Last month, San Diego filed its first lawsuit seeking payment of a tax on cannabis products. And while it appears the legal action may not last long because the defendant, San Diego developer Dave Gash, stated he’d pay it immediately, he did blame the problem on a misunderstanding and lack of communication.
What Led to the Legal Action?
Gash owns the company, Grizzly Peak Farms. The legal action claims the company failed to pay taxes on cannabis products it delivered to San Diego dispensaries from its Oakland facilities between January 2018 and June 2019, according to the San Diego Union-Tribune.
Gash admitted payment “slipped through the cracks” and called the tax “weird.” To clarify, San Diego’s cannabis tax covers not just those selling or growing within the city, but businesses outside the city that supply cannabis-related companies within San Diego.
What’s Being Alleged?
The city claims Grizzly Peak Farms owes nearly $10,000, including penalties and interest. Gash said they got one tax notice and tax authorities never called his business. San Diego hopes the tax will generate $30 million annually over the next five years. The tax rate on cannabis businesses went from 5 to 8% in July 2019.
San Diego and some other California cities use “apportionment” to tax cannabis businesses. This method splits up a company’s revenues so each city can tax a part of the revenue. Local cannabis industry leaders have stated taxing out-of-town suppliers has led to complaints. Grizzly Peak Farms seems to be the first company to be sued to collect it if not paying the tax.
Attorney Jessica McElfresh was quoted by the Union-Tribune as stating San Diego’s cannabis tax scheme has confusing sections, in part because it was copied from legislation in other cities. McElfresh went on to say the city treasurer’s office has been friendly and helpful with cannabis businesses in the early years of the tax, which passed in 2016.
What’s Next?
Gash stated the taxes he owes will be paid promptly, but it’s clear the city is taking enforcement seriously. In addition Gash had planned to open an indoor cannabis cultivation facility in Kearny Mesa, but delays and problems forced its sale. The goal was to supply San Diego’s dispensaries with locally grown cannabis. There are still plans to open a cannabis distribution facility in Kearny Mesa, possibly as early as this winter.
Have Tax Questions about Your Cannabis Business?
If you are building a legal cannabis business, make sure your license and permits are in order, and you follow all state and local guidelines. As you can see, there are unique issues and local caveats that come with California’s cannabis industry, including taxes.
Attorney Jessica McElfresh works closely with medical and recreational marijuana businesses in the San Diego area to ensure compliance and sustainability. Contact McElfresh Law today at (858) 756-7107 to schedule an appointment.