EDD and Sales Tax Audits
The fact that marijuana is still illegal under federal law is not the only reason marijuana-related businesses are audited. Many cannabusinesses pay their employees in cash, don’t carry unemployment or workers’ compensation insurance, and have no computer software to manage their sales transactions. It is no wonder that they have become the primary targets of California Employment Development Department (EDD) and Board of Equalization (BOE) sales and use tax audits.
EDD targeting the cannabis industry
Any business, marijuana-related or otherwise, that underreports its income and/or understates its payroll tax, is likely to become the target of an EDD audit. Take heed that many auditors do not understand all of the changes that have been taking place in cannabusiness operations and often employ audit methods that overstate the business’ tax liability. It is therefore crucial for marijuana business owners to hire competent tax professionals who know the industry and are actively involved in the audit process – this is the best way of ensuring that the auditor understands the business and makes the proper adjustments.
BOE sales and use tax audits
With the passage of Proposition 64 in November of 2016, the 7.5 percent sales and use tax was repealed for certain sales of medical marijuana and was replaced with a 15 percent excise tax on all sales of medical and recreational marijuana. However, the excise tax will not take effect until January of 2018, making sales of medical marijuana tax free through the end of 2017. When recreational marijuana sales commence in January, they will be subject to the 7.5 percent sales tax plus the 15 percent excise tax.
The new excise tax will also apply to all marijuana products. Additionally, there will be a tax on cultivators that will be assessed at $9.25 per dry-weight ounce of the flowers and $2.75 per dry-weight ounce of the leaves.
The BOE imposes a penalty of up to 10 percent for failure to file a sales and use tax return and pay the tax, and an additional 25 percent if the failure is due to fraud or any intent to evade the law or regulations. The changes being implemented as a result of Proposition 64 have already led to a great deal of confusion in the area of sales tax and it is crucial that businesses utilize the service of a highly experienced tax law firm in the case of an audit.
Full service San Francisco tax firm
The full service tax firm of Moskowitz, LLP is committed to helping ensure the fair tax treatment of marijuana-related businesses. Our accountants routinely prepare and file tax returns for cannabusinesses, and our tax attorneys have successfully defended many marijuana businesses in their EDD and BOE audits.
Disclaimer: Growing, cultivating and distributing marijuana are violations of federal law under the Controlled Substances Act, Title 21, Section 841(a)(1). The tax firm of Moskowitz, LLP can assist you in adhering to state and local law and regulations, and advise you how to conduct your operations in a way that will minimize your risk of federal prosecution. However, we do not intend for our advice to assist you in the violation of any law and in light of the evolving nature of the marijuana industry in the U.S., clients must understand that our legal and tax services can guarantee neither success nor immunity from civil and/or criminal prosecution. In all areas where the legal landscape is constantly changing, we recommend that our clients act with caution, stay abreast of developments in the industry, and consult with us often.