Navigating Audit Season: Tax Insights for CA Cannabis Retailers

Audits are an inevitable reality for more and more cannabis retailers. Being prepared is not just beneficial; it's essential. Given the CDTFA enforces a 50% penalty for late or inaccurately filed taxes, calculating taxes correctly and submitting on time is critical to avoiding severe financial setbacks.

That's why we held a webinar featuring CPA Patrick Finnegan and Brian Duckett from the CDFTA, focused on getting you ready for a smooth audit process. In this post, we'll walk you through their key takeaways and essential strategies. Watch the full video below for all the in-depth insights and answers to your pressing tax questions.

How to Prepare for an Audit:

1. Know the Rules: Knowledge of local, excise, and sales tax rules is paramount. Cannabis retailers must stay informed about the specific tax regulations applicable to their operations, ensuring compliance and accurate tax liability calculations.

2. Apply The Rules: Applying tax rules correctly when calculating your liabilities can save your dispensary from potential penalties and interest charges. Ensure that your financial practices align with the current tax legislation affecting cannabis retail.

3. Maintain Rigorous Documentation: Documentation is your best defense in an audit. Keep detailed records showing your calculations, starting figures, and the application of tax rules. This evidence will support your compliance efforts and facilitate a smoother audit process.

Key Takeaways:

Understanding the Excise Tax Shift

In a significant policy update effective January 1, 2023, the responsibility for collecting and remitting cannabis excise taxes shifted from distributors to retailers. This change requires retailers to directly manage excise tax collections on cannabis and cannabis products sold. The implications are profound:

• Direct Collection: Retailers must now calculate, collect, and remit the excise tax directly to the California Department of Tax and Fee Administration (CDTFA), ensuring the accuracy of tax calculations and compliance with state regulations.
• Increased Responsibility: The shift places a greater administrative burden on retailers, necessitating updated accounting practices and systems to track sales and tax collections accurately.

For a deeper dive into the excise tax changes and how they impact your dispensary, check out our blog post, "Are You Prepared for California's New Excise Tax Calculation?" and our California Excise Tax Changes Webinar, which takes an in-depth look of these updates with practical guidance on navigating local taxes, and tips for updating your pricing strategy to maintain your profit margins.

Social Equity Excise Credits

The Social Equity Excise Credit aims to alleviate financial burdens on cannabis retailers within social equity programs, reducing excise tax liabilities.

• Eligibility Criteria
  • Participation in a recognized Social Equity Program.
  • Compliance with all regulatory requirements.
  • Holding a valid cannabis retail or microbusiness license.
• Application Process
  • Obtain certification from local or state social equity programs.
  • Submit an application to CDTFA with required documentation.
  • Await approval, and apply the credit against excise tax liabilities.
• Applicability
  • The credit is applied against excise tax liabilities, offering financial relief and supporting the growth of businesses impacted by previous cannabis laws.

Navigating Delivery Ledgers & Taxes

Retailers must meticulously record delivery destinations, applicable taxes, and maintain comprehensive ledgers to demonstrate compliance:

• Delivery Taxes: Retailers must apply the correct tax rate based on the delivery destination, accounting for varying local taxes.
• Comprehensive Ledgers: Detailed records of all transactions, including delivery details and applied taxes, are essential for compliance.

For an in-depth look at California Delivery Ledger requirements and reporting, check out our Webinar "Avoid Costly Fines with Compliant Delivery Ledgers."

Embracing Documentation

Gone are the days when California cannabis retailers might have considered shredding documents to stay under the radar. Now, meticulous documentation is your best ally. This shift from avoiding paper trails to rigorously maintaining them is monumental, highlighting the industry's evolution towards transparency and compliance.

• Detail Your Tax Calculations: Understand the specifics of local, excise, and sales taxes applicable to your operations. Document how each tax liability is calculated, capturing what numbers you start with and the rules applied to arrive at your figures.

• Embrace Digital Record-Keeping: Transition from paper to digital records where possible. This not only ensures easier access and organization but also aids in creating a transparent audit trail that regulatory bodies can easily follow.

• Maintain Comprehensive Sales and Transaction Records: Every sale or transfer, including details around delivery such as the destination and associated taxes, must be documented meticulously. This ensures you're prepared for any questions auditors might have about individual transactions.

• Document Tax Payments and Credits: With the shift in excise tax responsibilities and the introduction of social equity excise credits, it's crucial to keep detailed records of all tax payments made, as well as any credits applied. This documentation will support your compliance and assist in any discussions with tax authorities.

