How To Handle Losses Due to Theft To Reduce California Cannabis Taxes and Sales & Use Tax
With the recent wave of break-ins and robberies to local dispensaries in particular, cannabis business should not overlook this opportunity to save taxes.
Cannabis Excise Tax for Cannabis Retailers
As a cannabis retailer, you are required to pay the cannabis excise tax (15%) to your distributor based on the average market price of the cannabis or the cannabis products sold or transferred to you. However, if you already paid the cannabis excise tax to your distributor and the associated cannabis or cannabis products were subsequently stolen from you, you may request a refund of the tax from your distributor, and provide your distributor with documentation substantiating the theft. Examples of documentation include, but are not limited to, police reports, insurance claims, etc. (see additional information below). When a refund is issued to you, your distributor is required to provide you with a receipt that indicates the amount of cannabis excise tax refunded.
Cannabis Excise Tax for Distributors
As a distributor, you are required to collect the cannabis excise tax from cannabis retailers that you supply with cannabis or cannabis products. The cannabis excise tax does not apply to cannabis or cannabis products that you sell or transfer to a cannabis retailer that is subsequently stolen from the retailer. When a theft of cannabis or cannabis products from a retailer occurs, and the cannabis excise tax was already paid to you, the retailer can request a refund from you for the cannabis excise tax paid to you. For your records, and for any claim for refund you may file, you should obtain documentation from the cannabis retailer that supports the theft. You are required to provide the cannabis retailer with a receipt or similar documentation that indicates the amount of the cannabis excise tax returned to the retailer.
For cannabis excise tax that you already reported and paid to the California Department of Tax and Fee Administration (CDTFA), and subsequently returned to the cannabis retailer due to theft, you may report the amount returned on your next cannabis tax return, on the line labeled “Less excess excise tax collected, if any”. Alternatively, you may submit a CDTFA-101, Claim for Refund, for the excess cannabis excise tax you paid to the CDTFA and later returned to the cannabis retailer. You will need to provide the supporting documentation of the loss that the retailer provided to you.
Cultivation Tax for Distributors
The cultivation tax is due on cannabis that enters the commercial market (that is, it passes the required testing and quality assurance review) even if the cannabis is subsequently lost due to theft. However, the cultivation tax is not due on cannabis stolen before the cannabis entered the commercial market. If you collected the cultivation tax on cannabis that never entered the commercial market, you are required to return the cultivation tax to the originating cultivator. If the cultivation tax cannot be returned to the cultivator, you must report and pay the cultivation tax to the CDTFA.
Sales and Use Tax
You are required to pay sales tax on all taxable sales despite the theft of cash. Losses of merchandise due to theft are not deductible for sales and use tax purposes (as no sale occurred). However, since the loss of merchandise from theft may affect your cost of goods sold, you should maintain documentation in case of an audit.
Proper documentation must be kept to support any losses due to theft. Acceptable forms of documentation for sales and use tax, cannabis excise tax, and cultivation tax may include police reports, insurance claims, and/or reports from private investigating agencies. Cannabis inventory losses should be recorded in the California Cannabis Track-and-Trace (CCTT) system.
No Relief For Losses Due To Theft Of Cash
Although the CDTFA is allowing for reimbursements to Distributors for refunds to retailers and operators related to stolen cannabis products, the CDTFA has specifically stated that there is no exemption or deduction of the cannabis excise tax for the loss of proceeds due to theft of cash. Arguably, under certain circumstances such theft loss should still be available to take for Federal & State income taxes.
What Should You Do?
Start your marijuana business on the right track. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.