California Cannabis Company Sues State, Alleges ‘Massive Overcollection’ of Taxes

A California marijuana retail chain has filed suit against several state agencies, including the primary tax collection bureau, alleging that the departments conspired to cover up an illegal change to cannabis tax policy and “massive overcollection” of taxes from marijuana businesses.

According to a lawsuit filed Dec. 28 in Orange County Superior Court by HNHPC Inc. – which is a wing of Long Beach-based Catalyst Cannabis Co. – the California Department of Tax and Fee Administration (CDTFA) and the Office of Administrative Law (OAL) worked together to illegally broaden the state’s 15% cannabis excise tax and the types of goods the tax covers.

Specifically, the CDTFA last month revamped one of its own regulations regarding the excise tax to ensure that it covers “cannabis accessories” in addition to marijuana products, such as flower, edibles,  and extracts. The OAL assisted the CDTFA in the move, and is thus complicit, the lawsuit alleges.

Catalyst v CDTFA lawsuit

The policy change flies in the face of previously established policy by the CDTFA, the lawsuit claims.

Catalyst contends that the switch was made because the agency wanted to claim victory in a two-quarter audit of Catalyst’s books. The audit found that the company underpaid its excise taxes to the state, but Catalyst argues that it paid the proper amount, given that the 15% tax should only apply to actual cannabis goods and not “accessories” or its total gross receipts.

The upshot, according to the lawsuit, is that Catalyst was perhaps the only marijuana retailer in the state to remit the correct tax amount it owed, and as a result, many in the industry have been “massively overpaying such taxes to the state’s unjust benefit.”

After the CDTFA audit,  Catalyst responded that it would appeal and explained its reasoning. One CDTFA staffer even affirmed Catalyst’s interpretation of the tax rules, the lawsuit claims, before the agency then asserted that the company was in arrears for Q1 and Q2 of 2023.

“When the CDTFA learned HNHPC and the other Catalyst-branded dispensaries had found a way to separately state cannabis accessories, thereby exempting them from excise taxation, Respondents engaged in a ‘mad scramble’ to do anything and everything possible to prevent them from continuing to do so and to dissuade other retailers from even thinking of also doing so,” the suit claims. “In short, this action was made necessary by the CDTFA’s legally improper ‘money grab’ in violation of (cannabis tax laws) and its own regulations.”

The lawsuit used an example of a $40 vape pen, and said that instead of the $6 in tax expected by the CDTFA, which is 15% of $40, Catalyst was only remitting 75 cents in taxes, because that’s 15% of the $5 value of the cannabis oil within the vape pen. Catalyst contended that all the other components of the pen, such as the cartridge and the battery, were not covered by the state excise tax.

The audit showdown led to the rule change in December, which the suit argues the OAL illegally fast-tracked and rubber-stamped, and also wrongly allowed for changes to regulations by the CDTFA even after formal language had been submitted to the OAL.

A CDTFA spokesperson declined to comment, citing the pending nature of the lawsuit.

The case is scheduled for a hearing on April 4 in Orange County.