• Regular Reviews and Updates: The cannabis regulatory landscape is constantly evolving. Regularly review and update your documentation practices to ensure they remain in line with the latest regulations and best practices.

View CDTFA's Presentation Slides, Tax Help for Cannabis Retailers ⬇️

Leveraging Meadow for Seamless Compliance

Navigating audit season successfully goes beyond just understanding the rules; it requires applying them effectively and substantiating with accurate reports and data. This is where Meadow steps in as your ultimate partner in compliance, ensuring cannabis retailers operate with confidence and peace of mind.

Meadow's platform is meticulously designed to address the specific needs of cannabis retailers, offering tools and features that streamline the process of staying compliant:

• Comprehensive Documentation: Meadow’s robust record-keeping capabilities mean that every transaction, every tax calculation, and every piece of compliance data is meticulously logged and easily accessible. This not only prepares you for audits but also provides a clear audit trail back to the source, demonstrating your commitment to compliance.

• Detailed Reporting: Generating comprehensive reports is effortless with Meadow. Whether it's sales reports, tax reports, or custom reports for specific data points, our platform provides the detailed insights needed to review your compliance status, prepare for audits, and make informed business decisions.

• Integration with Regulatory Requirements: Meadow stays ahead of regulatory changes, integrating new requirements and reporting tools into our software. This proactive approach to compliance reduces the risk of penalties and ensures that your business operates within the legal framework.

• Expert Support and Guidance: Beyond software, Meadow offers the support of a team deeply knowledgeable about the cannabis regulatory landscape. This means you have access to expert advice on navigating complex compliance issues, ensuring that your dispensary not only survives but thrives.

Incorporating Meadow into your operations means embracing a system built to ensure easy, comprehensive compliance. This allows you and your team to focus on what you do best—serving your customers and growing your business—while operating with the assurance that your compliance needs are fully managed.

Final Thoughts: Beyond Compliance

Audit season indeed brings its challenges, but armed with expert advice, diligent preparation, and the robust capabilities of Meadow, navigating these challenges becomes less daunting. Remember, the ultimate goal is to remain within the rules, avoid penalties, and cultivate a compliant, successful business landscape.

For more insights and personalized assistance on leveraging Meadow for your compliance needs, don't hesitate to reach out. Our team is committed to empowering dispensaries to understand and correctly apply regulations, letting you focus on growing your business and your customer base.

Resources:

Up-to-Date Tax Information for Cannabis Retailers from CDTFA

Stay up-to-date in the ever-changing world of cannabis taxes with the CDTFA's "Tax Guide for Cannabis Businesses." This essential online resource keeps you updated on the latest in Cannabis Tax Law, Sales and Use Tax Laws, and other programs administered by California Department of Tax and Fee Administration (CDTFA) that may affect the cannabis industry. As tax regulations evolve, this guide ensures you have the latest information directly from CDTFA to maintain compliance. Regularly check in for updates.

Read the webinar transcript below:

Hello, friends, welcome everybody!

We have a very important and timely topic for discussion today, as I just mentioned, around cannabis taxation and preparing for an audit. As we all know, or may be experiencing ourselves, a large and growing number of cannabis licenses are undergoing audits right now. One of our main goals at Meadow is keeping our partners within the rules and out of trouble...

So these are some of the topics that we have. As I mentioned passing an audit, accounting for the excise change from 2022 to 2023 when the excise tax changed from a wholesale base to a retail base tax for arm's length transactions, the social equity excise credit, and some of the details and limitations there. The delivery taxes and to some degree, ledgers which record details around delivery such as the destination at which an order is being delivered and the attending taxes and documentation. That last point really helps to inform the rest.

I think for a lot of us who've been doing this for a while, what used to be avoided at all costs as evidence of criminality is now going to be embraced as evidence of compliance. And so that's been a transition that's been years in the making. And you know we've received a lot of great questions as well that we'll get to in the second half of the webinar so without further ado you have myself here. I'm Max Esdale. I'm the COO of Meadow. Patrick Finnegan, who is the CPA and cannabis accounting professional extraordinaire who we've known. He's been a friend of Meadow for years Brian Duckett and Chazz Tyler both joining us from CDTFA, and that is the California Department of Tax and Fee Administration, for anyone who is blissfully unaware. You probably won't be for long if you if you don't know since you're in this industry. So to kick us off we're going to have Brian, who's prepared a presentation, a high level presentation to cover some of the most important changes nuances FAQs of cannabis taxation and auditing and then we'll pass it over to Patrick and Chaz open up for discussion and answer your questions.

