Overview: 2018 Cannabis Taxes & Accounting Workshop

Listen to tax experts discuss implications for every part of California’s cannabis supply chain

Panelists Aaron Flynn and Tim Morland take questions from the audience on the intricacies of cannabis taxes

Cannabis has a tax problem in California, and Meadow has committed long hours to getting answers and building a workable solution. The fruits of this work are our recent updates to tax functionality, our Meadow Memo on Cannabis Taxes outlining the basics, and our Cannabis Tax and Accounting Workshop to dive into specific details. Our goal is to bring simplicity and clarity to a confusing topic that touches everyone with any relationship to cannabis.

Meadow’s Cannabis Tax and Accounting Workshop brought together experts in their respective fields to talk about calculating and paying taxes from the perspective of producers, distributors, retailers and the state.

We covered sales tax, use tax, excise tax, local taxes and how best to account for them across various stages of the cannabis supply chain. We also had a chance to discuss potential changes to push for and how we can prepare for the future expectations of state and local regulators in regards to cannabis taxes. Listen in below and get your fill of detailed cannabis tax analysis!

Audio of Meadow’s Cannabis Tax and Accounting Workshop (2/27/18)

[A FULL TRANSCRIPT CAN BE FOUND BELOW SPEAKER BIOS]

Panelists who spoke at the workshop:

Patrick Finnegan, CPA
Patrick Finnegan, principal of Patrick Finnegan and Associates, is a licensed California CPA specializing in Sales and Use, Excise and Cannabis taxation. With 21 years as a Senior/Lead auditor with the California Board of Equalization, the division responsible for cannabis tax implementation, Patrick represents clients before the IRS and the California tax boards. Patrick is also president of Oakland Distributing Company.

Chelsey Miles, CPA — MilesBradley, Inc.
Outsourced and client accounting services specialist with over 15 years of experience providing state-of-the-art bookkeeping solutions for emerging companies. Expert in designing elegant, innovative, technology-enabled systems that deliver accurate, real-time financials for clients in the cannabis, technology, international and media and entertainment industries. Passionate about leadership and organizational psychology. Promotes corporate culture that encourages employees to achieve maximal performance and satisfaction.

Tim Morland, Compliance & Policy Director, River Distribution
Tim was previously Director of Legislative and Regulatory Affairs, for the Board of Equalization. Tim has extensive knowledge of the legislative process. Prior to joining Board Member Ma’s team, Tim served in the Assembly Chief Clerk’s Office from 2008–2015. Tim was the Assembly Daily File Clerk from 2013–2014, and the Reading Clerk for the California State Assembly from 2009–2013. Tim also served as the Engrossing and Enrolling Clerk for the Assembly Chief Clerk’s Office from 2008–2009.

Aaron Flynn, Co-Founder Gold Seal and Co-Chair SF CalGrowers
Aaron Flynn is a veteran of the United States Marine Corps, an entrepreneur in both the cannabis and bar/restaurant industries, and an active founding member of the CGA. Aaron has sat on the board of CGA as a founding member since 2015 and is now the co-chair of the San Francisco/Oakland chapter of the CGA. Aaron is also the co-founder of Gold Seal SF, a flower brand he operates with his two partners. Gold Seal SF cultivates and operates out of San Francisco. Aaron also participates in a number of cannabis related veterans groups and wants to continue to help those groups grow and connect to the industry.

Jennifer Hawkins, California Department of Tax and Fee Administration
Jennifer is a Business Taxes Specialist with the CDTFA (California Department of Tax and Fee Administration), working on special taxes in the Program Administration Branch of the Program and Compliance Bureau. She brings a depth of familiarity to the table that will benefit all of us as we work to navigate the new cannabis taxes our industry is working to understand.

FULL TRANSCRIPT OF EVENT AUDIO

Panelist — First of all thank you everyone for being here. Appreciate you showing up. Give yourselves a round of applause for being here for taxes, yeah taxes. Yeah, and the barbecue. We will have a barbecue at five. Make it through. It’s going to be a lot of good information. Five o’clock, a little happy hour with food. Just want to do a little intro to the day, what’s going to be happening. Essentially, we’ll have some great panelists coming up. We’ll have some panelists. They’re going to be talking to you about taxes, everything from excise taxes to royalty to everything you want to know. After each panelist, we’ll have a Q and A. So save your questions for the end. We also have people joining us online who will also be putting their questions, and then we’ll move on to the next panelist. About three rounds of that. And then, like I said, survive ’til five o’clock and you’re not just bursting with excitement about taxes, if you can keep it calm, we’ll have some food and drinks for you. Alright, so our first two panelists, we have Aaron Flynn, co-founder of Gold Seal and co-chair of the SF California Growers Association. Round of applause for himl. We also have Tim Morland who is the Compliance and Policy Director River Distribution, and asked not give the long bio. So he has a lot of experience as Director of Legislative and Regulatory Affairs for the BOE. So pretty important. Also board members of Morris team. I’d kind of keep going, but he asked me not to. So they’re going to go straight into it, guys. Any questions, like I said, just write ’em down.

Panelist — We’re going to go over all of ’em at the end.

Panelist — Thanks, Isa, how about a round of applause for our emcee? And Meadow. Tax, not super exciting. I guess, show of hands, how many producers do we have in the room? That would be cultivators, edibles manufacturers, manufacturers, yeah, we got a handful. Okay, cool. That’s primarily what I’m going to touch on. And then Tim is going to get into his wheelhouse of distribution and how the supply chain all kind of melds together. And we can obviously hop back and forth as there are a lot of nuances to this conversation. But I guess the obviously place to start would be with the state taxes. And particularly from the cultivation side, which is really where everything starts. and all sorts of cultivation, whether it goes to manufacturing, or whether the flowers goes straight to the distributor. And so as I’m sure most of you know at this point, there is a flower tax of $9.25 per ounce for every ounce of flower, and $2.15 for every ounce of trim. That equates to $148 per pound of flower and I believe it’s $52 per pound of trim, something to that effect. $44, yeah. And so that is something that every cultivator is going to have to pay. Whether or not your flower is going straight to a distributor or it’s going to a manufacturer, That tax is owed. What starts to get a little bit complicated is how that moves through the supply stream. So, myself, as a cultivator, I’m going to sell flower to Tim as a distributor. I, as a cultivator, am actually not allowed to remit that tax. And so I as I think most of us are aware the distributor model has been mandated and it’s probably one of the biggest

Panelist — single changes that most of us are going to experience, who’ve been doing this for a long time. Up until now, I grew my flower and I took it to a dispensary. Sales tax was paid, we got copies of each other’s seller’s permits. Everybody was covered. Now, I can’t take my product directly to a distributor, I’m sorry to a retailer, it has to go through a distributor. And even though I owe the tax, I cannot remit the tax, which is a little bit strange, I guess, or confusing. But the state really, and Tim can speak more to this, really to make their jobs a little bit easier, they did not want to have 25,000 taxpayers, they thought it would be much easier to have a consolidated group of taxpayers. There aren’t going to be nearly as many distributors as there are producers, so they chose to do it this way. I bring my pound of flower to Tim, the distributor. And, at that point, typically, although this can happen a couple of different ways, that cultivation tax is owed. I guess if we take it through every step, I bring it to you, Tim, Tim takes it into his possession, but it has to get sent out for testing. Once that test come back clear, and Tim can officially take possession of that as a distributor, then I will be charged that $148 for that pound. Tim will charge me that. But then Tim, as the distributor, is the one who actually owns the tax. For producers and for cultivators, specifically, the real key here is that we don’t have to go out and get a special tax certificate. We don’t have to go out and do some of these when we don’t ever file,

Panelist — but what we do need is to make sure that we get an invoice from the distributor saying that we paid him the flower tax. That’s our proof that tax was paid. At that point… And keep it for seven years, yeah, because we need that proof. Something happens to Tim’s distribution company, something goes down, if we don’t have those records, theoretically the… It’s not the BOE anymore, it’s the CDTFA, could come after you. And if there’s no record of that tax having been paid, you as a producer would then be liable of that tax. Keeping these records is vitally important. But just a invoice, a receipt of that transaction having happened is what covers the producer. At that point, Tim, the distributor, is now liable for that tax, which he remits on a quarterly basis. And so from the producer’s standpoint, you could say it’s relatively straightforward. We do not have to engage with the CDTFA. We do not have to get those tax certificates. We just need the receipt from the distributor that proves that the tax was paid. And we need to make sure to hang onto that. It’s going to become very valuable, or could help out in a pinch. And you’re going to put that in your reportings. And it’s going to be part of track and trace. What gets a little bit more complicated is when I decide to sell some of my trim to a manufacturer. And then at that point, that flower tax is owed. I’m sorry, that trim tax of $2.75 an ounce, thanks, is owed, and so I’m going to kind of stumble through this and Tim can correct me on this if I’m wrong.

Panelist — But myself, as the producer now, as I’m selling that trim to the manufacturer, that tax does need to exchange hands, correct? And so the manufacturer needs to collect the 2.75 per ounce, tax, from me, the cultivator. I still need to get that receipt from the manufacturer, but then the manufacturer is also not the taxpayer. They manufacturer can’t be the taxpayer. So they have to hold onto that until that product is processed and then pass that tax onto the distributor. And make sure that they’re getting receipts and copying the paper trail the whole way. And then is there an additional tax, Tim, from the manufacturer to distributor? Or as long as the trim tax is paid, then that portion of the supply stream is covered.

Panelist — Yeah, there’s no additional tax, as long as it’s just transferred to the distributor. That’s it, so it’s just transferring the actual revenue. There’s not additional tax. So there’s kind of a misnomer. A lot of people think that there’s a manufacturer tax. There’s actually not. It’s just a cultivation tax and the situation Aaron mentioned, passing through multiple hands.

Panelist — Right, so bottom line for producers, cultivators, making sure that you get that receipt for the initial transaction. Manufacturers, you have a little bit more complication, because you actually have to receive that flower tax, or that trim tax, hold onto it for the entirety of your production cycle and then make sure that it’s remitted once that product is actually complete. So, I mean, the name of the game here, and I think this is going to be a recurring theme over and over again, is way more bookkeeping and record tracking than most of us are used to, for sure. The one way to protect yourself is just to make sure that you’re on top of keeping track of all of this.

