California's shift to legal sales of marijuana for recreational use hits a milestone Monday when the state begins issuing tax permits to marijuana distributors.
State regulators estimate the California market could eventually generate $1 billion in taxes and fees annually. But the industry has resisted handing over its share of profits to the state treasury, and the pressure is on to reduce delinquencies and force scofflaws to pay up. Industry officials and state regulators say a proposed carrot-and-stick approach to taxes may lead to more compliance in the future.
The state is scheduled to begin licensing the growth, distribution, testing and sale of recreational pot starting Jan. 2, as approved by voters last November. But medical marijuana sales have been legal and taxed since voters approved the Compassionate Use Act of 1996.
A 2015 state study estimated that there were close to 3,100 dispensaries selling medical marijuana in California, and that 66% did not comply with state tax requirements. The delinquencies cost the state up to $105 million annually in unpaid sales taxes, according to the study by the state Board of Equalization.
Tax amnesty programs have been discussed in the past, but state officials say they are prepared to strictly enforce the law when the new system begins operating in less than two months.
"While we encourage maximum voluntary compliance, for those who seek to operate outside the lawful tax structure, we have the personnel and resources to go after them," said Paul Cambra, a spokesman for the California Department of Tax and Fee Administration. "As with all areas of tax collection, enforcement is a primary method of deterring tax avoidance and we're ready to enforce the law."
Industry officials predict some pot sellers will stay in the black market rather than get a tax permit and state license to sell marijuana.
But, they add, there will be a significant financial incentive for pot growers and sellers to get what is known as an adult-use permit and pay taxes: They must do so to obtain a valuable state license to operate in California.
"This is about making money, and in all honesty an adult-use permit is the golden ticket," said Nate Bradley, a legislative advocate for the California Cannabis Industry Assn. "So if they are not going to be willing to pay their taxes, there are going to be other people with capital investment ready to jump in."
After obtaining a pot seller's tax permit, which is already available, retailers will be responsible for collecting and giving the state a 15% excise tax on the marijuana they sell, as well as additional taxes set by cities and counties.
The new permit available Monday is for the more than 250 distributors of cannabis and cannabis products expected to operate under the new legal system. Distributors are responsible not only for moving cannabis from farm to pot shop, but also for collecting taxes from growers — $9.25 per dry-weight ounce of cannabis flowers, and $2.75 per dry-weight ounce of cannabis leaves.
The marijuana industry's past poor compliance rate concerned state legislators, who last year tried unsuccessfully to set up a six-month amnesty program that would allow businesses to pay delinquent taxes and temporarily avoid penalty payments ranging from 25% to 50% of taxes owed.
But Gov. Jerry Brown vetoed the legislation.
"While increasing tax compliance among medical marijuana businesses is important, it is premature to create a tax amnesty before the regulations that link enforcement to licenses are promulgated," Brown wrote in his veto message.
Rules for the marijuana industry proposed Thursday would put that link in place.
In order to get a state license to grow, distribute or sell marijuana, operators must first get a state tax permit, and renewal of those permits can be blocked if businesses don't pay their taxes.
"Generally, a taxpayer that owes back taxes will need to pay the taxes due or make arrangements to pay the taxes due to obtain a new seller's permit," Cambra said.
That leverage, and the amount of money at stake, should be more than enough to convince pot firms to stay current on their taxes, says Aaron Herzberg, an attorney for cannabis industry clients.
"If you don't pay taxes, then you are going to get knocked out of the system pretty quickly," he said.