Brian Duckett: ... This is tax help for cannabis retailers. So I wanted to start it off by mentioning to you could get something in writing. This presentation illustrates general tax concepts and does not describe every situation you can email add Us. Email us at cdtfa.ca.gov/email with details specific to your business operations for reliable written guidance. And just please note that the contents of these slides do not constitute written guidance. So the old few are looking for written guidance, you know. Please submit the written guidance with the specific details. So that you could be provided that written guidance and a cannabis retailer. A cannabis retailer is a person who engages in retail sales or deliveries... cannabis products to customers. This includes micro businesses authorized to sell cannabis at retail. and as far as the Cannabis tax law, so, November eighth, 2,016, under proposition 64 voters approve legalizing adult use of cannabis and then, on June thirtieth, 2,022 cannabis tax reform under into the cultivation tax as a July first, 2,022, and move the collection and payment of the cannabis excise tax from the distributor to the cannabis retailer for retail sales of cannabis or cannabis products made on and after January first 2,023. So beginning January first, 2,018. Through June thirtieth, 2,022. The cultivation tax was imposed on all harvested cannabis that entered the commercial market. This tax will applied to cultivators of cannabis. and the cultivators were responsible for paying the cultivation tax to the a distributor or manufacturer, once it left their facility, at which point the cultivation tax would get passed along until it reached the distributor who did the testing and the quality Assurance Review, at which point it would be considered entering the commercial market, and that distributor would be the one reporting it to CDTFA And then on and after July first, 2,022, the cultivation tax is no longer imposed on harvested cannabis that enters the commercial market. Distributors, manufacturers, and cultivators are no longer required to collect or pay the cultivation tax. Any cultivation tax collected on cannabis that enters the commercial market on or after July first, 2,022 must be returned to the cultivator that originally paid this. So this happens because of kind of that timing issue where? You know, it left the cultivators. Facility they paid. The cultivation tax, however, doesn't end up actually entering the commercial market till after July first. So you have an issue where it was collected and paid. However, then it's no longer due anymore. So that needs to be refunded back to that. That original cultivator. If the cultivation tax cannot be returned. It must be paid to CDTFA as excess cultivation tax collected. So that would be a situation if for some reason, maybe, the cultivator was at a business, or they couldn't. You know you couldn't locate them. You didn't know what to do with the money. You just remit it as excess tax on your your next return. beginning January first, 2,018, through December 30, first, 2,022. The cannabis tax law imposes, a 15% cannabis excise tax on hop purchasers at the retail sale of cannabis or cannabis products. Retailers are responsible for collecting the cannabis excise tax from purchasers at the time of the retail sale, based on the average market price for retail sales of cannabis or cannabis products made before January first, 2,023, and distributors are required to collect the cannabis excise tax from cannabis retailers for cannabis or cannabis products sold or transferred to a cannabis retailer before January first 2,023. And this is the average market price. So this is again, this is on still on the old distributor program. So between January first 2,018 through December 30, first, 2,022 the average market price is based on the type of transactions. So you either have an arm's length transaction which uses the average which the average market price is the wholesale cost plus a predetermined markup by CDTFA. or it's a non-arms link transaction, and then you, the average market price, would be the gross receipts received in the retail sale and the wholesale cost. So this again was applicable through December 30, first, 2,022, and the wholesale cost is the amount paid by the cannabis retailer for the cannabis or cannabis. This products, including the transportation charges. and then for our markup rate. the markup rate through December 30, first, 2,022 was set at 75, and then for our historical rates, you could view those on our website. The markup was evaluated every 6 months. So every 6 months it was either potentially stayed the same. Or it may have changed. So you could view those historical rates on on our website. And here's an example excise tax computation for the distributor program. So this assumes the wholesale cost of flour is $7,500. We're using the 75% markup rate to add the additional for the markup. And this is how we get the average market price of those flowers would be 13, 1, 25, and then the cannabis excise tax due would be 15% of the 13, 1, 25 to come out with a total of 1968, 75. So that would be the amount of cannabis excise tax due that the distributor would report and pay to the CDTFA. And now moving on to the current program. So this is the retailer program. We oftentimes call it CR for short. That's kind of the acronym that we use for cannabis retailer excise tax. So beginning January first 2,023, the cannabis excise tax is imposed upon. Purchasers of cannabis or cannabis products sold in a retail sale. Cannabis retailers are responsible for collecting the cannabis excise tax from the purchaser. and the 15% cannabis excise tax will be applied to the gross receipts from the retail sale rather than the average market price. So the and cannabis retailers are responsible for reporting and paying the cannabis excise tax directly to CDTFA for the retail sales made on or after January first, 2,023, and then this is there is a credit for tax paid to a distributor for CR, and so, beginning January first, 2,023 cannabis retailers may claim a credit on their return for any cannabis excise tax paid to a distributor for cannabis or cannabis products purchased before January first, 2,023, and sold at retail on or after January first. 2,023, and cannabis retailers must keep documentation to support any credit reported on their return, and this would include sales invoices. So for a sales invoice, you'd obviously want to show that the retail sale occurred after January first, 2,023, the purchase invoice that would show the purchase of that sold product prior to January first, 2,023, along with the amount of tax paid on that purchase invoice, and then any other information supporting the payment of cannabis excise tax to a distributor. And then one other thing to remember about this credit is this is about the retailer paying the distributor, and it's not about what the distributor reported to CDTFA totally separate liabilities. So you don't need to make sure that the distributor went ahead and reported it, or whatever they did with it. Well. as a retailer, you need to make sure that you have your proof to show that you paid it to the distributor which relieves you of your liability, and you get the credit because you prepaid that tax, not because the distributor reported it so. Just a slight little distinction there, and something to remember. and then for our vendor compensation. So beginning January first, 2,023 eligible cannabis retailers may apply to retain vendor compensation. and this is an approval to retain 20 of the cannabis excise tax owed on retail sales. Cannabis. Retailers must be approved for a DCC fee waiver prior to applying with us. And it's an online application and the vendor compensation program currently is set to end December 30, first, 2,025, and regarding the vendor compensation period, it is a 12 month period as long as you maintain your eligibility for a fee waiver. and it begins on the first day of the calendar quarter after the date of your vendor compensation, approval. So if you receive approval in the first quarter, your vendor compensation, your 12 month period would begin April first, that next beginning of the next quarter. The vendor compensation, approval can end prior to the 12 month period. If