Catalyst Cannabis Co., a major marijuana dispensary chain in California, has initiated court action against an emergency rule alteration implemented by state tax authorities in December. The company, operating under the name HNHPC Inc., went to court on Dec. 28, 2023, in the Superior Court of Orange County.
The suit alleges collusion between the state’s fee administration and tax department and the Administrative Law Office, accusing them of two key violations: imposing excise levies on nonmarijuana products such as accessories and exploiting emergency regulatory powers to hastily enforce retroactive regulations without sufficient notice to affected companies.
The crux of the legal challenge revolves around the interpretation of excise taxes on various elements of marijuana products. Taking a vape cartridge as a primary example, the suit claims that excise taxes should exclusively affect the marijuana oil, excluding the entire item, including the packaging and pen mechanism. This exemption would only apply if the vendor itemizes charges for both the marijuana oil plus the nonmarijuana components.
Under this approach, the retailer would only pay the 15% excise tax on the oil, typically valued at around $5, leading to a tax of only 75 cents. Catalyst Cannabis Co., based in Long Beach, California, has been employing this method to calculate excise taxes for more than a year, according to company executives and court documents.
As one of the state’s major cannabis operators, with 25 stores located mainly in Southern California, Catalyst is challenging the state regulators’ position outlined in Emergency Regulation 3802. According to this regulation, excise taxes should also cover “optional tangible personal property.” The broader definition encompasses the entire vape device, packaging and associated components. Consequently, under the state’s directive, a $40 vape pen would incur a $6 excise tax, which is eight times the tax applied solely to the oil.
Catalyst CEO Elliot Lewis, a vocal critic of the state’s marijuana regulations, expressed confidence in the lawsuit’s success. Lewis anticipates that overturning Regulation 3802 could potentially redirect millions back to the both marijuana industry and consumers.
Lewis has received supportive calls from fellow marijuana operators and foresees a ripple effect with other retailers reevaluating their excise tax calculations. He believes that by the second quarter of 2024, excise levy submissions to the state will reflect this recalibration, projecting a significant reduction from an estimated $600 million to around $200 million annually.
In Lewis’s view, the judicial intervention presents a crucial opportunity for relief and reform in the marijuana industry, emphasizing the potential impact on both industry finances and consumer costs.
The outcome of this lawsuit will be of interest to cannabis companies such as Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) because it could pave the way for similar legal challenges in other jurisdictions where the same formula is used to levy taxes on cannabis products.
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