Panelist — And if you’re a manufacturer, make sure when you make that sale to the distributor, that you get an invoice or receipt that covers you, again. But the distributor doesn’t pay the tax and you don’t have a receipt, CDTFA could come looking for you for that money. That’s the way it’ll happen. Make sure every step of the process, keep a receipt, or an invoice, or whatever you get. That is crucial. And keep it for a long time.

Panelist — That’s kind of the mechanics of the transaction, you know, production moving up through distribution. And, I think, may be it makes sense to just pause there for a second. I know we have a Q and A portion. But we have some other things that we can discuss on this and just see if we’ve covered all the bases. Or if there are any quick questions just about this specific producer to distributor transaction. Is that okay? Whoever’s monitoring? Can we take some questions? Yeah, okay, yeah. Well, because the tax is based on a per-ounce, you know, it doesn’t really matter what that price, what that wholesale price, is for this tax. It’s just due based on weight. So it doesn’t really matter the price that you agree on with the distributor, the 9.25 per ounce, or $148 per pound, is due whether the pounds is old for $1,000 or whether the pound is sold for $3,000. Well, right, so that’s just a once step farther in the supply chain, which we will get to, certainly. But, for now, we just want to focus on the mechanics of just producer to distributor, that particular transaction, which we just covered. Are there any questions on that? And we will get to your point. Sure. And we’ll touch on that, yes, sure, of course. Yes, of course. The question is is there a time limit with which the distributor has to remit to the state? Well, for the manufacturer to the distributor, the distributor is going to collect the tax from the manufacturer. That’s just the way it’s going to happen. And that happens at the transaction.

Panelist — At the transaction. So it’s very confusing. So say… I mean, we’re literally seeing the cultivation tax. At River, we sell a lot of edible products as well. But we’re literally seeing cultivation tax passed three different times before it even hits us. So it literally passes from the cultivator to oil maker to an edible company and then to us, then we remit it to the state. How am I supposed to know as a distributor, especially with the lack of track and trace at this moment. How much product was actually used in that batch of edibles of say candy bars that I bought from manufacturer A? How am I supposed to know how much product’s in that, in those bars? Therefore, how much do I actually remit to the state? Am I going off what the manufacturer tells me? Are they saying it’s a real high yield rate? Am I supposed to believe that? Because that obviously lowers the taxes. Though there’s a lot of unknowns right now, which I believe track and trace with help with, and Jennifer from TDTFA will probably help put it up. I know they’re aware of that and they’re working on that issue, but it’s really tough. The cultivation tracks packed really tricky. It’s not so much tricky when we’re buying just flower from a cultivator. But it’s really not that tricky. We kind of know what the weight is. We collect packs, we remit it. But we started getting into concentrates and edible, that’s when things get a little fuzzy.

Panelist — So I believe in the short answer to your question, the tax from producer to distributor or producer to manufacturer is due at the time that that product exchanges hands. The distributor pays the tax quarterly, but they will have already collected that. We had a question back here. That’s a good question, yeah. Oh. I mean, it could go to a distributor, but as far as we’re seeing, we’re not taking any trim and then send it to a manufacturer. We’re literally it’s the product’s going from cultivator to manufacturer then it ends up with us. And so —

Panelist — And maybe that’s a different business arrangement that some distributors have for the transportation piece, but that’s not something River’s doing. And the tax, you have to remember, the tax is the final distributor in the supply chain, the final distributor, the last distributor that actually puts that product into the retail market is liable for the tax.

Panelist — In the scenario that you laid out, and I’ll agree with Tim, most of what we’re seeing is trim going directly to manufacturers. Now the test isn’t mandated until that finished product from the manufacturer goes to the distributor. So that testing at the manufacturer level is on the manufacturer. It’s not something that’s mandated by any stretch. So I agree, a manufacturer would certainly want to test it, but that’s going to be on their own dime. And that’s not part of the mandated supply stream.

Panelist — Well, it’s technically not mandated for the manufacturer to supply a test, however, it is mandated that there’s a label claim on the packaging that goes to the distributor. So they almost like have to run a test. I mean, you have to get… I have to know what the THC value is on that product. So there’s almost like a Q and A test that almost has to be done. And then, the tricky part, and I’m going to get into testing a little bit and how this is tricky for distributors, distributors are not allowed to re-label product, only if the THC ends up different, that’s the only time that the distributor can actually re-label a product. It should be if the state is requiring a distributor to facilitate the state test that certifies it, puts it in the retail market, that the distributor should put all the results, the primary packaging label, with all the results. We cannot do that as distributors right now. This is a huge issue for us. We’re running into this all the time. Manufacturer will put a label claim, 25% THC, we test it, they probably used a different lab than we did, we test it, it comes back higher or lower every time. So we have to actually re-label that, the THC, that’s all we can touch. This is a huge issue that needs to be cleared up in the regulatory process next year.

Panelist — Right.

Panelist — Of course, well, I mean, one lab, you know, maybe the manufacturer’s lab passes the test and then it comes to our lab and then it fails. And so, you know, then you have a manufacturer going, “Well, your lab’s wrong, distributor. What do we do here?” So this is happening right now. We ran into this time and time again with testing.

Panelist — But the distributor, correct me if I’m wrong, but the distributor’s test is the mandated test. So as far as the state is concerned, the test that has to happen is that finished manufactured product has to be tested. They’re not forcing you to test the trim, you can make stuff all day long, but the stuff you make has to pass the test at the distributor level. So, obviously, it behooves the manufacturer to test it, but it’s not part of the mandate supply stream. You could buy trim all day long and turn it into whatever you want.

Panelist — The stuff that you manufacture just has to pass the test, which obviously it wouldn’t if the trim was dirty, but it’s definitely amiss in the supply stream. But, yeah, that test isn’t part of the mandated portion. That’s correct, we won’t, yeah. We deal with finished products. Oh, I’m sorry, River’s model, do we deal with both products? No, it’s all finished goods there. It’s within 10%. Is there, excuse me if I butcher — Yeah, is there a window of the different test result from the manufacturer from the distributor. There is a window and it’s 10%. A lot of people believe that’s a little too tight, that it should be 20. So that’s probably an issue that’s going to come up in regulatory process this year. So, basically, which distributor, say there’s a distributor to distributor transaction, which distributor is responsible for the testing? I mean, that a great question. I had nothing in writing about that, but I’ve been told verbally by a couple folks at the bureau that the last distributor, the distributor who places

Panelist — the product in the retail market is required to perform the testing, required to facilitate the testing. Now I’ve heard other people with different views on that. That’s the way River’s handling it. So we make sure if we do a distributor to distributor transaction, which happens, we make sure that they know that, hey, you’re required to make sure that this product’s tested before it hits the retail market, which gets really tricky when you’re dealing with micro-licenses, micro-businesses. Yeah, and I mean, we run into that a couple of times ourselves and we’re trying to get more clarity from the BCC not go down a rabbit trail on the distribution conversation, but secure storage, right? And if one distributor is really the one who’s engaging with the producers and the one who’s even going to take it out to the retailer, but they maybe don’t have a hub in a certain area. And so they’re just leasing some security storage space from a distributor in that area. It really seems to revolve around the definition of possession. And so if in your contract to least that secure storage space, the distributor whose storage space that is never really takes possession and it stays in distributor number one’s possession the whole time, and it’s your employees taking it to that secure storage, your employee’s picking it up, then that test would follow through. The distributor who’s providing the secure storage space wouldn’t have to then run their own test. Now, I mean, I think we’re going to run into, for at least the first year, a lot situations where…

Panelist — Not giving legal advice here, but just do what makes sense. And then we’ll let the regulatory agencies kind of flush these things out. It makes no sense for a distributor who’s only providing secure storage, who never actually takes possession of a product to have to test it. But we’ll see how that rolls out. A lot of this stuff’s we’re all going to see. And we’ll try not to come up with more questions than we’re going to answer here. — Harry and I Harry and I were in the back talkin’, we’re like we’re just kind of figuring this out as we go. So, you know? But, not completely shooting in the dark, but obviously studying the regs and the law and trying to come up with the best business practices that are compliant. That’s all of our goals. Should I talk about distribution? Well, we can get into distribution a little bit. I wanted to maybe answer that question from back there. So we went through the mechanics of just you’re a producer, here’s what you owe as far as the state is concerned and how’s it’s remitted and the fact that it goes either to the distributor or through the manufacturer then to the distributor. The question around what to charge in order to get a certain price that you’re trying to get. Now we’re getting into things that are not mandated by the state.

Panelist — The state doesn’t really care how much money you make. This is about agreements that we’re starting to see in the marketplace and that we’re starting to see between folks. And so if we look at the whole supply stream for state tax, you’ve got the flower tax or the trim tax, then you have the excise tax, and then you have sales tax. And so if a producer, a cultivator is used to getting a thousand, $2000 a pound, but now to incorporate all of these taxes in, and if you still want to get $2,000 a pound, what do you now need to charge in order to get that base rate, I believe was the premise of your question, is that correct? Right, how do you express that? And so if your base, the intended price that you want to get at the end of the day is $2,000, you obviously add that $148 a pound. So now you’re at 2148. And then the excise tax, this is where it gets pretty complicated. The state has implemented a 60% markup that is used to define what the excise tax is going to be. And the math for that for that 60% markup is a little bit tricky We’ve figured it out and I don’t even know.

Panelist — Wholesale plus 60 times 15%. There you go, wholesale plus 60 times 15. So on a thousand dollar pound, you would take that, what’s that quick math real quick? You know, 60%, $600. So $1600, 15% of $1600 is what’s owed for the excise tax. So at that point, you would take your thousand dollars you’d add the $148. You’d add 15% of $1600, and then you’d get what the price that it’s going to the retailer at. That would be what you want as the producer to charge in order to cover all of those costs and still get your $2,000. So on our invoices at River we separate the wholesale product, the cost of that, what that’ll cost and then excise taxes, which really . So I’d recommend that you do it that way. How many distributors are in the room, by the way? Couple, all right, okay, good deal. Yeah, it’s part of the whole… We’ll definitely pass it on. I mean, that’s what’s going to happen, you know? Just like everybody, it’s going to pass taxes along and ultimately they end up on the consumer. So I mean, that’s just the reality of the situation.

