.
So one of the things that we always advise when listening to these conversations and these webinars, a, uh, consult your, your CPA or state and local tax experts, salt, uh, to make sure that you’re properly running your business today and uh, always make sure that you’re in constant contact with a financial expert, green Grove CPAs, uh, et cetera. These are important organizations that are there to protect your business and to keep you running. Uh, so I think from here, if it’s okay with you, Jim, I’d love to go into kind of a live Q and a part unless you have anything you want to do.
No, that’s it for me. I appreciate you sharing that and it’s a good kind of like refresher of what sales tax is and you know, I appreciate you sharing your conversations with the CDTF Fe. If anyone has any questions, jump them into the chat here. We’ll hop into it. Peter and I are going to chat for a moment here. But yeah, man, when you start talking to the CDTF and they realize, Hey, we know that people aren’t accounting for taxes properly, especially sales tax, like this magnifies quickly, these penalties, fees and interest is a, is not a joke. And it’s compounding too. And they’re going to go back to the latest tax years that they can. It’s not like they’re going to go into 19 and be like, Oh, we’re just gonna look here. They’re going to untie a thread real far back and say, Oh, you have poor documentation, poor records. You didn’t produce the documentation we asked for soon enough. Cause, um, I think we were talking in one of our last conversations is that the auditors will start the audit and kind of just let the thing go and go. And it goes for a long time. And as that subsequently builds up, more and more bad things happen, more and more penalties add up, more fines
didn’t completely. And the one thing I will share in all this, when it, when it comes to, uh, CDTF. So let’s just say you’re doing paper records, right? So what they’re going to do is if you’re, you know, let’s say it’s only cash base right now, you don’t have a bank account, you don’t have electronics or anything else like that. Uh, one of the things that the state will do is they get very, very creative as to how they can back their way into your, your numbers. So what they’ll do, especially if you’re California base, the first thing they’re gonna do is ask for your income statements. And what they’re going to do is they’re going to cross reference your income statements with your transaction records. If they find deltas, then it’s going to get super invasive. Uh, so in other words, what ideally happens is you, you turn over the records to the state under audit, and then during that timeframe, the state at that point will look and they’re going to look for Delta’s, they’re trained, defined, um, differences and discrepancies.
And then if they do find it, then it gets crazy. Uh, things such as they could tack on additional fines and penalties. Uh, and some negotiations we’ve had with some of the States. We’ve actually seen cases where, uh, for example, in one case they’re auditing an Amazon retailer. And what happens is Amazon transactions are fluctuating from month to month, even even after like two, three months after the fact, you can see a Delta or change in the transaction. Well, first and foremost, they asked us why there’s a change. And I said, you’re going to have to go talk to Amazon and ask them why we don’t control the data there. But the, uh, the next part until all this was that, you know, the auditors, we need to get a closer number. And ultimately what we had to do and the agreement with the auditor was that we had to add an additional 10% above and beyond the actual transaction records to the state. Uh, so these kinds of things will surface. And again, if the state does fine, um, that there’s missing information there, you know, they’re looking for that. That’s the sneaky what they want to find. Then they know they got you. And at that point, they show up at your office. They’re going to want to go through all of your [Tax] for paper records. Everything that you have, uh, it gets nasty real fast.
Gotcha. Gotcha. So Carol has a question here. He says, we just received a notice to file a monthly beginning. Jan 20 Jan one, 2020. Uh, most clients refuse to pay the CDTF excise tax when we deliver. So I’m guessing that you are probably a distribution company. So is there a regulation that can point them to that makes them pay the excise tax upfront? Now the onus is not on the retailer to pay the excise tax up front. It’s just something you have to put into one of your distribution agreements when you work with the brands. Are we, when you work, sorry, not with the brand at the retailer, they have to pay that up front. There is a minimum markup and that markup, we’re going to do a post on that soon that just went up from, so here’s how tax works. So if you have a $10 item wholesale and you want to Mark, you want to get your excise tax for it, you got to Mark it up 60% so it’s $16 is the base and now you multiply it by 15% whatever that comes out to, I’m not that quick.
