By Dale Schafer, Esq.
On December 28, 2023, HNHPC (Catalyst), a retail dispensary operating under the Catalyst brand, took legal action against 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, Catalyst seeks to invalidate hastily implemented emergency regulations that, according to the complaint, jeopardize an ongoing appeal related to alleged excise tax underpayment for cannabis accessories.
Catalyst contends that the CDTFA and OAL deviated from proper procedures in adopting these emergency regulations, effectively authorizing the collection of cannabis excise tax for the sale of accessories. This, the lawsuit asserts, is in direct contradiction to Proposition 64 and the existing state law, except in cases where the accessory qualifies as “optional tangible personal property,” expressly excluding disposable vape carts.
The legal dispute originated post-January 1, 2023, when California law mandated cannabis retailers to collect excise tax from the gross receipts of cannabis or cannabis product sales, a shift from distributors collecting the tax in previous years. Prior to 2023, taxable cannabis accessories, such as disposable vape carts, required separate statement of the cannabis product’s value on invoices or receipts to determine tax liability. Catalyst and other retailers adhered to this practice, endorsed, as alleged, by the CDTFA. However, following the transition of tax collection to retailers, Catalyst underwent an audit, resulting in a substantial underpayment determination despite the consistent use of separate statements on their invoices.
Upon notifying the CDTFA of their intent to appeal based on the prevailing tax law that limited excise taxes to cannabis and cannabis products, Catalyst claims the CDTFA orchestrated an illicit plan to expedite changes to tax regulations. These alterations, retroactively applied to January 1, 2023, were allegedly carried out without proper disclosure and in violation of the state’s Administrative Procedures Act (APA). The complaint further implicates the OAL for allegedly colluding with the CDTFA in breaching the APA through the approval of these emergency and clandestine changes.
In seeking a resolution, Catalyst is pursuing a Writ of Mandamus, Injunctions, and Declaratory relief to invalidate the emergency regulations. Their objective is to prevent the collection of excise tax on cannabis accessories that are distinctly itemized on invoices or receipts. The potential financial burden of these taxes, particularly for high-volume sales of cannabis accessories like disposable vape carts, underscores the possibility of a broader class action involving retailers and previous distributors who may have paid taxes under circumstances that were not legally mandated.
This case raises concerns akin to ex post facto laws, suggesting a retrospective application of regulations to actions that were lawful when undertaken. The unfolding legal developments are anticipated with keen interest, especially regarding the state’s response, which, being a verified complaint, necessitates a verified response. The intricacies of this matter are poised to add layers to an already complex legal landscape.