When it comes to taxes, many hemp businesses are unsure about Internal Revenue Code Section 280-E and whether or not it applies to their businesses. Section 280-E was passed in order to prevent drug dealers from taking business deductions on income from trafficking in controlled substances, like cocaine and marijuana. Here is what you should know about growing hemp versus marijuana and its application to 280-E.
The cultivation of hemp has been considered by the federal government to be a violation of the Controlled Substances Act because hemp is botanically related to marijuana. In addition, hemp also contains low levels of THC, which is the same psychoactive substance found in marijuana. These properties are why the government sought to include hemp by default in the Controlled Substances Act.
The government did make some distinction between hemp and marijuana with the passage of the Agricultural Act of 2014, which removed the federal restrictions on growing industrial hemp and permitted any states that have legalized the manufacturing of hemp to set up research programs in order to study the benefits of cultivating hemp.
Since the federal government has failed to create an exception for hemp in the list of Schedule I substances of the Controlled Substances Act, Section 280-E still applies to hemp growers and hemp distribution businesses.
As a result, hemp growers still face the same restrictions on permitted deductions as marijuana growers when it comes to taxation. The full list of deductions that are available to hemp growers can be found here.
In the same way that hemp growers are treated like marijuana growers for taxation purposes, hemp distributors must also follow the same rules as marijuana distributors. The full list of deductions that are available to hemp distributors can be found here.
If you sell medical marijuana or marijuana-related items in California, the law requires that you register with the Board of Equalization (BOE) for a Seller’s Permit. Both cannabis growers and dispensaries are required to register, even if your business has not made any sales yet. There is no cost to obtain a Seller’s Permit.
Here are the steps to help you apply for your Seller’s Permit along with a brief overview of what you need to do after you’ve been approved by the BOE.
Applying for a Seller’s Permit
In order to start the registration application process, you will need to gather a number of documents about your business and the management team for your business. The full list of required documents can be found here.
Create an Online Account
The BOE registration process will guide you through the steps that are required to obtain your Seller’s Permit. Once you have successfully registered, you will be provided with a User ID for your business so that you can access the BOE online system and file your sales and use tax returns.
When to Register for a Seller’s Permit
The BOE wants every business to register for a Seller’s Permit before it makes its first sale. Although the requirement to register for a Seller’s Permit for businesses who sell medical cannabis didn’t go into effect until 2005, business who opened before the effective date are still required to register and pay any taxes that they may owe. Additionally, businesses who opened after this date and failed to register for a Seller’s Permit are required to register and may also be required to make back tax payments.
How Many Seller’s Permits Do I Need?
If you have multiple locations, you are required to register each location (located on different premises) of your business. Each location may be required to maintain a separate Seller’s Permit. In some cases, the BOE does allow you to obtain a consolidated permit for multiple business outlets. Even if you run a mobile dispensary, you still have to register.
The sales and use tax rate is made up of:
Cities and counties with applicable district taxes add to the base rate, which cause rates to be different throughout the state. As a result, you will also need to register with your city and county. A comprehensive list of the different California city and county sales and use tax rates can be found here.
What to Do After You Register
After you have applied and have been approved for a seller’s permit, you must make sure that you file sales and use tax returns, along with paying any tax that is due. If you file to file your returns on time, you may be subject to additional penalties and interest. The state of California offers an online sales tax filing service, which you should use to file your returns. When you have to file will be determined by the BOE based on your reported sales tax or your anticipated taxable sales at the time of your registration.
Sales and Use Tax Return Due Dates
The sales and use tax return due dates may vary depending on whether you are a monthly, quarterly or annual filer. However, they are generally due on April 30th, July 31st, October 31st, and January 31st for quarterly filers. For monthly filers, the due date is the last day of the following month. For annual filers, the due date is January 31st of the following year. If any of these due dates fall on a weekend or state holiday, the returns are due on the next business day. Even if you made no sales, you still need to file a return showing zero sales.
The BOE generally does not accept cash payments for tax due. However, with many cannabis businesses operating in cash only, some provisions have been made to accommodate these businesses. If you plan to make your payments of sales and use tax in cash, you will need to make an arrangement with one of the BOE’s field offices for cash the transactions by completing a ‘No Cash Exemption Request’ form.
Record Keeping for Your Business
In addition to filing timely sales and use tax returns, you are also required to maintain records about your business including:
These records must be maintained for at least 4 years unless you have been given explicit permission by the BOE to discard these records.
Which Sales Are Subject to Sales and Use Tax in California?
Sales that are subject to tax include all retail sales of medical cannabis. All sales are presumed to be retail sales unless your customer provides you with a valid resale certificate. Additionally, a portion of the equipment purchases that you make for your business may be exempt from sales and use tax. This equipment includes certain farm machinery and equipment that is used for the production and harvesting of agricultural products.
Who Is Exempt From Registering for a Seller’s Permit?
If your business is a health collective that dispenses medical cannabis, you may be exempt from applying for a Seller's permit under Regulation 1591. In order to qualify for this exemption, your health collective must be qualified as a "health facility" under state law to provide 24-hour inpatient care or as a state-licensed clinic.