That’s the excise tax you need to collect minimally. If you’re not going to do cash on delivery for the product, you have to at least do cash on for the excise tax because your liability is triggered the moment that that product leaves from your distribution center to their retailer. Now if they stiff you for that and you’re really good at moving a lot of product, it gets really big really quick and it doesn’t matter if they didn’t pay you, you’re still liable for that. Now if you miss that filing date and then you go maybe one or two days pass it or months passed it, it’s an immediate 50% penalty and there’s no built in abatement plan for cannabis excise tax. There’s a kind of a thing out there where you can, you know, pay off. They get you like a repayment program and you pay off the principle press the plus the interest and then you can request that the penalty be taken off.
But there’s no guarantee for that in the bigger year penalty, you know, the more people it’s going to have to go through. We did a webinar, I think two weeks ago about this specific thing on the, um, what about distributors? The first part was about that excise tax, but to tie it all back together, Kara, what I would say is I wouldn’t work with retailers that don’t pay the excise tax. If we’re not operating in good faith, then they’re putting you at risk. Um, that’s just a big thing. It’s a, it’ll put you out of business. Like this is real. It, it’ll go back until the officers is, go ahead.
The term you’re looking for is tax fraud tax. Uh, so you are literally, so a retailer acts as an agent of the state and as such, they are authorized by the state when they receive that tax license, um, to collect, remit the sales tax. Uh, now the state may say it’s a privilege, which I don’t think many I think many retailers would disagree with. Um, but what happens is now the burden of responsibility falls on the retailer. And so let’s just say hypothetically that the retailer collects the excise tax that does not remit. That is the literal definition of tax fraud. You are impersonating an agent of the state and you are not, you haven’t personally, you’ve clicked on money but half the state, but you do not permit to mine to the state. Also in the case of California, we’re talking about um, monthly payments.
So what’s interesting in this is that’s actually called a prepayment plan. So normally the state of California that the shortest frequency, they’ll give me a call, the quarterly. And then what they’ll do is they’ll aggregate now amongst the, on the sales tax side where you get kind of ballpark gross amounts for the first two months. And then on the quarterly you’re going to even it all up and make sure it all adds up at the end. So what’s your, what’s your talking about as a state requiring prepayment? They’ve gotten a little bit more relaxed on the prepayment front. They don’t expect you to be dead on, but they do want you to be close. Uh, so previously, if you weren’t, you know, within a couple of percentage points of uh, what the actual number was, um, they would find me for it. But now they’ve gotten a little more more relaxed on that subject.
On the prepayment side. That doesn’t mean you can short them 50% or 60%, I would say, you know, ballpark five to 10% max and no greater than that. Uh, and that’s pushing it. Um, you know, you really want to keep it as conservative as possible. And then on the quarterly, again, they’re going to, that’s when you’re going to say, we paid X amount and in January paid Y amount in February, and now in March we’re going to play Z , which is an aggregate of X and Y plus whatever sales we had conducted in the Z timeframe. And so that’s kind of how that whole piece would work out.
Great question. Yeah, it’s a great question. And one other thing here we see very common is people using excise tax. Since it’s a lot of cash, you get kind of diluted. And I think you’ve got a lot of money. Do not use this money as operating capital. Like make sure that this excise tax, sales tax, whatever tax you’re collecting, you should be planning for taxes every month. Putting some money aside, like put it in it’s own little thing and don’t touch it. It’s really hard to come up with $400,000 in April when you really got to pay. Like you got to pay that money. Like this is real bucks. You guys are making millions of dollars here. Um, and you, there’s not a lot of deductions you can take as a cannabis company. So your income taxes are super high. Sales taxes can again build up really quickly, excise tax extremely high.
Uh, and it can make you again, delude you to think that you’re very cash rich and you’re like, wow, we’ve got hundreds of thousands of dollars in this account. We must be doing great. And then you have to get this tax payment done. Uh, you won’t get a bill for that either. You have to just file this. It’s not like they’re like, Oh, you owe 321,000. You have to calculate it and remit it in that 14 day window past the quarter. It’s like, uh, the burden is on you. That’s why we talk about this often as cash crimes or the new drug crimes. No one cares about the cannabis anymore. It’s not any about the wind. It’s got nothing to do with that. They just want their money and they want it on time. And if they don’t have it on time, they will come.
