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Tax protest one of many efforts to address cultivation increase

December 2, 21021 — Tax revolts have a storied place in American history, going back to the Boston Tea Party, when the Sons of Liberty set off a revolution by destroying an entire shipment of British tea to protest taxation without representation.

More recently, Flow Cannabis Company co-founders Michael Steinmetz and Flavia Cassani invited California cannabis businesses to join them in withholding cultivation taxes until they see real, actionable change, presumably in California’s cannabis tax structure. In a recent article in Medium, they declared that they would recommend to their board that, instead of paying the tax, they place the estimated amount in an escrow account until the change takes place.

Steinmetz did not respond to an email or a phone call asking him to comment for this story, though he did speak with the Sacramento Bee shortly after the editorial appeared.

The California Department of Tax and Fee Administration recently announced that taxes on flower, leaves, and fresh cannabis per ounce will go up next month, due to inflation.

All three taxes rest squarely on licensed cultivators.

And so does the risk in the strategy of withholding the tax, according to Omar Figueroa, a longtime cannabis attorney in Sonoma County.

“Cultivators are required to pay the cultivation tax when they transfer the cannabis to distribution companies like Flow Kana,” he explained. “So if the distributor does not pass those taxes along to the state (because the distribution companies are supposed to be surrogate tax collectors for the state), if they fail to do their duty, they are putting the cultivators at risk. So cultivators would be wise to make sure that they get receipts showing that they remitted the taxes to the distribution companies, so that they can clear themselves from liability.”

There can be severe consequences for failing to pay the cannabis cultivation tax. Under the revenue and taxation code, any licensee who does not pay their taxes is subject to a penalty of half the amount owed, plus the taxes they owe, and could lose their license. “I don’t know who gives them legal advice,” Figueroa added; “but there’s no provision that says if you put the taxes not paid into an escrow account, you don’t have to pay penalties and you don’t get revoked. There’s no such provision in the law.”

Local cannabis policy and trade associations are sticking to old-fashioned advocacy and organizing to address the cannabis tax structure.The Origins Council is a non-profit education, research and policy advocacy group that partners with cannabis trade associations, including the Mendocino Cannabis Alliance, all over the state. Executive Director Genine Coleman says there is a robust conversation about the tax structure in Sacramento, and she’s optimistic about the next few months.

And Michael Katz, the Executive Director of the Mendocino Cannabis Alliance, says the tax increase does come  at a tough time. “This year, even more than last year, there have been challenges in the marketplace due to prices going down (and) substantial oversupply, that didn’t even exist when the previous tax increase was avoided,” he reflected. “The community is really aware of this tax increase and it has really created a lot of frustration.” 

He gets it, but he’s taking a measured approach to change-making. “The full industry understands the frustration,” he went on, before listing the strategies organizations like his are adopting to address the industry’s top priorities: “ And that includes addressing cultivation taxes immediately, expanding market access immediately (and) providing an opportunity for license fallowing, which would enable cultivators to not continue to pay and operate their cannabis businesses and pay on their licenses, but be able to continue working toward full compliance in such a way that they would not be removed from the program while they’re taking a pause on their cultivation or businesses practices,” he summarized. “And, again, things like normalizing cannabis cultivation as agriculture, which would create parity for cannabis farmers and other farmers, and provide more protections and support just on a fundamental business level. So how do we really approach these issues, with the goal in mind of creating actual change that’s going to benefit folks without having unintended  negative consequences that may hurt these people who are already burdened by this system?”

As for Figueroa, he respects those who resist a system they view as unjust. But he doesn’t think Flow Cannabis Company is in the same league as the great conscientious objectors. “My mentor Tony Serra was a tax protestor, and went to federal prison three times for refusing to pay war taxes,” he said. “But I don’t think that’s the same situation. Here we have a profit-seeking entity, Flow Kana, that’s all about making money. They’re not objecting to the taxes being used for militaristic purposes. Their objection is that they’re not able to profit enough.”

He does agree that the cannabis industry is overtaxed, which he thinks is counter to the language and the intent of Prop 64. He plans to flesh out an idea to create a tax credit that would cancel out the cultivation tax, at this month’s Emerald Cup at the Sonoma County fairgrounds in Santa Rosa.

 
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