With California’s passage of the Medical Marijuana Regulation and Safety Act (MMRSA) earlier this month has come an influx of calls to our cannabis licensing lawyers from California medical marijuana operators looking to secure “priority” licensing status. Recall that AB 266, at Article 4, Section 19321, states that:

California cannabis laws
California Medical Marijuana Licensing (http://bit.ly/1Ny8kiI)

“In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.”

Last week, we gave an overview of how to get priority licensing in California, and in a forthcoming series of posts, we will delve into some of the more specific issues we anticipate marijuana entities will face as they work to get their affairs in order to comply with the new law. First up in the series is the issue of state and local taxes and how they’ll likely play into the priority licensing status.

The MMRSA, as expected, gives little guidance to MMJ operators looking to establish priority before the January 1, 2016 deadline. The terms “satisfaction,” and “in operation,” and “in good standing with the local jurisdiction” contained in Article 4, Section 19321, will undoubtedly be defined in greater detail by the state regulatory agencies now tasked with rule making. However, a lack of final regulations does not prevent us from predicting, based on our extensive experience with these types of licensing applications in other jurisdictions, what the specific requirements will be. And we anticipate that state and local taxes will be a piece of the puzzle as they will operate as gating mechanisms for applicants.

Washington, for example, recently began accepting retail license applications again, and is assigning “priority” to certain existing medical marijuana cooperatives and collective gardens. Among those priority criteria is the requirement that the applicant “have had a history of paying all applicable state taxes and fees since January 1, 2013.” In order to prove this, applicants must submit a tax status letter from the Department of Revenue (DOR) indicating that their entity is up to date on all state taxes. Applicants can also satisfy the requirement by proving they have an agreed payment plan in place with the Washington State Liquor and Cannabis Board and the DOR.

While to most non-cannabis business owners these requirements seem like a no-brainer, in the context of a loosely regulated medical marijuana industry, these standards can be problematic. Like California, Washington’s medical marijuana industry, prior to the passage of Initiative 502, allowed for the creation of collective gardens and other nebulous non-profit entities. Medical marijuana businesses lived in a legal grey area, to say the least. These entities were often hard-pressed to find competent business, legal and accounting advice, and were frequently told different things by different advisers. Many medical marijuana entities were explicitly told, by both lawyers and accountants, not to pay taxes and now that advice has unfortunately come back to bite them.

In California, the Board of Equalization (BOE) has issued multiple notices over the years to distributors of medical marijuana. One such notice begins by stating, “[i]f you sell medical marijuana, your sales in California are subject to tax and you are required to hold a seller’s permit.” Individuals and entities that makes sales without a seller’s permit are generally subject to an eight-year-look-back period. Failure to pay state taxes on cannabis “sales” will not only subject your business to penalties and interest charges, it may preclude you from obtaining priority status under the new licensing regime.

The take away here is this: any advice indicating that cannabis businesses or even non-profits are not subject to state and federal taxation is flat out wrong, and we anticipate payment of state taxes to be a component of the priority licensing criteria developed pursuant to the MMRSA.

If your business has an outstanding tax liability, speak with an accountant and/or a tax attorney and do it fast if you’re shooting for priority in 2018. The BOE offers installment payment agreements to reduce payment amounts and has an Offer in Compromise Program wherein the BOE will sometimes accept payment of a lesser amount to satisfy a tax liability. Cleaning up tax issues can take a significant amount of time, making it critical for cannabis operators in California to assess their own situation as soon as possible to meet the January 1, 2016 priority deadline.