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As we’re rolling into our third year of California’s legal recreational marijuana market, industry operators might expect heightened tax enforcement could be on the horizon. With an increasing number of audits already underway, there is concern some marijuana businesses could find themselves drowning in delinquent tax bills – some possibly as high as tens of millions of dollars. California marijuana lawyers

The three-year milestone is noteworthy because that’s the cutoff for California Department of Tax and Fee Administration auditors for examination of corporate tax returns.

Prior to 2018, marijuana companies were already required to pay sales taxes. As our Los Angeles cannabis lawyers know first hand, many were were routinely subject to state audits. In 2018, when the state first allowed legal cannabis sales for recreational use, they were required to pay two new taxes – a cultivation tax and a 15 percent excise tax.


As some CPAs note, audits like these can be very advantageous for the state of California, so it should come as no shock that these are starting. In fact, the state is pumping up all its general business audits too, so it’s not necessarily that marijuana companies are being singled out. Still, the high tax rates and significant penalties associated with marijuana sales could spell trouble for some marijuana businesses if anything is amiss.

One CPA quoted by Marijuana Business Daily surmised it won’t be difficult for state auditors to uncover tax violations. Some estimate the state is going to be owed tens to hundreds of millions of dollars in unpaid taxes from the marijuana industry, which will include sales taxes, excise taxes and cultivation taxes. Further, this is the first fiscal year that both cultivation and excise tax audits are being funded by the state, and the agency has even been hiring more auditors. And estimated 60 inspectors are currently dedicated solely to ensuring tax compliance among tobacco and cannabis companies. In the words of the CPA: “It’s going to be a turkey shoot.”

A spokesman for CDTFA said that there have been ongoing compliance issues where sales taxes are concerned, which is why many have seen an uptick in sales tax inquiries. These in turn result in investigations into cannabis and excise taxes.


But while there’s unquestionably an uptick in audits, it’s also very likely the state will be more aggressively enforcing existing liabilities that don’t require an audit (something that’s a lot cheaper/faster for the state).

It’s not clear exactly how many marijuana businesses have received an audit notice, but even those that haven’t at this point may want to consider consulting with a tax specialist and cannabis business attorney to be on the safe side. This is especially true because some companies are getting hit with COVID-related tax headaches. For example, last year the CDTFA issued an announcement that there would be a delay in collections of sales taxes – a way to cut businesses some slack while they were in the throes of coronavirus response. Some companies took the agency up on that – only to hit a brick wall with the agency’s processing unit and then incurring stiff penalties for late payments.

Our law firm has heard complaints about the agency threatening to revoke operational permits of cannabis companies unless outstanding payments are made. The CDTFA insists its only goal is to compel taxpayers to pay only what they owe – no more or less.


Complaints of possible rights violations can be made to the Taxpayers’ Rights Advocate Office. An attorney can file this complaint on your behalf and help you decide your next step.

The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.

Additional Resources:


California marijuana firms face more state tax audits, millions of dollars in unpaid taxes, Feb. 25, 2021, Marijuana Business Daily

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