California Now Allowing Free Cannabis To Qualified Medicinal Patients.
The Bureau Of Cannabis Control has confirmed that beginning March 1, 2020, cannabis retailers may provide free cannabis or cannabis products to qualified medicinal patients or their primary caregivers. This change is due to the adoption of Senate Bill 34, which also exempts these donated items from excise, sales and use, and cultivation taxes. Licensed cultivators, manufacturers, distributors, retailers or microbusinesses may designate cannabis or cannabis products that they hold in their inventory for donation. Items designated for donation may only be provided to a medicinal patient or primary caregiver through a licensed retailer.
Key Requirements for Donations:
Cannabis and cannabis products designated for donation must comply with all requirements outlined in the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) and the state cannabis regulations. This includes, but is not limited to:
Donated cannabis and cannabis products must move through the licensed supply chain in the same way as cannabis and cannabis products for sale and meet all applicable requirements for cultivation, manufacturing, distribution, laboratory testing, packaging and labeling, etc.;
Cannabis and cannabis products that do not pass the required regulatory compliance testing cannot be donated; and
Only licensees authorized for retail activity, or nonprofits working in conjunction with those licensed retailers, may provide donated product directly to qualified medicinal consumers.
Licensees designating an item for donation are required to record that designation in Track-and-Trace and on invoices and sales receipts. Licensees cannot change the donation designation made by another licensee or after the donated item has been transported to another licensee. Any licensee that changes a donation designation will be liable for sales and use taxes on the items and may be subject to disciplinary action. Manufacturers producing cannabis products for donation must include the statement “FOR MEDICINAL USE ONLY” on the label.
Special Requirements for Retailers:
Donated items may only be provided to medicinal cannabis patients, or primary caregivers, with a valid recommendation or medical marijuana identification card under Section 11362.7 of the Health and Safety Code.
Before providing free cannabis goods to a medicinal patient that does not possess a valid identification card, a retailer must:
Verify with the Medical Board of California, the Osteopathic Medical Board of California, and the California Board of Podiatric Medicine that the attending physician providing the patient’s medicinal cannabis recommendation has a license in good standing to practice medicine or osteopathy in the state of California;
Keep a copy of the patient’s or primary caregiver’s driver license or other government issued identification; and
Prepare a written certification that the retailer verified the physician’s recommendation as required.
A licensee authorized to engage in retail sales only through delivery may provide free cannabis goods only by delivery. A licensee authorized to engage in retail sales on a licensed premises open to the public may contract with an individual or organization to coordinate the provision of free cannabis goods on the licensee’s retail premises. A license may be held responsible for violations of applicable statutory and regulatory requirements by the individual or organization with whom the licensee has contracted pursuant to this subsection.
The donated cannabis and cannabis products provided to a medicinal cannabis patient or the patient’s primary caregiver shall be applied toward the daily purchase limit for a medicinal cannabis customer contained in section 5409 of the Bureau Of Cannabis Control regulations and the possession limits contained in Section 11362.77 of the Health and Safety Code.
Designating Packages for Donation in Track-and-Trace:
All items intended for donation must be marked as such in Track-and-Trace. A bulletin with step-by-step instructions for designating new or existing packages of cannabis, cannabis products, and immature plants and for entering retail donations these items has been posted in the California Cannabis Track-and-Trace system. Licensees can log into their Metrc account and find this bulletin under the Messages tab (appears as an envelope in the top left corner).
This State Development Does Not Impact The Application Of Federal Law
Even though 33 states have legalized cannabis for medical or adult use, banks and financial institutions are hesitant to provide services to cannabis businesses because federal law still classifies cannabis as an illegal Schedule 1 drug under the Controlled Substances Act.
Higher Federal Taxes Still Remain
While the development listed above is favorable for California cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.
Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.
Federal Reporting Of Cash Payments Still Remain
The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.
Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.
How Do You Know Which Cannabis Tax Attorney Is Best For You?
Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government. While cannabis is legal in California, that is not enough to protect you. It’s coming down that the biggest risk is TAXES. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.