The Role of Kovel Accountants in California’s Regulated Cannabis Industry

Press Release (ePRNews.com) - Oakland, CA - Nov 24, 2018 - We are rapidly approaching the close of 2018 and the first birthday of a regulated medical and adult-use cannabis industry in California

The transformation from a lightly regulated medical cannabis industry to a highly regulated medical and adult-use commercial market[1] has been plagued by fits and starts as the regulatory agencies struggle to create a workable structure[2]. The highlights for us relating to this transition have included:

Concluding that cannabis cultivation in California constitutes agricultural activity [“farming”] for Federal and California income tax purposes.[3]

Seeking to ease the difficulties of California’s cannabis industry regulators by raising questions and suggesting answers to financial and taxation issues created by the difficulty of imposing regulation on a very substantial and well-established underground industry as is demonstrated by actions taken throughout California to address the licensing backlog, including the legislative fix of “provisional licensing”.[4]

Writing about the painful transition to mandatory testing of cannabis products which are sold through the legal cannabis supply chain in California and the destruction of the untested product as of last July 1.[5]

Writing about the consequences of litigating in Tax Court without involving the expertise of a certified public accountant with cannabis industry experience.[6] The article by Prof. Bryan Camp, Lesson From The Tax Court: Into The Weeds on COGS highlights the risks.

California’s cannabis industry has long focused on the unfairness of IRC Section 280E to the cannabis industry. The vast majority of the tax cases involving cannabis have been income tax cases involving IRC Section 280E. Beginning in 2019 the focus of tax controversies in California will change for at least four reasons.

First, income tax dollars at play in California’s cannabis industry are dwarfed by the CCT, CET, and Sales tax dollars at play in the industry.

Second, California’s tax collections are lagging behind projections.

Third, CCT and CET were brought into California’s legal landscape with little if any thought with respect to tax administration.

Fourth, California underwent a massive reorganization its administration of all taxes concurrently with the regulation of its medical and adult-use cannabis industry and CCT and CET are in a sense the over-looked stepchild in CDTFA.