California Cannabis Industry Owes State A Quarter Billion Dollars In Taxes

December 9, 2022 · Green Market Report

With penalties and fees, the money owed to the state could top $500 million.

The California cannabis industry as a whole owes the state a quarter billion in unpaid taxes, according to state data and industry experts. With added fees, that total could easily balloon into a $500 million tax tab.

To combat the rising debt trend, collections efforts appear to be ramping up, even against companies that have gone out of business.

As of Dec. 2, the cannabis sector as a whole was carrying $250,410,890 in unpaid sales and cannabis taxes, out of a $4.4 billion total in taxes due, according to data from the California Department of Tax and Fee Administration (CDTFA).

But the amount due from cannabis operators could easily double when penalties and interest are tacked on, said tax attorney Regina Unegovsky.

Tax Debts Mounting

Unegovsky cited an October lien letter from the CDTFA to a Los Angeles retailer, obtained by Green Market Report, that shows San Francisco Bay area cultivator Grizzly Peak owes the state $13.5 million, even though the principal tax balance only totaled $6.8 million.

“When you have a cannabis operation and you don’t pay your taxes, yeah, you can have a 100% net penalty, which may be what you’re seeing here,” Unegovsky said of the Grizzly Peak example – and she said the same could apply to other companies that have unpaid tax bills.

It’s not clear from the data how many or which of the companies in California still owe the CDTFA or how much of the debt may be carried by businesses that are no longer active. As of Dec. 8, there were 6,109 unique businesses licensed by the state Department of Cannabis Control, with a total of 12,213 licenses.

But the industry-wide tax tab will almost certainly keep growing, said Jerred Kiloh, the owner of L.A. cannabis shop The Higher Path, who also serves as president of the United Cannabis Business Association (UCBA).

“That’s just back taxes. Not future taxes,” Kiloh said of the $250 million tab.

With the tax debts added in, the entire debt bubble facing the industry could easily be more than $1 billion, he said.

“The industry now is in a much deeper decline than we’ve ever seen, so you could just double that for the third and fourth quarter of 2022, on the amount of taxes owed,” Kiloh said, referring to the $30 million in unpaid taxes from the third quarter of this year.

“If (the CDTFA has) got that much debt … it’s even more of an indicator of how much worse it is than the debt bubble side of things between licensees,” he said.

Kiloh also said there’s a hidden danger within the tax debt data: If state cannabis tax revenues fall below a certain threshold, it could trigger an excise tax increase for the cannabis industry, boosting the current rate of 15% up to 19%.

That’s a provision that was worked into Assembly Bill 195, which Gov. Gavin Newsom signed earlier this year. The bill eliminated the state cannabis cultivation tax and will shift excise tax collections to retailers from distributors as of January.

“We’re on the hook for higher taxes if we can’t meet a baseline that was never really determined,” Kiloh said. “That’s the issue. We’re having a problem, it’s pretty bad, and it’s getting worse. And if we don’t meet the obligations of AB 195, then the taxes go up, and it gets even worse.”

The Numbers

The unpaid tax amounts date back to January 2018, when the regulated adult-use market launched, and the percentage of taxes collected has trended steadily downwards in that timespan, from 99.8% to 87.7% at the end of the third quarter this year.

For just the third quarter of 2022, the CDTFA reported $30.7 million in unpaid taxes, while $129,664 in uncollected taxes still remains from the first three months of 2018.

The quarterly amount of unpaid taxes first broke the $10 million barrier in the second quarter of 2020,and jumped to more than $20 million in the fourth quarter of that year. The quarterly totals of unpaid taxes have not dipped below $22 million since the first half of 2021.

The percentage of taxes collected stayed above 90% until the most recent quarter, but it has never once hit a full 100% in the nearly five years since the recreational market began sales.

Tamma Adamek, a CDTFA spokeswoman, emphasized that the collection percentages will change as time goes on, because the agency is still pursuing outstanding taxes from the marijuana industry.

“We’re never done collecting. And people are never done paying,” Adamek said. “We get roughly 90% on time, and then we work on the rest of it. … We are confident we’ll get there for all of these other quarters.”

Adamek said the $250 million baseline in taxes owed by the industry comes from “amounts that taxpayers reported to us on their returns and the amounts they paid to us.”