the cannabis retailer does not maintain their eligibility. And then, similarly, we kind of follow it. The same rule where once we receive notification from DCC. That someone is no longer eligible, we would end their vendor compensation period, then into the next quarter. So if the DCC. Notified us in third quarter, that this individual is no longer eligible at the end of the fourth quarter is when we would end their vending vendor compensation. And just keep that in mind because a fee waiver period that you receive your fee waiver, for with DCC. May differ from your vendor compensation period approved with us. Remember that they're 2 separate periods. And they don't necessarily coincide with one another. It's just that your eligibility for a fee waiver must be maintained throughout the period that you receive vendor compensation with us and retailers can reapply with us to or after their retention period ends. And so that again, that's just through our online application, you could go in and just renew that. And then some other things to remember about retaining vendor compensation. So this applies only to the retail sales made at the retail location approved for vendor compensation. Vendor compensation cannot be retained on any retail sales made. If the cannabis retailer license is expired or revoked, or if the sales are made under any other cannabis license, that the retailer may have. So something to keep in mind. If you have. If you're going to be eligible for vendor compensation, you have 2 locations. You want to receive the fee, waiver on the location that you want to receive vendor compensation for. So keep that in mind. If you have more than one location. You're only going to receive vendor compensation for the location that receive the fee, waiver approval from DCC. So make sure you know you have that applied to the correct license that you want to have that applied to and the return will automatically calculate 20% of the excise tax due on sales reported for the location approved. So you really don't have to do anything additional once you're approved, the system pretty much, has, you know, everything kinda formatted in there. So whenever you report sales under your approved location, it'll automatically compute the 20. You'll be able to see that when you're submitting a return and then regarding gross receipts. So we do have a regulation 3802, which was approved in January of 2,024, and this provides additional guidance and clarity regarding gross receipts that are subject to the excise tax. and we will also be issuing a new cannabis tax. Fact. It's planned to go out next week. We're hoping to get it out next week. And this includes, you know, some examples about gross receipts and what's subject to gross receipts? So if if you have a cannabis tax account with us already, you'll be receiving that tax fact in addition to. If you're subscribed to our cannabis lists, serve it all also be distributed through that as well. And here's an example of the cannabis excise tax calculation, for after January first, 2,023 so in this example we have a $35 selling price of the cannabis. We have our cannabis business tax, or sometimes we call them local local cannabis business taxes. You know this one we use 10, and then we have a delivery fee of $5. Keep in mind. It's not on this example necessarily, but other service fees and charges. Those would also be included with gross receipts. So if you have other service fees that are added, here, you know those here also be included. And then once we get down to the subtotal, that's what you use to compute your excise tax. And then, once you compete, your excise tax, you would at the subtotal plus the excise tax would be your new base for computing your sales tax, and then in this example, we're using an 8.5 sales tax rate. And in this example we get come out to 54, 28 as the total with all the taxes included. Alright. So requirements for cannabis retailers. So you're required to register for a seller's permit. Beginning January first 2,023 cannabis retailers must file cannabis, retailer, excise tax returns online and pay the 15% cannabis excise tax due to CDTFA. In addition to you know, getting your CRA account as well to, you know. Report and pay. and then report and pay use tax on taxable items purchased without tax and used by the retailer for examples, inventory items used for displays and additional requirements for cannabis retailers. You want to collect the cannabis excise tax from purchasers and provide a receipt or invoice to the customer. Also beginning January first, 2,022. The cannabis excise tax must be listed separately on the receipt. So there's nothing in the cannabis tax law that prohibits you from using a tax included model. So that would be fine. To continue that, however. you still must list the excise tax out separately on the receipt. So just make sure that that is listed separately somewhere on the receipt. Even if you're using a tax included model. Because, you know, the general statement, like all taxes, are included in this, prices, no longer gonna be sufficient for the the excise tax for retail sales of cannabis or cannabis products made on and after January first, 2,023 retailers must report and pay the cannabis excise tax directly to CDTFA alright, and then requirements for cannabis, cultivators, manufacturers, and distributors. So you'll wanna register for a seller's permit obtain resell certificates for all your sales for resell that you're gonna be, you know, reselling and passing along file sales and use tax returns, report and pay use tax on taxable items purchased without tax and used. keep adequate records, and obtain the appropriate license for your business and record, keeping requirements for the cannabis industry. So every sale or transfer of cannabis or cannabis products from one licensing to another must be recorded on a sales, invoice over, seat each sale or invoice receipt. each sales invoice or receipt must include the name and address of the seller or purchaser data, the sale, the invoice number, and then the kind, quantity, size, and capacity of packages of cannabis or cannabis products sold. and then you also want to keep the cost to the purchaser, including any discount applied to the price shown on the invoice place from which the cannabis or cannabis products were transported from, unless the transport was made from the premise of the licensee and any other information as required. And this is regarding one of the penalties that we have. And this is a big one. So there's a 50% penalty for late payment of cannabis taxes. The cannabis tax law imposes a mandatory 50% penalty for failure to pay cannabis taxes when due. If you fail to pay the cannabis taxes. By your due date you may be relieved of the 50% penalty if you file a request for relief, and if CDTFA finds that your failure to timely pay was due to reasonable cause and circumstances beyond your control. and you may request relief, a penalty by visiting our online services. Page as CDTFA, Cav backslash services and follow directions under our request. Relief tab. And this is another just nice resource. I'm sure you guys, everyone's already familiar with the Department of Cannabis control. But obviously there, there are state licensing agencies, so they have a lot of good information for the cannabis business, and they could help and answer a lot of questions as well outside of the the tax side of things. And we also have our customer service center. So you could always call our customer service center with questions. You know they're here to help. so you can utilize them as well. and you could sign up for CDTFA updates here by going to cdtfa.ca vax subscribe and then select the cannabis outreach option circled down here so this will get you signed up just to receive some of those recurring updates and information that we we send out routinely. And lastly, I wanted to mention our taxpayers right advocate. So this is their their phone number along with their website. So if you're ever able, unable to resolve any tax issues through our normal channels with CDTFA. A. Or, if you would like to have more information regarding your rights, please contact our taxpayer rights advocate office so, and they could assist. and then that that was it for the slide presentation.

