California cannabis cultivators, distributors, and retailers are increasingly finding themselves under audit from the CDTFA. Due in part to a 3-year statute of limitations applicable to sales tax audits and California’s legalization of recreational cannabis in 2018, cannabis businesses in 2021 are finding themselves under greater threat of CDTFA sales tax audits. Indeed, the CDTFA is investing in its ability to audit cannabis businesses in a clear sign that the CDTFA considers cannabis tax enforcement a priority and reliable source of revenue. Fortunately, cannabis businesses under audit can mitigate their tax liability with experienced tax counsel and effective recordkeeping.
Jin Kim represents California cannabis businesses under audit by the CDTFA. If your cannabis business has received notice of an audit call tax attorney Jin Kim at (916) 299-9913 for a free consultation.
Cannabis Retail Sales Tax Audits
Cannabis retailers face the difficult hurdle of collecting local cannabis taxes, excise tax, and sales tax while navigating banking challenges, pre-payment deadlines, and cash-based accounting practices. Unsurprisingly, even well-intentioned cannabis businesses can find themselves subject to CDTFA sales tax audits, but the key to mitigating tax liability often lies in the early involvement of legal representation and effective recordkeeping.
Sales Tax Penalties
The CDTFA is quick to assess penalties associated with sales tax violations, but relief from penalties may be possible. While cannabis distributors face the harshest penalty for failure to pay (50% penalty; See Cannabis tax law section 334013(f)), cannabis retailers must also contend with an array of CDTFA sales tax penalties. In brief, for any cannabis retailer with $17,000 in monthly taxable sales (which is nearly every cannabis retailer), a 6% penalty attaches to late prepayments and can increase to 10% if the late payment is the result of negligence. Failure to file tax return penalties can also range between 10% and 25% depending upon the CDTFA’s determination of an intent to evade taxes. With the range of penalties applicable and monthly prepayment obligations for any profitable cannabis retailer, CDTFA Notices of Determination (ie. tax bills) are a frequent occurrence. Nevertheless, it’s essential for cannabis retailers to timely appeal CDTFA sales tax penalties and avoid patterns of sales tax violations.
In light of the array of CDTFA sales tax penalties, filing requirements, and accounting challenges posed by the cash-based nature of cannabis retail, any CDTFA sales tax audit or notice of determination can result in sizeable tax arrears. While there’s no guaranteed trick to get out of sales tax obligations, an experienced tax lawyer can secure an installment plan with the CDTFA. Through an installment plan, a cannabis retailer can continue operations while addressing tax arrears in a manageable payment plan in conjunction with requests for relief from penalties, collection cost recovery fees, and interest.