Panelist — Sorry, could you speak up? I can’t hear you. No, it’s all on the same invoice. As long as it’s taxxable product, that’s subject to the excise tax. Cannabis accessories, batteries, for example, we put those on a separate invoice, because those are not subject to the excise tax. So what we’re seeing, I think to try to round out and answer your question is the transactions between the producer and the distributor, and from the cultivation side, specifically, that $148 a pound is a fixed cost. And so you know that’s going to be charged. The excise tax is something that… That tax is not paid or remitted until the product goes from distributor to retailer. And so the distributors understand that that’s a cost that’s going to have to be assimilated. It typically does get kicked downstream to the cultivator to a point. But that’s where you get into negotiation with your individual distributor. You know as a producer you’re going to have to pay the $148 or the $44. You’re not getting around that. Who takes the brunt or the bulk of that excise tax is a conversation that you’re going to want to have with your individual distributor and that’s a deal point. And that’s something that a producers are looking to work with different distributors, that’s one of the conversations you’re going to want to have with them.

Panelist — How much of the excise tax are you going to put on me as the producer? How much are you trying to transfer over to the retailer? And you’ll come up with an agreement that every transaction that you do with the distributor, the flower tax is a give, and the excise tax, maybe it’s based on the different types of product you have. Maybe it’s based on the different wholesale price of the flower that you’re selling. Maybe more expensive flower gets taxed at a different rate. But when we say tax, it’s just the relationship between the distributor and the producer at that point, the state’s already taken their tax. So, I mean, I’m just going to be honest with you guys right now. My company really hasn’t dealt with the cultivation tax too much, because a lot of the product we’re working with was… It was all cultivated before January 1, 2018. So I think we actually dealt with our first cultivation tax yesterday. So, you know, fairly smooth. So it’s something that we’re really not dealing with, but definitely next year, as we get later into the year, probably the third or fourth quarter, we’ll start dealing with those scenarios.

Panelist — Just kind of some brief issues that the distributor, distributors, are kind of dealing with taxes. Obviously, there’s these arm link transactions, we apply the marup and the excise tax rate. And then we pass it on to put it on the invoice. And then we get that from the retailer. So technically, by law, the retailer has 90 days to remit those taxes, those excise taxes to the distributor. However, I don’t know a distributor in their right mind that would float the 90 days on the taxes. All of the excise taxes that River’s collecting is being collected up front at the time of sale. So we get the money. It comes in, it’s a lot of cash. And then we take it, we process it in a facility and then we remit to CDTFA on . So we remit it to CDTFA. So this isn’t CDTFA’s fault, but we had an arrangement with the local branch of Bank of America in Sacramento to meet CDTFA officials and remit our taxes, excise taxes. So this was a weekly process we were doing. And then we did, I think, three payments. And then all of a sudden I get a call one day from the district administrator at CDTFA and he says the process is over. And I’m just like, “Oh, shit, really?” I mean, were just like going along remitting our taxes, everything’s fine and then it just ends. So I found out last week why it ended.

Panelist — There was a convention in L.A. and the Director of FTB is a great lady. She just kind of nonchalantly mentioned how everything was going, and how people were remitting their taxes in the cannabis industry. And so she brought up this arrangement and there was press in the back. Once the press got wind of it, they actually ran the story. So, of course, all of a sudden, the execs, in North Carolina, that’s where Bank of America is headquartered at, they flipped out. And so they called folks in California and the next thing you now it was over like that. So we’re back to remitting at CDTFA offices. There’s a whole list of challenges with that. I mean, they do a great job. But they’re kind of bound by rules, too. They have to have CHP there when we remit these taxes, so we can’t remit them as frequently. So we’re like every two weeks or every month. I mean, we remitted almost, well, we remitted over $500,000 in excise taxes all in cash. And it’s slow right now, guys. The markets, there’s not a lot retail shops, it’s kind of slow. And as the volume picks up, which it will, those payments are going to be significant. We’re going to need to remit, at least my company’s going to need to remit, every week, maybe even more. I mean, you know, we only have a certain amount, certain area where we can store the cash safely. So this is a huge issue. This is kind of what we’ve been dealing with. If you are a distributor and you are floating those excise taxes, I would not do that if I were you. One of the quick issue we’re dealing with with excise tax liability is Type 12s.

Panelist — So a Type 12 license can operate in three of the four designated areas. So we, I mean, from like almost day one after January 1, we’d go and we would send an invoice with one of our drivers and the shop would say, “I’m a Type 12. “I don’t need to give you excise tax.” And we’re like, oh, well, we realized what was going on. So they’re acting like they’re buying from their distributor arm, which I have no idea. Like who am I selling this to? If I’m selling it to a Type 12, am I selling it to your distributor arm, am I selling it to your retail arm? And then we have to go off their work. So the reason why that’s an issue, so if River sells producer to a retailer, or sells product to someone and they act as a retailer, and we don’t collect the excise tax, guess who’s on the hook for the taxes? River is, the distributor’s on the hook. So we decided that we would contact, we contacted our lawyers, and we had some type of letter drafted that basically says like we’re making these sales with you, you’re acting as a distributor, or tell us which arm you’re dealing with. If you’re acting as a distributor, you sign this line. So far so good. Everybody signed up. Couple people have kind of fought back, but we are not going to let that situation happen. There’s also testing implications there as well. So lets distributor test, I’m telling to Type 12. If I’m telling it to their distributor, am I required? The one test is the Type 12 license, their distributor aren’t required to perform the test. I think there’s a huge issue with Type 12s.

Panelist — I really believe that we need to kind of clean up the language as far as a tax and testing implication on Type 12s. That’s kind of what we’ve been dealing with with testing, just general, or excuse me, taxation. Testing’s huge. We had a little discussion about testing. Testing is expensive. We have to test on SKUs, on batch or SKU. And those tests are running anywhere between $650 to 700 bucks. First SKU, and then we’re finding out, as I mentioned, the manufacturer can make a claim, THC panel, labeling information, and then it comes out every time, every time it has been different. It’s been over, it’s under, so it’s kind of a mess right now. I mean, we’re figuring it out, but we need to figure out how to get this testing situation figured out and get some uniformity in the system, otherwise, it’s going to cause major supply chain effect that we’re going to build . Yes, we like to make this as rosy a conversation as possible, but it’s tough and it’s complicated. And I guess to recap, supply chain from producer to distributor, there’s that flower tax that’s owed. And, really, once that’s happened, again, it’s a conversation between you, the producer and your distributor, as to what you’re going to be getting paid. We see a lot of distributors obviously getting charged the flower or the leaf tax, incorporating the fee of the test into what they’re finally giving the producer

Panelist — and then having some conversation around that excise tax. But you, as a producer, once you’re paid from the distributor, you’re good. So whatever price you’re able to negotiate with your distributor, and what that all incorporates, or what it does not incorporate, much of this really falls on the distributor, so understand that that flower tax is due. The distributor is going to be paying for the testing. The distributor is going to be paying for transportation, the distributor’s going to pay the excise tax, but from the production standpoint, you can incorporate all that in and you can still get the price that you’re looking for after you pay that flower or leaf tax. Then you’re able to move forward. So one other thing that I want to touch on, you guys let us know how much time we have, we’re talking about state tax here and state tax requirements. One other huge component of this conversation is the local tax. So how many folks here are operating in San Francisco? Alright, and then Bay Area in general is I’m assuming everyone else. And so The California Growers Association has been having a series of conversations about this, which Tim really helps oftentimes lend some sanity and logic to and just some factual based data. But here in San Francisco, and I’ll speak to San Francisco for the next little while. We have yet to make a decision on what our local tax is going to be. In fact, we’re not going to know until November the tax rate that cannabis businesses will taxed at is going to be on the ballot. Short term, maybe quick little silver lining good news,

Panelist — there is no tax until November, only sales tax. But it’s definitely something that we need to track very, very closely, because we are going to open our businesses, we’re going to start operating. And the last thing we need is some member of the board of supervisors who’s campaigning on the line that I’m going to be bring tons of tax revenue to the city through this industry and hit us with something really, really tough. And so we’re definitely going to make a concentrated effort, locally here, to start engaging board of supervisors. We also have a mayoral election coming up that can definitely have sway. But what I wanted to touch on real quick are really what we’re seeing across the state as the two, possibly three, different type of local taxes that are being implemented. You basically have a gross receipts tax, which is very common. We’re seeing it in quit a few places throughout the state, where you’re simply taxed a percentage of the gross profit that you make in a given year. It’s a straightforward tax. A lot of cities and counties like it because the more money that a company makes, the more tax revenue they have to remit. The industry is not the biggest fans of a gross receipts tax, but I’ll talk about the second type of tax that the industry is a little bit more… Likes a little bit more, which is a square footage tax. And this is for producers specifically. Square footage tax would be depending on the size of your cultivation, and what size permit you have, whether you have a type one, two, or three permit, you’re going to be taxed on square footage.

Panelist — The reason cultivators like this is because if you have a really great, your tax rate is fixed, you’re always going to pay the same tax rate. If you have a Type 2 license, and your canopy is 7500 square feet, you’ll always pay tax on 7500 square feet, no matter what happens. Now the scary thing about this is you’re going to be charged that rate every year, even if you have a bad year. That is a frightening part. But if you have a great year, your tax rate is fixed. This is something that makes doing your books easier You know every year that you owe X amount in tax, period, it’s over, it’s done. You can allot for it and there’s not a shifting scale. The downsides to square footage tax are, again, near or crop loss. That can be devastating. You owe that tax, it doesn’t really matter. There are issues in different areas around how that square footage is actually calculated. Some areas are calculating it as to the actual canopy. Some are calculating it as to the whole size of the building, or the greenhouse, or the overall area to include walkways, different things like that. That starts to tax people on non-production areas. That’s an issue as well. So the reason I’m breaking this down is just so that everyone can start to really give some thought to what type of tax we’d like to advocate for and what type of tax is going to work for you. The third type of tax that CGA is actually really starting to get behind and focus on a little bit more, especially in counties that have a lot of production is a by-weight tax. This is how alcohol is often taxed.

