Dale Schafer Esq.
On December 28, 2023, HNHPC (Catalyst), a Catalyst branded retail dispensary, sued the California Department of Tax and Fee Administration (CDTFA) and the Office of Administrative Law (OAL), in a verified complaint filed in Orange County Superior Court, asking the court to invalidate emergency regulations “jammed through” at the last minute which will invalidate an appeal filed by Catalyst over alleged taxes due for underpayment of excise taxes for cannabis accessories. Catalyst alleges that the CDTFA and OAL failed to follow procedures for adopting emergency regulations when it effectively authorized the cannabis excise tax to be collected for the sale of cannabis accessories, in contravention to Prop 64 and state law, unless the accessory is “optional tangible personal property”, not a disposable vape cart.
The saga, as alleged in the complaint, began after 1/1/23 when California law was changed to require cannabis retailers to collect the cannabis excise tax from the gross receipts of the sale of cannabis or cannabis products. Prior to 2023, distributors collected the excise tax from the sale of cannabis and cannabis products. Cannabis accessories, like disposable vape carts, were taxable unless the value of the cannabis product was separately stated on the invoice or receipt. The distributor used by Catalyst, and other Catalyst retailers, issued separate invoices for items like disposable vape carts that contained the separate cost of the cannabis product. Excise taxes were paid only on the cannabis product, not the remainder of the item. This approach was alleged to have been approved by the CDTFA. However, after the tax collection was moved to the retailers, Catalyst was audited and they were determined to have significantly underpaid the excise tax, despite issuing separate statements on their invoices to customers just like their distributor had done. Catalyst notified CDTFA they were going to appeal the determination, based upon the current tax law that allowed excise taxes only on cannabis and cannabis products. That’s when Catalyst alleges CDTFA engaged in an illegal scheme to ram through changes to tax regulations that would nullify their appeal, and make the changes retroactive to 1.1.23.
Catalyst alleges that CDTFA manufactured an emergency, failed to disclose changes to one of the regulations, and made secret changes to the other regulation, all in violation of the state’s Administrative Procedures Act (APA). They also allege the OAL colluded with CDTFA in violating the APA by approving the emergency and secret changes. Plaintiffs are requesting a Writ of Mandamus, Injunctions, and Declaratory relief seeking to invalidate the emergency regulations and prevent collection of the excise tax for cannabis accessories that are separately stated on the invoice or receipt. Depending on the volume of sales for cannabis accessories like disposable vape carts, the taxes could be excessive. This case screams for a class action for retailers, and prior distributors, that paid taxes on cannabis accessories that were not lawfully collected. I’m anxious to read what the state files next in response. Since this is a verified complaint, the state will need to file a verified response. This whole affair smells like an ex post facto law, a law that back dates a law to capture actions that were lawful at the time they were done. This will get interesting.
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