Max Esdale (Meadow): Excellent. Thank you very much, Brian. That was very informative. And getting through that, you can see. Obviously there are a lot of complications and questions and changes that we've had in cannabis taxation. We did have some questions come in during your your, your presentation there. So so we are going to be covering those. I did want to cover something very quickly that you mentioned that we've had some of our partners ask about oh, I see. Here, are you able to see my screen? Currently okay, great. Before I jump into that. As Brian was mentioning the resources that are available on their website, this is one of my most used resources. If you go to CDTFA you can find the tax guide for cannabis businesses. It really gets into detail. It breaks it down by license type. You know, it gives examples. I highly recommend that you get familiar with the site, bookmark it, you know, print it out. No, no, don't print it. It changes. But this is something that's very helpful. So get familiar with it and definitely take a look.

And you know, he mentioned all of those other resources as well. The ability to reach out to where you can get answers to questions but a question that we had just come in beforehand was around the compounding. So I just wanted to show this as an example, as they you know, show you on the website. You're going to have this compounding of taxes, and if you set it up in Meadow in this way, it's going to apply based off of tiers. And so your local tax will apply first to your sales total, and then the excise tax would layer in on top of that and compound it in the sales, tax layer, and compound on top of that. You can reach out to our help team. Our support team will be able to walk you through that. We also add videos and guides for self-serve if you prefer that. Or if you're frantically setting up taxes in the middle of the night. But you know, there's really a lot of granularity here, a lot of control of making sure that you're setting up your taxes in a way that's compliant with where you're based or where it is that you're delivering. And so, you know, we have different tax types you can differentiate by adult use or medical, is it exemptable, for example, with sales tax? If you have an MMIC, some local taxes, there's differentiation between adult use or medical or MMIC. If, fortunately, we haven't reached this level yet, you can get up to 5 compounding taxes. Please, if you're listening. Don't do that to us. You can also exclude specific products. For example, you can exclude your accessories from an excise tax, or you know, some things aren't exemptable. So even if I have an MMIC, if I buy a non-cannabis accessory, I still have to pay sales tax on it. Right? So those are some of the details, the level of nuance that we've built into our system. And you know, making sure that if you're doing delivery, you're also able to do that with the correct tax for the place that you're delivering to. So if I'm creating a delivery zone within Meadow, I can say I want to import a sales tax jurisdiction. And so, for example, if I enter San Francisco here, it's going to query the California State Geoportal, and it shows me what my sales and use tax rate is there, so I can import a specific zone, and if any delivery is happening within that zone, it will apply the correct tax, report the correct tax, and you'll be able to see that in your reporting. So that's something that's been really important to our partners all across the State because, you know, there are more and more requirements around keeping this documentation for deliveries. Now with the ledgers, we're reporting city and zip code to metric and of course, you have to know that whatever we're reporting to metric is the basis of what the State may be looking at. So we want that to accurately reflect what you're doing. Okay. Another hotly debated point from the latest emergency regulations. Specifically 3802, and the definition of gross receipts we are eagerly looking forward to the new tax fact, but I'd like to open up the conversation here a bit, and maybe get some confirmation, if possible, on CDTFA's position towards you know, maybe apportioning your cannabis excise tax the part of a line item or cannabis product. This is something that's come up a lot, and we all have. We've heard a lot of opinions on it. So, for example, if I carry a vape pen that I sell as one unit, right? That consists of a battery, a cartridge, some concentrate in that cartridge and packaging. Can I split out those values and charge excise tax on the cannabis portion of that product is that cause? That's something that we've been hearing a lot about recently. It seems that's something that more and more retailers are doing if you're able to provide any guidance there.