Panelist — And it’s taxed by the gallon. And this would be a tax that is based on the pound of, or the ounce, rather, of what you produce. The reason why we like this over a square footage tax is because value add is incentivized. If you’re taxed by square footage, it doesn’t matter if you have a great product that sells for more, or if you have a relatively low quality product that sells for less, your tax rate is the same. The same goes for if you tax by the pound. But the pound, you know, if you have a very poor harvest and you only get a low amount of pounds, you’re going to pay a much lower tax. That’s where the benefit really comes. With square footage, you’re at a set rate. By the pound, it fluctuates with your production. However, if you work hard to develop a really high quality product, your tax rate stays the same, because it’s taxed at the pound. So if you grow product that’s worth $3,000 a pound, you’re still only paying that per-pound tax rate. And so operators, there’s a sliding scale. So if you have a bad yields, you get to pay less. But if you get better quality, you don’t pay any more. And that’s why we’re very attracted to this by unit of measure tax. We haven’t seen it pop up in too many places, but we want to start really talking about this sort of third and better, especially for producers, method of tax, because it incentivizes high quality product, but it doesn’t punish you for having low yields. Gross receipts, the higher the quality your product, the more you sell it for, the more you pay in taxes. So I just wanted to talk about those real briefly.

Panelist — So one of the issues, and I think it’s a good point, when you’re especially, so state taxes, you’re set with those for awhile, ’til somebody comes along, wants to fund an initiative to lower the taxes. I know there’s talk in the legislature about a movement to… It’s called the ACA, Assembly Constitutional Amendment, or SCA, Senate Constitutional Amendment, to lower the excise tax rate. So that takes a two-third vote of the legislature. The governor doesn’t have to sign the bill and that’s the nice thing. But if it passes the two-thirds vote, it will be put on the… Well, it’ll be put on the ballot. However, I doubt that’s going to happen, because we’ve actually have a Republican author who’s pushing that idea and we all know the politics in Sacramento and Republicans don’t have a lot of power in Sacramento, Democratically controlled Assembly and Senate and then so that’s probably not going to happen. And I don’t think anyone’s going to fund that initiative if they were successful. And guess who would have to fund it? It wouldn’t be the politicians, it would be the industry, right? You guys would fund it, we would fund it. So when you’re dealing with your locals, you need to remind them that you guys are not swimming in cash, because this is the assumption. When you walk in, and River’s done this, we walk in and we meet with people and they think we have all the money in the world, that business is good. And it’s not right now. If you’re operating in this regulated market, it is tough, it is. A lot of people are not making money right now.

Panelist — And it’s probably going to be awhile. I mean, let’s be honest. But they need to know that if they overtax you, that, first of all, you may even just not even decide to come into that city and operate. Really frustrated that San Francisco hasn’t been up front and say, “Hey, this is going to be the tax rate.” ’Cause that’s a little like, hey, I start operating and then you hit me with the 10% gross receipts tax. And then I need to make a decision. Is it possible for me to run my business? We have Mike, Mike who works with River over there. We negotiated with West Sacramento, you always want the tax rate up front. We want to know what you’re dealing with, not on the back end when everything’s in place. And then industry types. There’s different industry types. Tax rates affect different parts of this industry differently. So like distribution, we do a lot of volume, so a 10% or even a 5% tax rate, gross receipt tax rate, is a lot of money when you’re doing a lot of volume. It’s a little bit different for a retailer. Maybe they can absorb that. But if you’re a distributor and you’re paying all these additional costs and then you have a 5% tax rate, or 10% tax rate, that’s going to crush your bottom line, because you’re operating on thin margin. So we’re looking for, you know, a SoCal location. And this is one of the first conversations that comes up, “What’s your tax rate?” That’s one of the first things you say, “What is your tax rate?” If it’s something crazy we’ll be like, “Oh, thank you, thank you for taking the time. “We’ll go somewhere else.”

Panelist — So those of us who live in areas that we still have an opportunity to have this discussion, it’s really good to take a long hard look at what the best tax scenario would be locally for your business and start to get behind groups that are advocating for those. And to just real quickly put it into perspective, Oakland has instituted a 5% gross receipts tax for all businesses across the board, if I’m correct? 10 or 5? Okay, and Mendocino just instituted a really great tax rate. They have a 2.5% gross receipts tax for cultivation. They have a flat rate of $2500 a year for manufacturers and for distributors. And then the retailers have, I believe, a slightly higher tax rate. And so we’re seeing all sorts of things go on. Those of us here in San Francisco, fortunately we have the state legalization task force, who is really advocating on our behalf. They’re looking at a 1% gross receipts tax, that’s what’s being proposed right now. And I think that we really need to get behind that and start having these conversations, especially with elections coming up. And folks who are in other cities and counties, you know, we encourage you to engage with your local legislators, and really start to have this conversation if it’s not being had already. It might be too late to talk about the per-weight tax here in San Francisco, but maybe not. And there are so many things going on right now. Everybody’s just trying to get their permits and move forward. Let’s not let taxes sneak up and really hit us hard. It’s definitely something to consider. State taxes, Tim said, that’s set in stone,

Panelist — we can’t really do much about it, but the local tax could really make a difference to the viability of our businesses in the near future. I will just say this. Cities are already… Oakland is a prime example. They have this 10% tax on adult use, 5% on medical. And they are already, and I don’t know long this tax has been, but they’re already reconsidering that tax rate, because they already see the effects that it’s having on the industry and the black market. But you know we really haven’t talked about that and what tax would do to the black market. You go on Weedmaps and you pull up a legal shop that is charging taxes and you pull up a illegal delivery service or illegal shop and you see the differences in prices.

Panelist — Weedmaps got the letter, though, they’re — Weedmaps got the letter and with everybody supporting B2, 2899. Just kind of reigning that it. So, but, yeah, it’s definitely an issue. I really disagree. I mean, again, you want to be incentivized by that value add. Gross receipts does not incentivize producers to make a better product, because you get taxed more for that better product. And so as that moves all the way through the supply chain it really doesn’t benefit the distributors, it doesn’t benefit the end consumer. If the by-weight tax is reasonable then it’s even small producers have that set tax based on their production, but their quality is they’re incentivized to get higher.

Panelist — You know, any rate that incentives folks to add value to their product, at the end, I think, benefits the entire industry. That’s my opinion. Alright, so we have Chelsea Miles, who is a CPA at Miles Bradley, Inc. She’s outsource and client accounting service specialist with over 15 years of experience, providing state-of-the-art bookkeeping solutions for industries like cannabis, technology, international markets and media and entertainment. So thank you so much, Chelsea, for being here. We also have Patrick Finnegan, also a CPA principal at Patrick Finnegan and Associates, is a licensed CPA and also is President of Oakland Distributing Company, so over 21 years of experience with the California Board of Equalization as well. So definitely have some good info coming up. Again, save your questions and comments for after the presentation and I’ll be coming around with a mic so that everyone can hear the questions a little bitter. Great, thank you so much guys for being here, let’s give ’em a round of applause real quick, get ’em excited. Are we good? Okay.

Panelist — So welcome. How many retailers or delivery services individuals do we have here? Okay, great. So I kind of geeked out a little bit last night, so I apologize that I have a lot of slides and a lot of information on these slides. But I’ll go through them pretty quickly and skip through. And if you guys need them, just go ahead and email me and I can send them to you. So we can to the next couple of slides where it’s going to the regulatory impact. So basically what I started when the ECC came out with all of their regulations. I just kind of glommed onto them more from a financial and accounting department what I need to know for my clients. So a lot of it in the beginning is understanding and tracking between the medical and the adult use. So making sure that you always have a great start of your chart of accounts and marking sure that as you get your license that you supply chain has to stay consistent. So you’re going to be tracking it, all of the adult use activity, all of the medical use activity. So it’s easier to do that from the beginning as opposed to trying to unravel that at year end when you’re trying to get your taxes, or to make sure if you get audited. The other one is the big portion is to track and trace. And everyone, not everyone, but there’s a lot of discussion, “Well, I’m just going to use metric.” And as an accountant, outsource accountant, I highly do not recommend that at all, because you’re going to want a system that you can track and inventory is your most valuable asset and you want to make sure that you’re getting

Panelist — all of that value built in to your inventory cost. And metric doesn’t do that. If you want to have a recall and you need to pull that information, you want your CRM system. You want all of your point-of-sales, you want to be able to pull that into your accounting system so that you’re not trying to have to pay an accountant at the year end. So you want to make that investment now that way a year down the road even when you’re trying to do your taxes, pulling your books together, that it’s there, as well as your point-of-sales, where you all of this tax, that we’re going to talk about later, built in. So you want to be able to pull this together. And Meadow has a great system down here. But I’ve been working with them making sure and making sure that they’re actually taking the accountants out of job, which I love in the sense of having that all built in. Because at the end of the day, I don’t like Excel spreadsheets just like you guys don’t like it. I just want to pull it from the system. Next slide. And then making sure that you kind of know what is the policy for your returns, that’s important so that you can capture that on your income statement. And then for the retailers and for focusing on retailers, just kind of what your documentation’s needed, how often you have to do an inventory count, because a lot of my clients don’t know how to do inventory counts, or they never had to and how often. And it’s like every 14 days. So what’s nice is that Meadow’s built into their software notification that says that, hey, have you done your inventory account.

Panelist — So those are something that as I’m working with some of my clients, that that’s important to me as the accountant. Next slide. So, basically, and this is just where, from an accounting perspective overall, that I think that’s really good best practices, is you want like a system for, can’t say it enough, a POS system and inventory management, a great solid chart of accounts so you’re not trying to do it after the fact. Obviously, cash handling, ’cause you’re dealing with lots of cash. Time keeping system. Now there’s a way where we going to talk about it ’cause I have one slide when we get to it, about the income tax and how we can minimize the effect of 280E, and one is through allocations. And we want to make sure, where you have proper documentations in the beginning, to use a time tracking system to say this is what this employee was doing. So making sure you have that system in place, those are really great. And the obviously with the employee handbooks, document management system for all of the documents that you have to retain for between four and seven years. And then your budget. Your budget’s no good unless you go back to it and refer back to it often and have variances so that way we now how you’re doing. Excellent. Okay, then I’m going to stop and let him, you want to add on it.

