The California cannabis industry is increasingly underwater with its tax bills to the state, and it appears that the primary tax authority wants to ensure more effective collections.

According to the California Department of Tax and Fee Administration, the state industry’s total outstanding tax tab neared $1.3 billion as of Oct. 31. The figure represents “the total accounts receivable for cannabis excise tax and sales and use tax accounts for known cannabis sellers,” including all unpaid taxes, penalties and interest, the agency wrote in an email to Green Market Report.

Taxes, interest and penalties from audits alone make up $727.7 million of that, the agency wrote, dating back to 2018. Another $354.4 million in reported but unpaid excise, sales and use taxes are also part of the total.

That’s up from an outstanding balance of roughly $287 million in February. It’s also up from the estimated $732 million calculated by GreenWave Advisors in April, of which 72% was owed by  companies that were already out of business.

No easy answers

The ballooning tax bill could explain why scores of licensed California cannabis dispensaries in the Los Angeles area recently received notices from the CDTFA stating that their mandatory tax payment schedule will change from quarterly to monthly, which has caused some alarm, according to industry sources.

However, operators can contact the CDTFA by Dec. 1 to request their payment plans stay the same, the agency said.

Dispensary owners began receiving the “Notice of Change in Reporting Basis” letters around Nov. 1, according to Jerred Kiloh, owner of The Higher Path in L.A. and president of the United Cannabis Business Association.

One such notice, shared with Green Market Report, states, “The average tax liability you report is at a level that will change your reporting basis. As a result, your reporting basis is changing from quarterly to monthly, effective January 1, 2025.”

CDTFA Notice of change 11.7.24_Redacted

“My members are worried that they have to pay this new reporting requirement,” Kiloh said. “We’re using that to buy products and sell them to float our debt.”

One member’s reaction was to simply declare that he’d close up shop in January if he was going to be required to remit taxes every month.

“That is how slim the margins are in this industry, that we’re utilizing floated tax dollars to buy products to put on our shelves to sell so we can afford to pay the taxes,” Kiloh said.

Kiloh said he tried calling the CDTFA to request that The Higher Path remain with quarterly payments, but the staffer he spoke to was unaware of the notices.

“I had to go through three different departments to finally get to an adjuster, and that adjuster still didn’t know what they were doing. So this is a problem. So even if you call, there’s still no clear path to an answer,” Kiloh said.

Kiloh said Thursday that he’s still awaiting clarification from the agency that he can share with UCBA members to put their minds at ease.

Business as usual?

CDTFA clarified to Green Market Report that there’s been no change in policy as far as marijuana tax collections from retailers and said notices were only sent to “affected taxpayers.”

“CDTFA’s general guidelines for changes to filing frequency can be found in our Compliance Policy and Procedures Manual,” the agency wrote in an emailed statement. “If taxpayers have questions about their accounts or a letter they received from us, they can contact our customer service center at 1-800-400-7115 or their local CDTFA office.”

Cannabis tax attorney Regina Unegovsky said she can’t say that’s an industry-wide issue, but she’s helped several clients through the process to maintain their quarterly payments.

“In the past, whenever any given business reaches certain reporting volume (i.e. sales) then they get switched from quarterly to monthly,” she said. “It used to mean a good thing – that the business has grown. These days, I get it – it’s so much tougher on compliance time.”

“Long story short, I have been able in the past to have the CDTFA back off on the change for a bit to give the taxpayer time to adjust or back off completely as well,” she wrote.

Kiloh said that he thinks it’s a trigger within the state tax code that led to the confusion. CDTFA has the option to such a switch payment schedules from quarterly to monthly if a business owes the state more than $20,000 a month, and he said The Higher Path and many other dispensaries typically pay far more than that to the state.

But Kiloh faulted the agency for not being clearer in its communication with marijuana companies that are struggling to survive. He said many of UCBA’s members were thankful when he reached out this past week to inform them the switch is apparently something they can opt out of.

“Of those almost 200 emails, 70 of them came back and went, ‘Oh my God, thank you, Jerred. I thought this was going to be like the death blow of us,’” Kiloh said. “So when you look at the amount of people who either didn’t read it, didn’t understand, it felt like this was going to happen.”