Brian Duckett: So on the retail side of things. No, I don't think there's anything. That would allow for that, because currently under 3802, I think there's only that adjustment for What is it? The optional, tangible, personal property. So I guess unless you are, do separately sell them. and are able to indicate that then I don't think that would be possible to do. because it would have to qualify as optional, tangible, personal property. So I guess if you sold the vape cartridge separately. you sold the vaping device separately, and then you also sold them as a bundle. Then you could probably separate them, because then they have to be tangible. Personal property do. because you have to. You have to separately sell the items so that it's it's optional for the taxpayer to go in and buy it as a bundle. You could also buy separately. So if you could buy it separately.

Max Esdale: then you could separate it and make that segregation for that bundle price. If that makes sense absolutely. That was my understanding as well that, you know, and unless I can go in and buy the empty cartridge, there isn't a way for me to sell those separately. It's a single unit, single SKU. It's only sold together. So I just wanted to confirm that since it's something that we've been hearing a lot about.

Brian Duckett: Yeah, not unless that it's sold set. You know there is some kind of segregation that you can make where you sell the product separately as well to create an optional scenario. So you can't. Yeah. Accounting for it separately is not sufficient. It actually has to be possible to sell it separately. Okay, yeah.

Patrick Finnegan: I think the genesis of that is the response by the industry, saying, Hey, there's only a dollar 60 of cannabis in that vape pen. I wanna charge tax on the dollar 60. But you've charged retail sale. Price 20 bucks for that vape pen. I think it's a long stretch for The seller to really think that the taxes are going to be on a very small portion of that. Liability grocery seeds also includes credit card fees that you have to report. You know the delivery charges that it's as well as other taxes included in that total. So I I'd be very careful for somebody to take that position that we're only going to report a very small amount of the excise tax based on that that liability, especially having a 50% backstop penalty for failure to to pay. So be careful.