Panelist — My background was as the tax auditor for 21 years . Like I say, when I speak to these events, I was basically based at the BOE for the retailers. So some of the areas that I will give you is that when an auditor comes into your store, your retail store, or your delivery company, you’re going to know pretty well, pretty quickly, whether the tax payer is complying. So generally if your accounting records are such that you’re organized, when an auditor comes in, it’ll be I think about an hour review of those records. If they get the feeling at that point this is dialed in, it’s organized, it reconciles simple things, like your bank statements, including your reporting, including your sale tax. The number should be if you’re depositing your money you have that cash. Your federal income tax returns should be reconciled to your sales tax returns as well as with your retail businesses. Those are simple items and you really should be thinking about when you’re beginning your retail businesses. So the idea to keep accurate accounting records is really critical because I think that there’s enough agencies that are out there that have licenses, be it local, state, in the Internal Revenue Service, that the odds of having your accounting records looked at. It’s going to be pretty high. You don’t want to be the individual to have to explain what happened with this invoice or why this tax was returned. So, again, accurate accounting records that you are diligent about maintaining will pull you through. Hard to say that .

Panelist — Yeah. So now onto the fun stuff is taxes. So what I wanted to bring up is… I know we’re going to be talking the next couple slides after this, are going to be the sales use and excise tax. But a lot of my delivery clients this year were taken aback that all of the delivery has to be, delivery employees are actually employees and not independent contractors. So I just kind of put up the new rates for you, and then put up that testing to say is your employee and employee or an independent contractor? And you can go to this website and go through a checklist. And I’ll tell you, pretty much 99% of the time, they’re going to be employees, if you’re controlling, it’s all about the control. But that’s a really great website to go to. Next slide. This one was really just a really quick… My friend who was in health insurance, there’s a whole thing in the news about Affordable Care Act going away, but here in California it might not be going away. So if you have 15 employees or more, just be aware, because full-time equivalent is 30 hours. Just I just wanted to give you guys a heads up on that. ’Cause that’s what I’m hearing from a lot of my clients is it’s not just the excise tax, it’s all the other taxes that are associated with being in the business. Next slide. Okay, the fun stuff. So this is just really high level for the retailers that you have to register. Basically, you have to, for the sales and use tax, you’re paying the tax on the… Basically mostly everything except for medical.

Panelist — And then you cannot remit your excise tax to the, you’re collecting it, but you’re not remitting it to the CDTFA. You’re actually giving that to the distributor, which the group before mentioned. And then basically this just going to reiterates the fact that this goes kind of into the items that you’re using for re-sale. So you purchased an items, say a t-shirt for retail, and you decided to give it away as a… Or use it or consume it yourself. You have to pay use tax on it. So because you didn’t pay taxes on it in the beginning and you bought it wholesale, you have to pay taxes on it. So that’s kind of where a lot of people don’t pay it. They’re like, oh well, just because we’ve already paid for it when we purchased it, it’s just kind of… It’s just a nice reminder. And even if you don’t have any sales tax obligation, you still need to file your tax return. Do you want to add anything else? I think that’s the last, just on the sales and use tax. Well, there’s a few areas of the sales and use taxes especially delivery companies need to be aware of and one is the tax rate of the locality that you’re delivering your product to. So understanding now that brings us something that our software with our tax rate is on the deliver items. Another area, too, is remember delivery charges if they’re made by the retailer or the delivery company, if they’re made in the van of the delivery company, those are subject to sales tax. And there’s areas of the new cannabis law that

Panelist — are a little tricky for retailers. One of the areas that I know it’s going back and forth and there’s discussions on, is that local gross receipts tax. How is that applied to the sales tax? Well, if you put that on your invoice and it’s a part of your price, you say Oakland city tax is 5%, that’s subject to sales tax as well. So really you need to do your due diligence to really understand what areas are subject to tax so that you’re not in the scenario where you put yourself in jeopardy by not collecting what you should have collected on. That’s where sales tax really comes into play. You guys have any questions on the sales and use tax aspect for retailers? Okay. Maybe this question’s coming up. So the question was if you have a compassion program —

Panelist — If you guys can repeat the question in case someone can’t answer, you can also use the mic. I can run you down, or you can scream. Those are other options. But, yeah, please repeat the question to the audience. But the question was if you’re a retailer and you have a compassion program where you provide to the customer individual for cannabis. And what is your tax liability on the sales tax since that . I know we have Jennifer Hawkins from CDTFA that’s going to speak to that. There’s a scenario where we have issues with Sam. And it’s part of the law that negates the use of samples . So I believe, and correct me if I’m wrong, that you will be charged your excise tax on it from the producer. Yeah, and then on the sales tax you wouldn’t. But she can clarify that as well.

Panelist — Yeah, it’s someone still a work in process. Yeah. Okay. Okay, the excise tax. So obviously we all know that no cannabis can be sold without having the excise tax. The big question is what do I do with the inventory at, or the inventory of January 1st, 2018? Do I need to remit the 15% sales tax on that? Excuse me, excise tax on that, you’re beginning inventory? The answer is yes that you have the remit whatever you that was in-house as of January 1st, you have to not start remitting that to your distributor. Yeah, and there’s really two ways to calculate that liability. You’re going to take… The first way is common. I think we’re seeing it more often, is if you have $100,000 pre-January 1 inventory that you begin, so you have $100,000 . Well, applying that 60% markup and then tax you add by 15%, leads you with the tax liability of $24,000 excise tax for that beginning inventory. And certainly that ratio is there for $500,000 of the 24% or that $500,000 becomes your liability. The question, though, is when do I remit that?

Panelist — ’Cause I know I’m not going to burn through my entire January 1st 2018 inventory in sync with the money. And especially that if you know you’re going to flip that inventory over a four-month period, and then you begin that… That 24,000 is divided by four and that’s $6,000 every month that you have to recognize as the tax through the state for that. But, remember, the law requires you to, the retailer, to bill the purchaser for the excise tax. Second method — Yeah, and it kind of brings up a point is that what’s a distributor, it’s difficult to say, “Hey, I’m going to take monies from you “and remit them on your behalf.” You have to have a good business relationship, because taking cash from somebody to send it back in, my insurance company or the insurance company of the distributor is wondering, well, what are you… you’re taking a fairly substantial cash risk but now you’re responsible for to remit to the state. And you feel that you certainly have to charge for that. ’Cause not a lot of retailers want to pay that after tax is paid. So it’s kind of a catch-22 on the number of distributors that actually want to take that risk, for lack of a better term. Yes? Yeah, the question was if you have a large harvest 2017 and you are having to remit the excise taxes on that product over the course. And the question was if after six months you still have some of that inventory that you still have and you’re paying taxes on that. You would pay the tax when you sell the product. And if it has to be declared after June of — Well, this is product in a dispensary

Panelist — that’s being sold, they’re the one that has the license. Right? Hopefully. Yeah, and I get it, ’cause people ask me on cases that have, that aren’t covered by the individual license, the collective model, or that, I’m staying away from that. My practice licensees. And so at the distributor and the dispensary and delivery companies, if you have that inventory January 1st, you need to pay the excise tax as you’re move back through . Yeah, the grosses. So there’s debate, which is more favorable if one day you can go one, depends on the sales price, I guess. And then just kind of the required documents that you need to have. On some of them there’s a lot more required documents. I had to take out three slides. And then do you guys have any questions on the excise tax, before go on to kind of other tax and income tax? So if you’re starting from the cultivator? So, basically, from the cultivation you would pay the cultivation tax. And then that’s kind of where if you’re not…

Panelist — That’s kind of where as a cultivator if you’d stop there, if you don’t have the vertical, then on the, so then it goes to the distributor and gets tested. And… Actually, I would think that the, and the distributor will probably have their own rates that they mark on because they’re doing the testing and they’re doing transportation costs. And so the cost that the distributor would purchase it from the cultivator is probably not the same cost that they’re going to be selling it to you. And then as that base, that base to add the 60%. Yeah, so it’s going to be at the wholesale cost. So if I’m a distributor and I’m selling to a dispensary. Let’s say I have five different items and they all come up to equal $1,000. Excise tax calculation is on that $1,000 times the 60% times the 15%. That’s how you get to there. So it’s really up to the distributor to that to final determination where the excise tax is to the retailer, ’cause it’s based on the distributor’s gross sale price, wholesale price, to the dispensary. So if you look at the invoice, what I say to the dispensary is “Hey, all the items, “these five items, the flower, or the shatter, “or whatever I’m selling to ’em, they equal $1200.” But you still have that formula against that where multiply that really by 24% to get to the excise tax level. So it’s driven by what the distributor charges the dispensary for those items. Hopefully. It is, absolutely, it’s going to come through. So if the distributors paid, or is paying, the cultivation tax, so that becomes, so I’m buying a pound of althor for let’s say $1000.

Panelist — You included the $148 of cultivation tax. I’m remitting that and you better know that that thousand dollars is carried through to my cost. So that is the excise taxes on that as well. Yeah, and they’re probably going to be adding more to it. It’s compounding not just the cultivation tax — Well, in my discussion, I had bought for 850 and added the 148 to make it a thousand dollars, kind of what the price is . But it could be even 1200 if the 1200 includes the 148. Again, I’m going to mark up the 1200 as a distributor, because there’s other costs associated with it. Yeah, that’s why you’re seeing this, you know, the $80 rates. This is where you’re seeing the pricing being brought into the market and the expenses that you’re seeing at the retail level.

Panelist — It’s a little of a shock, too. I mean, the — Yeah, and with your systems in making sure that if you have products you’re selling, you’re paying a sales tax, you’re not paying the excise tax. We had a nice discussion about what happens if you have a packaging that is say a vape pen that comes with the battery and it’s all packaged together what do you charge for the excise tax for that? And, for me, I think it’s an accounting nightmare. So it’s charge the 15% excise tax, cover yourself. Don’t try to break it down, because that’s just more accounting and making sure that you’re tracking everything. I don’t think, yet.

Panelist — Yeah, this a good question, ‘cause — Okay, so she asked, sorry, I’ll repeat the question that is there a penalty for overcharging and that’s Mario the taxes. As a retailer, is there going to be negative consequences to her? And where we are right now, and Jennifer Hawkins will add clarity to this, is that you are delivery company and you’re buying from a distributor. The distributor is charging you the excise tax based on their cost, plus their margin and we’ve talked about that. The law now allows, or requires the delivery company to charge your purchaser and excise tax. So you’re building it into your pricing what you need to get back. Well, right now, if you’re charging greater than the amount that you’re paying to the distribution company,

Panelist — there is no… If you keep that at 15%, I will tell you, if you try to bring that at 20%, they’re going to say you’ve over-collected. But, as of now, and Jennifer, again, will speak to this, there is no excise tax reimbursement provision in the cannabis law. And this is the only tax currently that has this scenario. I don’t know of any other, maybe there is one out there. But what that means, when we were doing audits, you could not enrich yourself by charging tax more than you remitted to the state. This is that area right now that the cannabis industry is going through. It’s unique. Again, we have a great expert with the State of California that will speak to that, but it is unique in that I think that’s going to be looked at fairly closely coming . But it’s there right now. Other questions? The question was is you’ve miscalculated your margins and you owe the state more than what you’ve accrued, or collected to be able to remit. You have a big penalty.

