Every cannabis license to do some degree has risk, and often times these risks are the same. There are several risks in working in cannabis, and each cannabis license has both a shared risk and unique risk related to that license type.
Common risks for cannabis businesses include:
- Changing regulation that can impact operations overnight
- Federal Illegality (which in and of itself has significant risk)
- Fines and Penalties for not complying with regulation
- Product and Quality Control Risk
- Reputational Risk
- Employee Risk
- Financial Reporting Risk
- Environmental Risk
- Public Safety
Cannabis specific risks can range from pest and mold risk for cannabis cultivators to selling to minors to retailers. Every cannabis license has the risk of diversion, poor inventory and cash management (asset misappropriation), and cash flow (due to IRC 280e and high costs of state taxes and compliance).
However, one license type in the State of California has much more risk than the other licenses – The Cannabis Distributor.
In the State of California, the distributor is responsible for performing quality control, coordinating lab testing, collecting and remitting cannabis taxes.
Therefore, beyond the shared risk of operating in cannabis, the risks associated with cannabis distribution include theft, diversion, quality control, public safety, and the financial risk of insolvency.
In the State of California, the state cannabis tax is two-fold. There is a cannabis tax on cultivation that is imposed on the cultivator. There is also a cannabis excise tax that is imposed on the retailer. The distributor is responsible for collecting these taxes and remitting them back to the taxing authority in California (the CDTFA).
This heightened responsibility on the distributor requires the license to not only have excellent organizational skills, tracking of its movements between both vendors and customers, but a full understanding of collecting and remitting the tax.
Unlike a federal income tax, state taxes owed such as excise tax payable, sales tax, cannabis tax, can immediately shut down a business. If a state cannabis distributor is not remitting the required tax to the state, it can face the penalty of both fees, fines, and even loss of the license.
It is important that Cannabis Distributors in California understand their role in collecting and remitting both the state cannabis cultivation tax and the state cannabis excise tax. Moreover, it’s necessary for these businesses to have strong internal controls and standard operating procedures over their invoicing, payment, and cash receiving functions.