Licensed cannabis businesses in Santa Ana, Los Angeles raided over unpaid taxes – Orange County Register
Two California Highway Patrol vehicles and half a dozen unmarked vehicles blocked the parking lot of Super Clinik, a licensed cannabis store in Santa Ana, just after the store opened at 8 a.m. on March 18.
As an agent from the California Department of Tax and Expenses looked on, several CHP officers went inside, counted some six-inch-tall stacks of cash, and took them from the store. Birch Street, according to witness reports and photos from the scene. .
Super Clinik owners did not respond to multiple requests to speak for this story, while state tax authorities said privacy laws prevent them from discussing specific cases. But experts said the operation at the Santa Ana store had all the hallmarks of a “tap-to-the-tap” civil warrant, which the tax agency uses to seize money from businesses that failed to pay the bills. sales tax bills despite intensified warnings.
This is the second such transaction reported at a long-running licensed cannabis store in Southern California in the past month. In early March, a store called TLC in Boyle Heights, owned by well-known industry veterans Jungle Boys, was also raided by CDTFA and CHP. The company posted video of the incident on its Instagram page, saying officers arrived with guns and removed more than $100,000 from their cash registers after paying $18 million in taxes. 2021.
“It triggers all of us because it was happening regularly,” said Dana Cisneros, an attorney who has worked with cannabis companies for 15 years.
For decades, law enforcement raided pot shops in California, arresting people on the spot and seizing goods as businesses operated in the gray space created by loose medical marijuana laws. . But with recreational cannabis use legal in California since 2016, and the state giving some leeway to members of the fledgling industry, raids on licensed stores have been rare in recent years.
Now, recent reports of tax raids have industry insiders wondering if state authorities are entering a tougher enforcement phase when it comes to dealing with licensed operators.
Such an escalation was inevitable on the one hand, as the industry matured. But there is also evidence that while most cannabis companies pay their tax bills on time, the industry is somewhat less likely than others to do so.
The state reports that 99% of all California businesses pay their sales tax on time each quarter, but the on-time payment rate for the cannabis industry is around 90%. And with nearly $309 million in tax revenue collected from cannabis businesses in the last quarter of 2021, and nearly $3.5 billion collected since the taxes took effect in January 2018, that rate of Default means cannabis companies owed the state more than $11 million in outstanding taxes. at the end of last year.
Add to that another factor – some licensed cannabis operators continue to work in the unlicensed sector of the industry.
Rob Taft, owner of 420 Central in Santa Ana, said he had long predicted that California and other governments would eventually use tax enforcement to target potential bad actors in the cannabis industry, from the same way mobster Al Capone was eventually arrested for tax evasion. In that case, rather than giving companies wiggle room, Taft and others suggest the state might have given cannabis operators just enough rope to hang themselves.
“We’ve pretty much hammered home (our clients) that the scariest boogeyman in enforcement is the taxman,” said Los Angeles cannabis industry attorney Hilary Bricken.
Taft and others in the industry have said they don’t support anyone who doesn’t pay their taxes. But they also say there couldn’t be a worse time for the state to start targeting licensed companies so aggressively.
According to a January report from Portland-based data firm Whitney Economics, only 26% of cannabis businesses in California are making a profit. This is well below the national average of 42%. Among the 17% of operators who only break even and the 56% who lose money, some speak anecdotally of leaving California or returning to the illicit market where many of them have made their debut.
“They’re suffocating us,” Taft said.
Where is the protection?
One of the problems is the continued existence of the underground cannabis market. It is difficult for licensed operators to get started in California, while it is not difficult for illegal operators to stay in business. As a result, most experts estimate that the underground cannabis market is about twice as large as the licensed trade in California.
That makes tax raids on licensed businesses — by state agents who, in theory, could weed out illegal operators — especially frustrating, Cisneros said.
“I’m not saying anyone shouldn’t pay their taxes,” she said. “But where are law enforcement to protect people who follow the law, or at least try?”
The state cannabis control department was reluctant in the early years of legalization to take aggressive action even against unlicensed cannabis businesses. Executives said they wanted to use a ‘carrot’ rather than a ‘stick’ approach in hopes of bringing more illicit traders into the regulated market.
While some licensed operators have been frustrated with this approach, Bricken said she is concerned about the chilling effect the CDTFA’s aggressive raids will have on efforts to convert more businesses.
“People in the illegal market will see that and that’s another reason to say, ‘Why would I ever transition? “”
The second main factor licensed companies say is holding the industry back is the same thing that triggered the recent raids: taxes.
Vendors have signaled the need for relief from industry taxes that can easily reach rates of 45%, increasing the cost consumers pay for safe and regulated products and creating a window for unlicensed operators to seize market shares. In Sacramento, some lawmakers are pushing for cannabis tax relief, but most industry players aren’t convinced they will pass.
So in recent months, some licensed operators have threatened to withhold their tax payments from the state and put that money in escrow accounts to prove a point. But there is no evidence that licensed companies acted on this threat, or that any of the recent CDTFA raids had any connection to such an effort.
In the case of Jungle Boys, the company reports that it appealed $60,000 in penalties and interest that CDTFA says it owes on a $130,000 tax bill. While that appeal was still ongoing, the company says the agency came and collected more than it should have.
“CDTFA is coming out strong,” Bricken said. “And they’re the perfect agency to do that because they’re almost untouchable.”
Asked about cash transactions, agency spokeswoman Tamma Adamek pointed to a document that explains that these civil warrants (which are usually executed with the help of the CHP or local police) are only issued after that verbal and written collection requests have been unsuccessful.
The policy states that CDTFA may also collect funds beyond the delinquent tax fee to cover the cost of running the cash tap.
That’s why Bricken said she always advises her clients to prepay any taxes the state says they owe, and then appeal to recover the funds that are rightfully theirs.
When businesses are upset by the CDTFA, she said she expects the agency to share that information with the IRS, which can draw federal attention. Raid reports can also damage relationships with customers, suppliers and financiers, which are already hard to come by in an industry that is still considered high risk.
“They’re looking to make examples of people,” Bricken said. “And the larger the target, the more influential the message.”
The CDTFA does not specifically target cannabis companies, Adamek said. But until faucets, she explained, worked better with cash-intensive businesses such as bars, gas stations and cannabis stores. While other industries have a lot of money for different reasons, cannabis operators depend on the money because their product is illegal under federal law and they may have trouble accessing regulated banks. federal.
Rather than risk such drastic action by refusing to pay the tax bills, Taft said he encourages licensed businesses to be “good operators” and protest California’s high cannabis taxes by joining organized efforts to lower rates. He is one of a group of licensed business owners who recently filed a petition, for example, asking Santa Ana to reduce its local cannabis tax from 8% to 4%.
“The government won’t do it for us,” he said. “We have to be the pushers.”