Panelist — Yeah, there’s substantial penalty for failing to remit the excise taxes that are owed by your business. Well, penalty is 15% of the sales, , the amount owed, was my understanding. That’s going to be hard, that’s a big hole to dig out, especially the first quarter. I would suggest you contact either of us, set up a… I mean, if you’re in that position and you don’t know where your excise tax liability is, you need to figure that out. ’Cause the penalties for not remitting are pretty enormous. That might take that back, right? So the payrolls taxes are this might be the worst. Yeah, don’t be in that position. And put the money away. If you’re collecting excise tax, and this is for all the dispensaries and delivery companies. Set up an accrual account where if you’re taking in a tax that’s a debt owed to your state, do not make it part of your cash flow. You’re going to bury yourself and all of a sudden, you’re like, “Aw, shit, I’m screwed.” So —

Panelist — And the same with the manufacturing clients that are taking that and holding the cultivation tax that’s not your money, put it aside, put it in a bank account and then just keep the records. Don’t put that into your cash flow. So you… For the medical, you do not have to pay the sales tax. But you still have to pay the excise tax. Well, there’s a little you have to have a card. Oh, sorry.

Panelist — You have to have a . So we’re not seeing a ton of those. That’s usually costing about $150 for the county to issue that card. So as a consumer you have weigh how much am I paying on sales tax on weed? Versus is it worth it for $150 a year on this card? I guess if you’re smoking a lot, yeah, maybe it is worth it. But that’s an individual decision. I don’t know that we’re seeing that being played out a lot in the industry at the retail level yet. But it might happen. I do not know the answer to that question. But I can definitely research it and I’ll get back to you on that, ’cause that’s, yeah, that’s… Yes? Well, the excise tax is not required to be separately stated, but there has to be a statement on the invoice that says the sales price of the cannabis includes the California State excise tax. So, secondly, the sales tax has to be separately stated. You cannot get away with that. You can say it’s included in the price of the product, but you better have signs in your dispensary saying that the sales tax is included in the price, so you, as the retailer, are responsible for remitting that tax. It is included, you can back it out,

Panelist — but you are responsible for that, and that will be calculated as well. Don’t see a lot of people claiming that sales tax include a deduction, but it is available. The local taxes, the gross receipts. And I will add to this as well, the excise tax, if it is separately stated on the invoice, the state’s going to be looking for that money as a remittance. You painted yourself in a corner by doing that. I say that because now you have to remit based on that and you very well might’ve purchased cannabis from a distribution company with the excise tax being charged to you. So now you got to back that out. So there’s a lot of drawbacks. And I would definitely recommend if you are a dispensary delivery company, have your billings, your invoice, looked at, because if you’re messing around with the software, and the software was written for these, then you’re pretty much setting yourself up for a little risk if you’re not calculating it correctly. When we were doing audit, or when I was doing audits that you basically get down to you’re auditing the . If it is operating correctly and remitting and charging tax on the items that it needs to, it tends to be bulletproof, unless you don’t admit to that. I mean, if you’re cheating and so forth, well, the best software’s not going to help. If you play it straight and you’re remitting based on that, that is the way . Yeah. Yeah, and so our distribution company wanted to know that. One of the questions we asked the city of Oakland is do we charge the gross receipts on the excise tax?

Panelist — We got the response back from the city of Oakland saying no. I would encourage everybody that has a gross receipts tax to learn with your locality what the responsibilities are. Just to make sure that there’s other taxes out there, we talked about it, you know. Just talking about the local retail tax, there’s gross receipt tax. There’s property tax that you have to do. San Jose has, you know, on a business tax. San Francisco has funky taxes if you’re doing business in San Francisco with their subject to their payroll. So it’s really just understanding what it means to do business in that locality. So understanding that it’s not just about the cannabis taxation, there’s just the normal course of doing business. And so you have to research it and understand if there’s a different avenue or lane, if they carved out and they had their local regulations for cannabis clients or if it’s just in the general you’re doing business in this county.

Panelist — Yeah, and the reason why it’s imperative to know your local and your tax rates, you have to place your product. If you are not incorporating what your actual expenses on all the items that you have to pay, you don’t want to be running a negative 5% margin. And if you’re not educated, that is an easy enough way to kind of bury yourself, ’cause then you’re not collecting what you need to actually collect for that. So all the local taxes, all the licensing fees, understand what those are and accordingly. So I’m just going to touch upon a little bit on the income taxes. I actually don’t file income taxes, so I’ll put that as a disclaimer, but just to make sure that for the retailer perspective, you know, you’re just going to be able to, for all, every, you’re just going to be able to deduct the cost oF . So unless you have carved out different companies and separate lines of businesses and you’ve documented everything, I mean, everything, with agreements, where you’re going to be, you’re still going to be obviously subject to audits, but just making sure that you have all the substantiation for your allocations and your followingness. So that’s where the timekeeping system comes in. And it’s not something that you’re doing at the year end. You’re doing it throughout the year to ensure that this is the consistent, that you’re a good steward and you are making sure that you are practicing everything that you have in writing.

Panelist — And to further that, you’re going to give an individual a job description that if you’re having labor and that labor is associated with the product, you’re going to want to have the job description in your records showing that that individual is working as in purchasing, something specific to the inventory. That brings it into the cost of sales environment. The sales and marketing expenses, the professional expenses that you’re paying for. Be aware of the taxability on that and seek good counsel for tax that, hey, this is not deductible. The blind benefit of the recent tax change, I mean, there’s other benefits, certainly, but the tax rate for corporations go into 21%. As restrictive as 280B is on the cannabis industry, that made it a little bit more bearable as the rates go down. So there’s that. Yes.

Panelist — Have I seen scenarios where what? Yeah, if what their efforts are not towards the product. If it’s sales and marketing, yeah, that wouldn’t. You’d have to categorize that as a non-profit sale item. Yeah — It’s what you’re doing and you’re — Just keep good records and ensure that if they are actually working in the inventory, then it’s probably tracked.

Panelist — Go ahead. So some of the research I have done on the RNB is that it’s not capitalized well until it’s been used. And so it’s an expense, and therefore it’s not subject, it’s not allocatable for your taxes. But that’s something that we’d have to look at at one on one and what we’re doing. So that’s definitely like a research project to see where I’d want to get more information. ’Cause there’s always going to be what your situation is compared to everybody else. And so there’s a lot of people that can just dive into it and say, “What are you doing? “Is that something that you’re going to be “putting into place soon?” And then you talk about depreciation and doing that and that could be an inventoriable cost. You’re adding it, it’s not just your raw goods. But that’s going to be a one-on-one situation where we’d have to dive into. You want to take one more question? And I think we’re pretty close to our —

Panelist — One more slide and then one more, it’s fun. It’s collections over $10,000. And then basically as you have to do you Form 8300. Yeah, this is a big one. This is what is moving through Colorado. It is the requirement, cash transactions over $10,000. And there’s even scenarios that talk about issue, continuing purchase. Mm-hm, so basically —

Panelist — Understand Form 8300. If you do not, seek counsel to make sure that you’re compliant. The IRS fines are pretty substantial. So cannabis industry is doing a lot of cash transactions over $10,000, so be sure to know what your responsibilities are. Yeah, and don’t send your cash person to the bank who is a clerk or one of our staff people. She got really scared when they started asking her a lot of information. She’s like, “I’m never dropping off cash again.” ’Cause they ask for a lot of information when you… To fill out this form with a lot of personal information. Yeah, you’re going to be looking at drivers license numbers on the people that you’re taking that cash from. So just be aware that’s out there.

Panelist — Any more questions? What do you mean? Form 8300? So basically you give me cash for $10,000 or a rolling $10,000 for that for 12 months. So basically there’s form that I have to file as a recipient of that money. I am — The person receiving — Person that receiving the money. So I’m an accountant, so you’re my client, you give me $10,000 for accounting fees. After I get to the $10,000 mark, I have to remit this form. And I have to remit the form the 15th day after the month end that I received the funds. So then I have to get a lot of information from you to say this is who you are, why are you giving me this $10,000 and then, again, as the recipient, I have to give out information as to who I am.

Panelist — Well, yeah, if the distributor’s taking $10,000 from you in cash on a purchase, it still is. This began… Where this started is people going and buying cars for cash. And the dealerships, it was common. So this began on high cash businesses as a way for the government to be able to track people that were paying for cash and not have any . It hits the cannabis industry really hard, this cash is key. Yes? The banks will be asked and that’s the distraction. You’ll be at the counter and all of a sudden you’re dropping $10,000. You’re going to go through forms . So what I advise my clients, if they do have the bank accounts, open up several. It’s going to happen.

Panelist — Alright. Any more? Thank you, guys.

Panelist — Thank you. Thank you so much, Chelsea and Patrick. Again, really useful information there. And, yes, open multiple bank accounts. I know someone who got 20 shut down. So keep on keeping on. Alright, we’re going to give everyone just like two minutes, again, maybe one-and-a-half minutes this time, if you just want to get up and stretch, use the restroom, maybe no smoke break this time. ’Cause coming up we will have our last presenter, Jennifer Hawkins from the CDTFA. So you definitely don’t want to miss that. Again, just one minute. Bathroom’s on the other side of this wall. If you don’t need anything, stay in your seats and we’ll begin very shortly. Thank you. Test, test, test. Test. Hello, hello, hello. Hello, hello. Hello, hello. Hello, hello, hello. Test, test, test. Hello, hello. Test, test, test, hello, hello.

Panelist — George? Yeah. And as you see, everyone’s doing that, right? We have to. Yeah. their questions and they get a response in writing and they . Right, use that. Okay, sure. Yeah, I’ll just be here. I’ll just be here speaking about things, talking about the way things are going and, yeah, Scott is just walking over there, giving it a… No, we just, we had it muted for a second there. Let’s see, let me make sure it’s not muted now. No, it was just the… A little better?

