By Mike Parnes, Barth Daly LLP
California’s enactment of the Medical Marijuana Regulation and Safety Act (the “Act”), which became effective on January 1, 2016, ushered in the framework for the most comprehensive regulatory scheme for state-sanctioned cannabis enterprises in the United States. The Act’s arguably chief creation is statewide licensing for organizations conducting “commercial cannabis activity.” This activity includes cultivating, possessing, manufacturing, processing, storing, laboratory testing, labeling, transporting, distributing, or selling medical cannabis or medical cannabis products.
The Act also created the Bureau of Medical Marijuana Regulation (the “Bureau”) within California’s Department of Consumer Affairs. The Bureau is the primary administrative agency empowered to create, issue, renew and revoke licenses, and promulgate regulations consistent with the purposes of the Act.  Once the Bureau implements regulations, no cannabis enterprise will be permitted to operate in the state unless it is licensed by both the state and the local jurisdiction in which it is located. The Bureau’s rulemaking process is expected to continue until January 1, 2018. Thereafter, the Bureau should begin to issue licenses. By then, California may very well legalize recreational cannabis use and sale.
One requirement that all enterprises will have to meet to obtain a state license should surprise no one. To obtain a state license, an applicant will have to demonstrate, among other things, that it has or is in the process of obtaining a “seller’s permit” from the State Board of Equalization (the “Board”). In California, the Board administers the state and local sales and use tax. The seller’s permit that the Act refers to is the permit that all businesses dealing in sales of tangible personal property must have. Seller’s permit holders, and any business engaging in retail sales of tangible personal property, must comply with California’s sales and use tax code. Moreover, holding a seller’s permit authorizes businesses to collect sales tax reimbursements from customers.
In issuing licenses, the Bureau will prioritize enterprises that can prove they have been compliant with local law in the jurisdiction that they have operated by January 1, 2016. Because local jurisdictions are authorized to levy local sales and use taxes, compliance with sales and use tax is therefore necessary to obtain both ordinary licensure and priority licensure.
It does not end there. State licenses will be valid for twelve months at a time. The Bureau may deny an enterprise’s renewal for various reasons. Of course, one of those reasons is “failure to obtain and maintain a valid seller’s permit.” The Board can refuse to issue a seller’s permit to any applicant with an outstanding liability with the Board for any amount due. Should that business continue to operate without a license, it will incur financial penalties up to twice the amount of the license fee each day that it operates without a license.
It follows that sales and use tax compliance represents a substantial risk to cannabis enterprises seeking to prosper in California. Not only is obtaining a seller’s permit a precondition to state licensure, but failing to comply with sales and use tax law may cause a cannabis enterprise to lose its seller’s permit which in turn will provide a reason for the Bureau to deny license renewal.
By now, curious readers are likely wondering what a cannabis enterprise must do to ensure that it (i) obtains a seller’s permit, and (ii) complies with sales and use tax law applicable to cannabis enterprises. The next few articles will cover some of the most important concepts involved in sales and use tax compliance for cannabis enterprises: addressing back tax liability (unremitted tax due on sales before registration), taxability (is cannabis subject to sales tax), exemptions (are there instances where payment of tax is unnecessary), economic incidence of the tax (is the customer or the seller liable), situs (what tax rate applies), and bundled transactions (taxability of transactions consisting of both taxable and nontaxable items for one price). Management for cannabis enterprises will need to, at a minimum, become aware of these concepts to maximize the likelihood of obtaining a license from the Bureau and minimize the likelihood of losing a license thereafter.
Mike Parnes is an associate attorney at Barth Daly LLP in Sacramento, California. Mike represents private and public sector clients in various legal disputes. Mike’s practice is focused in business litigation and state and local tax while his experience includes contract, real property, labor and employment, and fiduciary duty disputes. Mike has written four articles on the income taxation of legal cannabis.
 Codified in California Business & Professions Code section 19300 et seq.
 See Cal. Bus. & Prof. Code § 19300.5(k).
 See id.
 See id. § 19302.
 See id. § 19304. Other agencies empowered with rulemaking for the purposes of the Act include the Department of Food and Agriculture, the Department of Fish and Wildlife, the Department of Pesticide Regulation, the State Department of Public Health, the State Water Resources Control Board, the California Medical Board, and the State Board of Equalization.
 See id. § 193209(a).
 Cf. id. § 19321(c).
 See id. § 19322(a)(7).
 See Cal. Rev. & Tax. Code § 7051.
 See id. § 6226; Cal. Code of Regs., tit. 18 § 1699(a); see also Cal. Rev. & Tax. Code §§ 6066(a) (stating all such businesses must apply for a seller’s permit); 6071 (stating that those who engage in business without a permit are guilty of a misdemeanor).
 See Cal. Code of Regs., tit. 18 § 1500(c)(2).
 Cf. id. § 1700.
 See Cal. Bus. & Prof. Code § 19321(c).
 See Cal. Rev. & Tax. Code § 7285 (authorizing counties); id. § 7285.9 (authorizing cities); see also id. § 6066.4 (authorizing local jurisdictions to demand seller’s permit account numbers from businesses who seek to sell tangible personal property in their respect jurisdictions).
 See Cal. Bus. & Prof. Code § 19321(b).
 See id. § 19323(b).
 See id. § 19323(b)(9).
 See Cal. Rev. & Tax. Code § 6070.5(a); Cal. Code of Regs., tit. 18 § 1699(g)(1).
 See Cal. Bus. & Prof. Code §§ 19360(a); 19318(a).