Recently, numerous clients have come to us about issues with cannabis payment plans and the California Department of Tax and Fee Administration (“CDTFA“). Recall, there was a time in California (not that long ago) where certain cannabis companies threatened to just not pay their taxes because they believed the tax rate was too high.
In recent months, California enacted some tax reform that provides a modicum of relief to cultivators (it really just shifts the tax burden predominantly to retailers while eliminating the cultivation tax), but that hasn’t been enough to help cannabis businesses fend off an overall inability to timely and fully pay all cannabis and excise taxes. What’s happening then is that cannabis businesses are finding themselves faced with the prospect of trying to get on payment plans with CDTFA for the balance owed, which includes interest and penalties. If you’re flirting with getting on a CDTFA cannabis payment plan (because, I can assure you, just not paying your taxes will not work), here’s what you need to know:
- CDTFA is not cutting any sweetheart deals with cannabis businesses. Quite the opposite. CDTFA is following established law and policy when taxes go unpaid. Cannabis isn’t getting special treatment because the industry believes the taxes to be unfair or still too high.
- Cannabis businesses should be checking their CDTFA online tax payer portals regularly. CDTFA typically sends all of its notices and correspondences through that portal and, as a result, important things can be missed.
- CDTFA generally wants eligible cannabis businesses that are behind on taxes to get on payment plans. The state would rather get paid slowly over time than not at all. Taxpayers are always free to request these payment plans if they cannot pay.
- CDTFA can enter into a payment plan with a cannabis business for up to 12 months without any other Department evaluation. If payments go beyond 12 months, CDTFA will want to see certain financial information about the business to determine its overall ability to pay and to ensure that the company isn’t hiding assets. That information includes, but is not limited, to:
- Profit and loss statements
- Largest current accounts receivables, including their addresses, phone numbers, and amounts due
- List of largest customers, including their addresses and phone numbers
- Business merchant account (credit card payment processing) statements for the past three months
- Evidence of a loan in process or denial letter
- Statement of Officers (including a statement as to which officer(s) can make financial decisions)
- Schedule of Officer Compensation (for example, wages, commissions, bonuses, dividends, etc.)
- Depreciation schedule
- A copy of an issued invoice for a taxable transaction
- Cash flow statements from certain years
- CDTFA will ask you what you can offer for a payment plan. If that offer means that you’re paying CDTFA beyond 12 months, then it will want the foregoing information. Note that even if you get on a payment plan, interest on the outstanding balance will continue to accrue.
- Once you commit to a payment plan, which will be confirmed in writing by CDTFA, you better stay true to that plan and make timely payments. You must also stay current and up-to-date on current taxes owed.
- If you’re late on a payment or don’t make a payment under the plan or if you fail to pay current taxes, CDTFA will cancel the plan after a 15-day notice period.
- After plan cancellation, CDTFA will take steps to place liens on the business and will also explore filing collections and enforcement actions (including levies of personal and real property owned by the tax payer) after that to try to collect the balance.
- You can request to get back on a payment plan with CDTFA, but once those liens have been placed, they’re likely not coming off unless and until the full balance is paid.
- Only once all outstanding tax and interest has been paid will CDTFA potentially entertain a waiver of penalties. A waiver of penalties will not happen before the tax and interest is paid off. And the tax payer is the one to apply for the waiver, and there’s no guarantee that the penalties will indeed be waived. Per CDTFA, “The CDTFA may grant relief from penalty charges if it is determined that you failed to timely file or pay, or failed to pay using the correct payment method, due to reasonable cause and circumstances beyond your control. Your request may not be processed until the tax/fee has been paid in full. If you are relieved of the penalty charges, you must still pay the interest due on late return payments and prepayments.”
There’s very little room to negotiate with CDTFA on payment plans (unless you qualify for the Offer in Compromise Program, which many cannabis businesses won’t unless they’re headed out of business). CDTFA is not going to reduce the tax or interest owed when it comes to a payment plan. The one place where there’s maybe some back and forth is on the offer amount for a payment plan, and even then the CDTFA just slots that number into months payable and asks for financial information to back it up.
If you’re behind on your cannabis taxes and have a balance due, probably the worst thing you can do for your business is to delay talking to CDTFA to get on a payment plan. The liabilities will only continue to pile up as a result, including interest, penalties, liens, and levies, and CDTFA is also free to share certain tax payer information with other government agencies, like the Internal Revenue Service.
The moral of the story? If you’re in dire straits with your cannabis and/or excise taxes, be transparent with CDTFA, try to get on a payment plan ASAP, and keep on paying.