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California Cannabis Excise Tax - Application to Reality

The weather is actually nice outside and once again I am spending a Sunday afternoon in front of the computer. This afternoon, I have the pleasure of putting together comments that our firm is going to submit on behalf of the firm and a number of our clients on the Readopted Emergency Regulations which were issued by the Bureau of Cannabis Control[“BCC”], California Department of Public Health[“CDPH”] and California Department of Food and Agriculture [“CDFA”] and California Department of Tax and Fee Administration['CDTFA"].

The specific issue that we are seeking to address is the fact that CDTFA has made simplifying assumptions in the way they calculate Cannabis Excise Tax that doesn’t reflect the economic reality of what happens in the market. Just to provide some background the following are two articles we wrote that deal with the taxation fo flower in the first post, Reporting and Collection of California’s Cannabis Taxes and a second one dealing with extraction and subsequent processing CA Cannabis Excise Tax – Extraction – Processing. [We add a warning that if you have an aversion to complex mathematical calculations…you may not want to read the second article.]

The bottom line is that the calculation of the two taxes gets very complex very quickly. What I would be interested in learning is whether people have made some of the same discoveries that we have on their own or in other states. The recordkeeping gets even more complicated when we add METRC or an equivalent tracking system to the mix. The list of issues that we have found present tricky problems include:

  • Evaporation during the extraction process.

  • Having to discard the contaminated or spoiled product.

  • Tracking SKU’s if concentrate from several different farms is mixed and essentially become fungible when it is winterized or subject to additional refining.

  • Arrangements where a grower brings trim to an extractor, and the deal they reach is that the extractor uses the grower’s trim to extract, and when the process is done, the two of them split the concentrate. The proper sourcing of product origin and cost capture for allocation purposes becomes a nightmare.

  • The product is sent out for testing and is determined to be contaminated. In California, the Distributor is technically responsible for destruction and may not return to the Cultivator. This gets particularly complicated over the issue of who bears the cost of destruction, and whether there is a functional process to appeal the lab’s test results.

  • Where product passes from an extractor to additional manufacturing such as making infused product or cookies, there is a complex issue of whether the cannabis excise tax is collected in the last step before the product reaches a dispensary or whether the liability arises at incremental steps along the way [which is how EU VAT or Canadian GST is calculated.]

We are very interested in all of you view these issues and theoretical and you just ignore them, or you have spent time dealing with them. [Clearly, the California authorities are considering all of this stuff].We would really appreciate hear about your experience.

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