Max Esdale: absolutely. Thank you, Patrick. Yes, and you know you've long been an advocate in our industry, and someone who knows the rules very well, and you know our our goal is to pay the right amount of of course, the lowest right amount, and exactly that. Nothing more, nothing less getting a 50% tax penalty could be devastating to to any business, especially in in an industry with margins as is razor, thin as ours. You know one of the the questions that we've talked to our, our, our customers the most about is around the excise tax change from 2022 to 2023, which you which you touched upon. And and I know that you know, sort of easy rule of thumb that some people may have applied is just to sort of estimate their credit by looking at their inventory on hand on January first, 2023, and then multiplying it by the excise tax rate. But II would say, be careful about, you know, claiming your credit off of that. You know, because what we're really looking for is that you? You have to be able to go down and and show. You know the the distributor came from, and the invoice. And so you know something that that we've done in in in meadow for those of you who use meadow if you are running an orders report you can actually see that value directly for every single line. Item that you've sold. If it was purchased in 2,022, say in December, and then sold in January of 2023. You can actually see which of those products had excise tax that's already been paid, and the amount of it. So you know, that's something that that you really want to be careful of. If you overstate it, you claim a credit that's too large. You're gonna be asked for documentation. You're gonna be asked to justify and and prove that out. And so if if you don't have that documentation, it suddenly becomes a lot more difficult and a lot more risky. Is, is that something that you have been getting a lot of questions around around the the change in excise tax

Brian Duckett: we have. Yeah, we've received a few and it. It's good to hear that your guys is programmed is set up to. properly computed. Because I think one of the issues we were facing is. you know, everybody was just taking, like all all their inventory and then trying to claim tax for that, or they weren't you know, understanding that the retail sale had to occur after 1 one. So they were just claiming, like all all the excise tax paid like in the month of December. And then they're just trying to claim that. So they weren't really you know, kind of sorting through the transactions. And so it's it's nice to see that there's a system that links that kind of on a item per item basis. So it's like, if you paid a dollar tax every time you resell that after January first, you get that dollar credit, but you know it doesn't tie back necessarily to the 100 products you bought in December, because if you sold half of them in December. Those don't qualify for the credit anymore. So it's not as easy as just kind of syncing up your taxic rules and thinking. Oh, well, I get a claim everything that I paid before 1 one. It, you know. You have to make sure you sell the product because we're mainly looking at not taxing it twice under both programs is essentially what this credit was trying to do. So if you pay the distributor and you pay the tax there, you don't have to pay it again on the retail side. It's like we only want it paid once, not both times. January first. Then you just saw the one tax, and there is no retail tax involved. So

Max Esdale: and and for anybody who's looking for that, you know, you can run your orders. Report. Here's just an example for the whole year of 2023, or you can do it on a quarterly basis. And in your orders report, you do see this line items tab, and if you scroll down here you can see the line cost for every single package and excise, and and that again is for 2022 inventory where the excise tax is being calculated. based off of wholesale. So I can sum this year, and I can see the total value of excise tax that was already paid in 2022 on a wholesale basis to the distributor. And now I've sold those products and and so you know again, if you need any help with anything like that. If you have questions definitely reach out to our support team and and we can walk you through it. You know, we have a a step by step guide to to make that easier. Because there's there's a lot of confusion there, right and and there's also risk. And you know, we we mentioned especially, I think, because with this the switch to retail for excise, there was also the new complexity of compounding where before people maybe had a a local tax and a sales tax. And now this excise tax that's been slotted there in the middle. I'd I'd be curious to hear. Do. Do you also get a lot of questions about the delivery tax? Is there a lot of confusion. There, you know, is is is that something that you're also looking at in the audits, making sure that the correct amount is being collected, based off of the delivery. Address the destination of the order.

Chaz Tyler: Correct. That's a very large issue, and a lot of our retail audits is handling those district taxes appropriately. And I think, Max, we've had conversations about how the district taxes aren't as easy as we would like. There's various district taxes depending on zip code, and it could be very problematic for users. So I think you guys provide solutions to assist in that regard. But it is very common for us in audits of retail licenses, to see them reporting to one district tax area when they truly have delivery sales in several other districts, and may or may not be compensating themselves in terms of reimbursement adequately. And in other instances, maybe over collecting tax from the consumer. So we just try to make sure on the tail-end. We handle that appropriate during audit and educate. You know, the taxpayers have to move forward.