Panelist — Yeah. So we’re still gettin’. Is it redlining still? Or what’s the issue? Okay. I turned it down.

Panelist — Yeah, we’re going down to one mic, right? Yeah, we’re going to one. Yeah, we’re just going to use the one.

Panelist — I’m going to turn the volume up, actually. Alright, let’s do that. So you can turn that one .

Panelist — This is the one. Go ahead and throw this back. Let people know we’re getting started. Alright, everybody, if you want to take your seats, we have our last panelist. Know everyone’s super pumped on taxes now. I know I am. So I want to welcome Jennifer Hawkins. Thank you for being here. Jennifer is a business taxes specialist with the CDTFA. That’s the California Department of Tax and Fee Administration. If you’re not familiar with it, you definitely will be after today. And she’s working on special taxes and the program administration branch. So I’m going to let Jennifer take it away. You saved all your incredibly detailed hard question for her, I’m sure. But we’re here to support you. So, yeah, thanks again, Jennifer. Giver her a round applause. And, yeah, after the panel, just any questions you have, and after that we’ll wrap it up and have happy hour and drinks and snacks in the back. Alright.

Panelist — Hi, everybody. Thank you, guys, for inviting me. Everybody, all the panelists, did a great job of… Alright, everybody did a great job ahead of me of kind of explaining about the taxes and giving me some insight into the supply chain, which I don’t get a lot of information on that. But I just wanted to clarify a few things and go into a little bit more detail about the cannabis taxes themselves and what CDTFA is kind of expecting in regards to those taxes. So the first is a registration component. Any business who sells tangible personal property, that’s anything you can touch or feel, is required to register with the California Department of Tax and Fee Administration for a seller’s permit. And you may not be the retailer. This could be the cultivators who are selling the flowers onto somebody else, or a manufacturer who’s making an oil and passing it on and selling it to someone else. They are required to hold that seller’s permit. And what they’re going to want to do is collect resale certificates so that they have proof that they’re not responsible for the sales tax, that they’re not making actual retail sales, that they’re selling it to somebody else for resale who’s going to go on to make the retail sale. So you want to make sure that you register for that seller’s permit and you collect those resale certificates to anybody that you sell your product to. And the other registration is the cannabis tax permit. And for that program, we do expect the distributors, who are the entity or the person who’s responsible for collected those taxes

Panelist — both from the cultivator and from the retailer who is ultimately going to collect from the purchaser the excise tax and they will be collecting from both of those parties and potentially the manufacturers and then filing a cannabis tax return with us and remitting those taxes along with that tax return. It’s easy to register. You go to our website, up on the right, right-hand corner, there’s a little button that says Register. And then it just asks you questions about your business activities and then it collects some information about you and then issues you an account at the end. It’s free, it doesn’t cost anything to register for either the seller’s permit or the cannabis tax permit. So as you all are sure aware, January 1, there was implementation of these two new taxes, the cultivation tax, and I won’t bore you, ’cause they already talked to you a bunch about the cultivation tax and the excise tax. But I just want to make you aware that the distributor will be calculating those taxes, or in the case of the cultivation tax, where it first is transferred to a manufacturer, that manufacturer is going to calculate those tax and is required to provide the cultivator with a receipt showing how much of that cultivation tax was collected from the cultivator. Same with the manufacturer, when the manufacturer passes on those taxes to the distributor, the distributors can give that manufacturer a receipt. And, as they said earlier, that receipt is really your proof, it’s your relief of liability,

Panelist — that you did, in fact, did pay those taxes, that you were responsible for paying. For the manufacturers, as they said, it’s a little complex. It’s tricky. On our website, we have some examples of kind of what’s expected from the manufacturers. And the manufacturers are going to have to know because their manufactured product may move on to more than one distributor, they’re really going to have to know how much of that cannabis they used, that they purchased and they used to make their manufactured product. And they’re going to have to pass it on to the distributor in relation to that individual unit, whether it be, you know, a candy bar, or an ounce of oil, or whatever. They’re going to need to know. And the distributor should be collecting information from the manufacturer on what was used and how much of it was used, because the distributor is going to be responsible for reporting, in ounces, to us. Even though what they received from the manufacturer was a cannabis product, how many ounces of either flower or trim, or fresh cannabis plan was used? They didn’t cover that. I think they talked about flowers and trim. But through our regulations, we did add an additional category for the cultivation tax. We added a fresh cannabis plant category that’s taxed at a rate of a $1.29 per ounce. There are some requirements that have to be met in order for the cannabis to qualify for that category. And that’s that it’s cut off right above the root. It’s weighed within two hours of harvesting and there isn’t any further or additional processing

Panelist — to that plant, so you didn’t artificially dry it or manipulate it in any way, so just so you’re aware there is that other category. The distributor’s going to be required to report in ounces, flowers, leaves, what I guess everybody else calls trim, and then the fresh cannabis plant. So they’re really going to need that information for the manufacturers. And we’re hoping that the track and trace system, once it’s up and running and everybody has to input their information in there, that that’s really going to be able to support and help the manufacturers be able to kind of provide that information. And then they also talked a lot about the cannabis excise taxes. And the cannabis excise taxes are actually imposed upon the purchaser. They are the — And the retailer’s required to collect it from the purchaser at the time of retail sale. And then the distributor, of course, is collecting those taxes from the retailer. It might be a little backwards, like the distributor may have already collected it from the retailer. And then the retailer’s collecting it from the purchaser, so it’s more like a reimbursement system rather than a collecting and paying back, again, because of the cash issues, or maybe some of the industry issues. So there are two types of transactions and they touched on them a little bit. But there’s this concept of average market price. And average market price is how the distributor is going to calculate how much excise tax is due. And there are two type of transactions. There’s arm’s-length transaction,

Panelist — which means basically a third-party distributor, someone who doesn’t have a relationship with the retailer, isn’t the same business, it’s not a related entity of any sort, they’re just a third-party, who’s moving on the product to the retailer. In that case, it’s going to be based on wholesale cost plus a markup, which is currently 60%. That markup is determined by the CDTFA. We’re tasked with the responsibility of coming up with that markup rate. We have to do it bi-annually, in six month intervals. So at least twice a year, we’ll be looking at that markup rate to see if it’s kind of equivalent to what the retail selling prices is. So people who are in arm’s-length transactions and non-arm’s-length transactions, are paying the same amount of taxes. So the wholesale cast, plus that 60% markup times the 15% excise tax rate, for your arm’s-length transaction. For your non-arm’s-length transaction, you’re talking about a business that is related, it’s a related entity. Either it’s vertically integrated, they hold licenses in multiple categories, or maybe possibly those Type 12 are… For sure those Type 12 micro-businesses, right? Where the micro-business is a distributor and also a retailer. In those situations, the taxes, the 15% tax is actually based on the gross receipts from the retail sale. That’s the retail selling price, the money that you’re actually collecting from the purchase at the point of sale. Let me just catch up on my notes here, sorry. So, yeah, so in that case, in those related entities or businesses, they will, the distributor will know,

Panelist — what the retailer, they’ll know what the retailer’s selling their product for, and therefore they’ll be able to calculate the 15% off of that amount. The distributor then, they briefly mentioned that there was a 90-day period. There is a 90-day period that’s allowed in the statute for the collection from the retailer by the distributor. As the distributor indicated earlier that’s really between the retailer and the distributor and their practices and whatever agreements they have, being that it’s a heavy cash industry. We’re hearing that that’s probably not very likely that people are going to, way that they’re going to collect on delivery, the taxes. The distributors are required to remit the taxes to us that they collected from the cultivator and the retailer on a quarterly basis, the last day of the month following the quarter. So first reporting period is January 1st through March 31st. And the last day that they have to file their tax return and remit those taxes is April 30th. And then that goes on through the year. We do have the ability to, if a distributor comes to us and asks to change their reporting basis, we do have a monthly reporting basis. But then they would need to be aware that that means that they’ll be filing tax returns monthly and remitting those taxes to us on a monthly basis. The distributors will be required to report, like I said earlier, they’ll be required to report by ounces, the flowers, the trim, and the fresh cannabis plant. And they’ll also, for the excise tax, they’ll have to report the total transfers or sales to a retailer of all cannabis

Panelist — and cannabis products that occurred during that reporting period. They also will have to separate those out by medicinal and adult-use sales for both the cultivation tax and for the excise tax. So for any distributors in here, just be aware that that however you keep records, that eventually when you go to file your tax return, you’re going to have to separate out medicinal, adult use, ounces, and total, total sales. The return is required to be filed electronically. We don’t have any paper option. So the distributors do have to go onto our website and file the cannabis tax return through our website. They do have the ability to make an electronic payment with their tax return or at a later date, you know, if they want to file their tax return on the 15th, and then pay us on the 30th or whatever. They do have the ability to remit electronically. We know that that is a challenge for a lot of business. If you are not able to pay us electronically, we have no — we do hae a no-cash policy, but we have an exemption from that cash policy. But what you have to do is contact our local field office, ask them for an exemption form from the cash policy. You’ll fill out that exemption form and turn it in. And then we will send you a letter letting you know whether you’re approved or not. And then instructions on how to remit cash to us. As Tim indicated, it’s a little complicated, a little complex, we don’t allow people to just walk into our office and hand us cash. We have procedures in place. You do have to make an appointment.