So two guarantees in life, death in taxes. Now one thing I will share, um, uh, you know, prepayment plan says monthly reporting filing. Carol, uh, we can we sync up offline a little bit more on that area. Now, one thing I will share is if your clients are also CBD retailers, um, does not restrict it to the California market, which means they maybe do an eCommerce sales of CBD products into other States. Now here’s where this is going to get really nasty for them. Um, if they have a certain volume of sales in Texas or in Florida or in Virginia or in New York by recent, uh, the overturning of quilt Wayfair by the Supreme court last year, you may be somebody that’s looking at sales tax and those various other States depending on your sales lives. The de minimus threshold for a lot of States on average is either $100,000 or 200 transactions.
So it doesn’t take a lot depending on the size of your retail business and the amount of CBD you’re selling in the various markets. So one thing here also as well that you need to make sure that you’re cautious about is if your client is also on eCommerce side, are they properly collecting meeting sales tax as well for CBD products. And this is a big boom right now, a lot of people in the CBD space. So this is something you need to be very, very aware of. Now, if you’re selling your CBD product to a retailer, let’s say you’re a distributor and you’re selling to Jane Doe’s dispensary in California, she better supply you with the receptor activity. Because if Jane doesn’t supply you with a resale certificate, you’re on the hook for the sales tax that she should have paid. So there’s that documentation that you want to make sure that you get to protect your business so that you’re not responsible for it. And if you sell it to any, um, distributors or you sell to any retailers, make sure, um, that they supply you wherever you’re shipping to a resell certificate. So let’s just say they bought from you in California, but they’re going to have you ship $100,000 worth of product to Virginia. You need to make sure that they supply, unless they pick it up from your California destination, if you’re shipping it to them in Virginia, and you need to make sure that they supply the resell certificate,
all these fun little nuances to sales tax.
Never a boring day in the nerdery of sales tax.
But that’s kind of the, uh, you know, the whole idea here is like, you know, let professionals help you with these types of taxes or these type of legal regulations. So you can focus on building a very large, you know, business and focused on the actual activities of the business. Let other people take care of this, you know, number crunching and being, counting, moving things, paying bills, all those kinds of things so that you can really, really triple down on what your strengths are within your business. And then I’d like you to Peter it, tell us a little bit about Ken attacks, where if you could, we were still on that slide for just a little bit here, but if you visit greengrowthcpas.com.
Yup. So one of the things that we’ve begun to work on, and I also put the link in the, uh, in the Texas wall so everyone can see it there. Um, we have created a software that specializes in the sales tax industry that automates the overall process. So we do currently have a API with MJ freeway and with, uh, trees.io. And what we do is we can do multiple things there. So for example, if you’re shipping around locations or destinations and you don’t know what the proper rate is, we can actually do a direct rates call. So in other words, you don’t have to figure it out. That removes some of the calculations in your cart. The next thing, and we’re gonna discuss this at greater length in the next presentation, is we automate the filing, uh, can attacks. What it does is automate your filing with California. So when you have to do a sales tax file in California, you actually have to break down jurisdictionally everywhere you collect the sales tax. Um, it could be quite tedious and bit of a payment, but if you wait, so, uh, the whole objective of what the system does is a simplified and streamlined the process so that you as a retailer can focus your time and effort and building your business versus having to deal with the sales tax off.
Yeah. Well I think we’ll be looking at one of those forms next week on the presentation and just, uh, I see him all the time. It’s just, it really punches me in the gut when you see how complicated these forms are. Yeah. Like every has 88 municipalities in LA and you got an 88 different rates and you better make sure you get it right. Cause like you said, it could that, that, um, zip code change could be just under the, across the street. Uh, and then you’re actually subject to that. So that’s it. And then go ahead.
At any given time to, uh, they could, they can reach all the lines of zip codes. They can, um, change their rates. So this is constantly a moving target, if you want as well.
Yeah. So Adelanto sent us out the CDTFA notice that they changed their sales tax rates. So, uh, it’s a real big thing, you know, it’s just constantly in flux. Yup. Good deal. Good deal, Stacy. It’s nice to see out here is a cultivator and distributor, you know, it might be, again, subject to the sales tax if you don’t collect that, um, that a sales, what is it called? The sales a resale certificate. So these are big things. You know, you don’t want to trigger your liability, uh, unnecessarily. So there’s no more questions. We’re going to end up tying up this session here. But Peter, I really appreciate your time. Thank you very much for sharing. You know, just a little bit of your knowledge today and a lot more to come over the next two weeks. I’m very excited to have you and I appreciate your time and your thoughts today.