Max Esdale: Excellent! Yes, and again, you know, since since I have many of our partners here, currently, if you're looking for that in the orders report, you can see the delivery zone in which your delivery took place. And so it's very easy to see where you delivered and all of the taxes that were applied over a given period will be listed out so I can come in and I could sort. And I can sum. And I can say, Okay, this tax rate. San Francisco was applied for this total. You know, being able to differentiate. we we really try to make that easy. We know that it's a complex thing. But you know, if if your if your system is set up for it and your tax settings are set up, you're gonna have the correct documentation to be able to show exactly on an order by order basis. You know what it is that you collected, or what it is you charged and remitted, and why? So we have some more questions here that we wanted to get to from our audience. We had. Let's see one of our attendees wrote in and asked, what is the typical audit frequency? And and I am I actually curious about that as well. Because if if I'm not mistaken historically, cannabis retailers have been one of the higher ROI audit areas for the CDTFA. Is that right? And so you know, it may be. One of the more frequently audited industries is that accurate?

Chaz Tyler: In terms of you know the audit frequency? There is no established standard in terms of when we can initiate an engagement with a permit holder. Are historically, our audit periods have been 3 year engagements, but they don't necessarily need to be they could be various periods, whether it be a single quarter a single year, multiple years. But in in regards to any increased focus on the cannabis industry. Since it's a new industry, we are keeping an eye on the reporting practices of certain taxpayers and ensuring that if we do see a computation issue, or something that appears to be incorrect, instead of letting that problem go on for a number of years or a number of quarters. We attempt to make contact with that operator as quickly as possible, to try to resolve that issue and say, Hey, we were looking at your online ordering platform. We realize that you're not compounding the tax on your municipal business taxes or on your excise taxes. And we attempt to make contact with them to help them address those issues. So it's a shorter period issue, maybe a handful of quarters or a single year opposed to being a 3 year issue. And then you, you know, having to eat that out of pocket because you were unaware of the the situation. So we do try to make efforts, if we do see issues like that, to establish contact early and try to address them. But again, there is no set standard in terms of the frequency of our audit engagements.

Max Esdale: Okay, thank you. Yeah. I know that there's a lot of trepidation around, you know, once you've been audited, when is it going to happen again. Is this something that is perennial? We also have had a lot of questions around, you know. What is the situation with excise taxes applying to even non-cannabis goods? Well, that that was, you know, saying we mentioned earlier with the definition of gross receipts. And I, actually, this was, this was a very important point, though we've had a lot of questions around this with the change in the emergency regulations. You're not applying excise tax to a pure accessory right? So if I have a T-shirt that that doesn't have excise tax, not by only, and when it's bundled together and sold for one price with cannabis.

Brian Duckett: So I mean, if you're selling, you know you sell an eighth and you sell a T-shirt. The tax only applies to the eighth, not your t-shirt, not your your your pipes, your the other accessories, tho those are separate transactions, not subject to the excise tax. Just your cannabis. The question here, I think, is, when it's a bundled transaction you're selling something like you were saying before. It's packaged together. So it's a vape cartridge package with the vaping device in one package for one price. That's where that optional TPP comes into play.

Max Esdale: Thank you. Okay. we have a lot of questions around 3802. What, exactly was the emergency? Oh, I asked myself that question, too. Are sales of medical use cannabis products exempt from excise tax? So medical. No medical excise still applies to. Is that right? It's if you have the MMIC specifically so. But you have to have, and that's for sales tax, not for excise. Is that right?

Chaz Tyler: Correct? And to your point earlier, Max, you know, I know different localities have different tiers regarding recreational medical, and there can be some confusion from a State agency perspective. In terms of differentiating a doctor's recommendation from an MMIC card. Some operators consider them to be the same. But again, just to reemphasize the sales and use taxes for the medical marijuana identification cards. Then, I see, and not solely the doctor's recommendation.

Max Esdale: Thank you. Yes, that that is something that we've heard a lot of confusion around as well. You know, there is also, I believe it's a CDPH website. I can share the link here. Where you can actually go in and learn more about the MMIC they also post monthly data and statistics. So you can get a sense of you know, how the program is going? I believe card data participating counties. Let me see, the latest monthly data the MMIC's are quite rare. Currently. Let's see. December of 2,023, 189 were issued in the State of California, so in the entire calendar year of 2023, 3,196 the MMIC's are are extraordinarily rare relative to the size of the the cannabis consuming population. So I would err on the side of caution if someone has a recommendation, and and they think it's an MMIC. Make sure that you validate that don't accidentally exempt taxes that that you should be charging. But then you're later going to be on the hook.

.... watch the full webinar for the conclusion of this discussion