The balance does not include potential penalties, interest, or taxes owed by unlicensed marijuana  companies.

Adamek also said the CDTFA is actively getting marijuana businesses onto payment plans for some hefty tax bills, emphasizing that the agency isn’t trying to run companies into the ground.

“We’re not in the business of shutting down business. We’re in the business of helping them survive and pay what they owe us,” Adamek said.

Collection Efforts Expand

The lien letter sent out by CDTFA regarding the outstanding tax balance for Grizzly Peak is just one example of how both state authorities and private businesses are ramping up collection efforts on unpaid bills.

“It’s not just cannabis. I’ve just seen an enormous uptick in collections … just in the last couple of months,” Unegovsky said, adding that CDTFA has ramped up collections across the board for all industries, and that lien letters are only one method the agency uses.

She said the uptick aligns with the end of a collections pause that the state of California instituted during the COVID-19 pandemic, but now, she said, “It’s back to business as usual.”

Kiloh said other stories have also been circulating, such as CDTFA agents confiscating money from cannabis retailer cash registers, some companies being put into receivership or onto payment plans with the state, and other collection efforts.

Grizzly Peak President Matt Yamashita told Green Market Report previously that his company is cooperating with the CDTFA to identify companies that haven’t paid their tax bills to his distribution wing, which is the primary reason Grizzly Peak is in so deep with the state.

He said Grizzly Peak is on a payment plan with the CDTFA, but he asked the agency for help on collecting cannabis tax monies that retailers owe him.

“I told the CDTFA, here’s a list of people that owe me an exorbitant amount of money that won’t pay me, and can you help me to get my money and your money?” Yamashita said. “So the CDTFA has sent out several letters on our behalf to help us collect the money.”

“We’ve exhausted all of our resources, and we’re using the biggest bullet that we have, which is the CDTFA,” Yamashita said, adding that he’s been chasing retailers to pay bills for months.

Yamashita could not be reached for comment on the state data this week, but he said last month that he’s confident that his company will be able to continue operations, given the payment plan with CDTFA.

Personal Liability for Executives?

Perhaps more concerning for some company owners and executives, Unegovsky said, is the potential that they will be held personally liable for the tax debts incurred by their companies.

A formerly “huge” cultivator that has gone out of business recently contacted her, because the CDTFA is trying to collect about $4 million in taxes the company left unpaid when it shuttered. But the tax agency is targeting the company’s executives through individual tax assessments rather than the corporation, she said.

“They owe the CDTFA $3 million-$4 million. Bankruptcy is not an option because it’s a cannabis operation,” Unegovsky said. “This is a life-ruining amount of money.”

Her client is still trying to figure out how to discharge the debt, and it’s still unclear which of the company’s officers may be found personally liable. It’s also unclear whether any such executives will be able to escape the millions the CDTFA wants by declaring personal bankruptcy, instead of filing for business bankruptcy.

“I told a bunch of people about this, this past week, and you could hear the CFOs, their brains freaking out,” Unegovsky said. “Because whether or not they would all potentially be part of individual assessment, that’s a big question right now.”

Another San Francisco Bay Area attorney, James Anthony, pivoted much of his practice to helping marijuana businesses collect unpaid debts from other private vendors in the supply chain, such as distributors who haven’t been paid by retailers for flower or edibles they delivered.

That adds to the collection frenzy going on across the industry landscape, and it’s created a small boom in collections-related business for his law practice in recent months, Anthony said. It all goes back to the underlying theme that the California cannabis industry has very little – if any – real profit.

“What it comes down to is that it’s inherently not profitable at every level,” Anthony said.

His office has seen an uptick of at least 10 companies a month looking for help collecting unpaid bills, and he’s drafted around a few dozen lawsuits that threaten legal action if the bills aren’t paid, a fairly successful tactic, Anthony said.

“The short-term solution to that is, my office can get you paid by people who have money. If they don’t have money, don’t waste your time suing them,” Anthony said. “Basically, everyone is extending everyone else credit, but that can only stretch so far.”

That all adds up to “cascading failure” within the California cannabis trade, he predicted, and said the CDTFA collections are part of that ongoing development.

“It’s like a line of canoes that are trying to somehow get downstream, and they’re all headed for a waterfall,” Anthony said. “There’s going to be cascading failure, going up the supply chain, as people just run out of cash.” (Full Story)

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