Panelist — As Tim said, we have to make arrangements with the California Highway Patrol to be onsite when we take that cash. And we have to make sure that we have, of course, enough staff there to… We have to double-count money to make sure that it’s the right amount, we’re counting the right amount. So we have to make sure that we have all these things in place in order to be able to take the cash. A 50% penalty was mentioned. I understand it’s very harsh penalty. It’s one of the largest penalties we’ve ever seen in a tax program. We didn’t write it. It wasn’t our doing. But, unfortunately, it is there and it’s a 50% on any taxes that were failed to be paid. And so if a distributor files their tax return and they only pay half the taxes, that they indicated that they owed to us, then that 50% penalty will apply to the half of the taxes that they didn’t pay. If the distributor collects more taxes than we’re actually owed from the cultivator, say, for instance, the distributor collected the cultivation tax and for some reason the cannabis didn’t actually enter the commercial market, it failed testing, it wasn’t able to be remediated in any way into a cannabis product, or something else, the cultivator is due a refund of those taxes. And the distributor’s required to give those taxes back. Same thing if the manufacturer purchases cannabis from the cultivator, he collects those taxes, and then the cannabis product, for whatever reason, fails that testing, then the distributor’s required to return the cultivation tax back to the cultivator,

Panelist — ’cause entry into the commercial market didn’t actually occur. It failed the testing and the quality assurance review. For the excise tax, I will say only the distributors are, since they are taxpayer and they are the person that’s remitting the taxes to us, they’re the person that can come to us and request a refund. The cultivator would have to work with the distributor to get a refund. And the same thing on the excise tax side. For any reason if the retailer was due a refund of the taxes, say the purchaser returned the product and they didn’t want it, they didn’t like it, or it didn’t work for them, and the product had to be destroyed, ’cause they can’t resell it, then the retailer could come to the distributor and ask for a refund and then the distributor could then come to CDTFA and file a claim for a refund and get those taxes that were paid to us back. They touched on the record keeping requirements, the licensing agencies requires that businesses keep all cannabis records for seven years. They mentioned that receipt, when you’re a cultivator, getting that receipt from the manufacturer or the distributor relieves you of the liability and proves that you paid those taxes that were imposed upon you. For the retailers, they’re required to put a statement on the receipt that they give to the purchaser that says that the cannabis taxes are included in the total amount of the invoice or receipt being given to the purchaser. We recommend that retailers, Patrick touched on it, there’s no requirement that the cannabis excise tax be separately stated on that receipt.

Panelist — And we actually recommend that it’s incorporated into the retail selling price, because, as someone mentioned, you get into a potential excess tax collection situation, where you may be charging the purchaser more taxes than you paid. And that becomes really tricky. And so we just recommend that you don’t do that. Just really quick, I am not a sales tax expert, I am a cannabis tax expert. I know about just this much about sales tax just enough to be dangerous, or maybe potentially stupid. But the sales taxes are imposed on the retail sale and there is an exemption out there, it was mentioned, for medicinal sales to a patient that holds one of those state our county issued medical marijuana identification cards, they’re exempt from the sales and use tax. And to qualify for that, the retailer needs to collect that nine-digit number. They don’t need to collect any other identifying information for the patient, because then you run into like HIPAA issues. But they do need at least that nine-digit ID number and the expiration date of that card, and then you can, on your sales and use tax return, you can take an exemption for your sales for that. And just be aware that when you calculate the sale tax amount, that the 15% excise tax is to be included in your calculation of sales tax. So when you calculate the amount of sales tax due, you have to include in your gross receipts the amount of the 15% excise tax. So some people call that a tax on a tax. But that’s the way Proposition 64 was written. It was included in the initiative.

Panelist — And so, unfortunately, that’s how the taxes break down. We have an incredible… So those are the basic, really high level things that you need to know kind of about the taxes and the collection and who’s required to do what. We have an incredible amount of information on our website. We have a tax guide for cannabis businesses that’s broken down by the business type, so retailers have their own tab, cultivators have their own tab, distributors and so on. And as we learn more information, ’cause we’re learning along with everyone else, we’re adding to that constantly, revamping it and adding more examples. And adding new information as we find it out. And as we work with the licensing agencies and kind of how the tax is and the licensing, and maybe some of the activities that you are or are not allowed to do under the licensing, and kind of how that impacts the taxes. So our website is <a href=”http://www.cdtfa.ca.gov" target=”_blank”>www.cdtfa.ca.gov</a>. And down kind of towards the bottom of the page, there’s an industry guide section. And you’ll see tax guide for cannabis businesses. If you click on that, all of that great information is available there. Also on the tax guide, there’s a resources tab. And on that tab it has all of the special notices that we’ve issued, information that we have put out there to specific groups of people. We also have a cannabis listserv that you can sign up for. There’s a link there that says Cannabis Outreach. If you click on that and you give us our email address, anytime we send out information, we send it out to our targeted parties and also through that listserv,

Panelist — so we’re reaching as many people as possible. We also have videos. There’s a video tab on there. We’ve got a short brief video for retailers and one for cultivators and manufacturers that go over pretty much this high level information that I’ve given you today. And then one for the distributors as well. But the key part of that is at the end of the video, there’s also a email address at the end of that video. I believe, don’t quote me, CDTFACannabisHelp <a href=”https://twitter.com/cdtfa" target=”_blank”>@cdtfa</a>.ca.gov. And if you email that, send in an email through that link, then we’ll respond. We’ll answer your questions in writing. We also have another link on that resource tab that says Get it in Writing. The great thing about tax advice is if you’re a business owner and you have a question and you want to know how a tax applies to your particular situation or a certain kind of transaction and you write into us and you tell us the facts of that situation or that transaction, or you ask us about the taxability of something and we respond to you in writing, that can later can be used for relief of penalty or, you know, if someone comes in and audits you and asks you questions. And you say, “Hey, wait a minute, I wrote you guys in “and I asked you about this. “And this is what you told me.” it can serve as protection for you. So anytime you have any tax questions and you want to know how something applies to you, definitely write us. We answer cannabis tax questions all day long. It’s been a very busy few months for us. A lot of people have a lot of questions. It’s really complex. A lot of great questions. And we’ll get to your questions,

Panelist — but I will say, you guys already had some pretty tough questions that Patrick tried to defer to me. And I will, I will say that we are still working on a lot of issues. So I may not be able to give you an answer today. But, again, if you email in that, get it in writing, your questions, specifically about the, I can say off the top of my head, the excess tax collection, question by a retailer is something that I’m probably going to have to defer. It is something that I’m working right now with my legal department on. The tax law can be tricky in analyzing it and seeing how the repercussions are. So I can’t necessarily answer that question, but, like I said, do write us and ask us the question. That gives me even more fuel to work with my legal department to get a solid answer on those issues. They’re real, they’re out there, people are asking. What am I supposed to tell them? The other question was about medicinal giveaways. And how the sale, and, again, I already qualified that I am not a sales tax expert, that’s another question that I would prefer that you write in and ask the question. And then I can work to get a good answer for you. I would hate to misinform anybody in this forum about anything. So with that, I think I covered the highlights. Anybody got any questions?

Panelist — I just want to you had the email right CDTFACannabisHelp@cdtfa.ca.gov. Alright. Yay, thanks. We are aware, of course, that banking is an issue. And so if you don’t have a bank account then you wouldn’t be able to pay us… You wouldn’t be able to pay us electronically and you would qualify for the cash exemption. Filling out a form and turning it in. Yes? The cultivation tax doesn’t apply to anything that was transferred or sold from a cultivator prior to January 1, 2018. So as your manufacturing that cannabis that you acquired prior to then into a product and you transfer that product on to the distributor for the testing, the distributor is going to want some kind of statement from you that you don’t have any cultivation tax to pass along, because the cannabis that you used to manufacturer that product was acquired prior to January 1. And that information is on our website. Yes.

Panelist — Thank you. Just to that we have both . Correct. You had a question?

Panelist — I did. Speaking now about cannabis and compassion program, it’s my understanding that all the taxes throughout the products that would be distributed through a compassion program would be pretty medicine to patients. Would it be put through the entire system, taxed through the system and delivered as a pre-packed product. At the time of that delivery, the cost of those taxes, in order for those taxes to be refuted, that would be part of the state ballot initiative where two-thirds would be voted to bill. You know more than I do. Okay. you said you weren’t a sales tax specialist, .

Panelist — Right. So I know . Email us in. It’s a great way to get an answer to that question.

Panelist — So the industry was built on getting cannabis . Anybody else? So I’m a little curious, just . I’m curious if there’s any with like collecting input , because obviously .

Panelist — Honestly, I don’t work on the cash policy. I do know that our administration is working on it. Prior to the separation from the Board of Equalization, before we became the CDTFA, there was I think like a hard no-cash policy, where we were not collecting cash. We have worked to change that and we now are accepting cash, ’cause of course we want people to be able to pay their taxes. And you don’t want to punish people for not paying taxes when they don’t even have the ability to do so. But as far as that high level cannabis banking advisory that’s being done, I believe, by the state controller, I believe some of the board members are working on that and are heavily involved in that. We are working with other state agencies to potentially collect their cash as well. And then there’s the mandate that there be like a central, I believe, a central location up in Humboldt County or somewhere like that that the state agencies all cooperate to collect cash there as well. So we’re working within our means. And we are trying our best to offer options and have a resolution for that problem as best we can without overstepping any federal rules to say. Yes?

Panelist — Chelsea said and she’s saying she had clients that and I was thinking well, . And then it occurred to me she meant extra. And I thought we just went down to state training and they had there. And it was my understanding we didn’t have an option. Like that was going to be the track and trace reporting application. And we then couldn’t even use it until we received our current license so . I’m wondering is that true? Are there other applications besides track and trace. And when we finally activate that track and trace button on , is that going to be . No, so, you mind if I pick up on this?

Panelist — Yes, ’cause that is outside my purview. The state mandated control is opening the eye for record track and trace . And that means that any in state can apply to be the , get access to the member and So do a lot of the functionality that you need to be in metric by means of a third-party vendor or . And so in this case that would be, you’re still handling your inventory, you’re cracking your sales, all of this kind of data to a third-party system like Meadow. But then that would have to be pushed to the Metric system. And you have to . I mean, what exact form is that going to happen? we prefer. Or is it going to be something that happens the end of each day? Stay tuned, we’ll find out sooner, I hope.

Panelist — Yes. I don’t want to get rid of that . So that’s a good point. There is mandatory EFT requirement for any businesses who have a tax liability. Under sales and and use tax it’s $10,000 and under the fee collection procedure law, which is what the cannabis taxes are administered under, it’s $20,000. And currently we don’t have the mechanism. There was a bill for sales and use tax to exempt medical dispensaries from that EFT requirement. But now that we have many cannabis businesses from cultivation all the way through to retail, that exemption was, from the EFT requirement,

Panelist — was very specific. So, as he said, there is a bill out there to release cannabis businesses who have that no-cash policy exemption automatically from the EFT requirement, ’cause what happens is if you’re required to pay by EFT, and you don’t pay by EFT, then you automatically incur a 10% penalty for paying us in a means other than electronically. But you can always file for relief of penalty and we will grant it. But it just makes for extra paperwork on your side and extra paperwork on our side. And so we are supportive of that bill. Anybody have more questions? Alright, thank you so much.