Cannabis retailer Catalyst is taking a stand against what it believes to be unfair and illegal practices by the California Department of Tax and Fee Administration (CDTFA). In a lawsuit filed by its affiliate HNHPC Inc., Catalyst alleges that state agencies are collecting excessive taxes from marijuana businesses, totaling an estimated 400 million dollars per year.
But their claims don’t stop there – they are also accusing the CDTFA of changing cannabis tax policy without following proper procedures and using emergency authority to push through retroactive regulations with little notice. This case could have far-reaching implications for the state’s cannabis industry, and Catalyst is determined to fight for what it believes is right. Let’s take a closer look at the details of this ongoing legal battle.
Background on Excise Taxes in California’s Cannabis Industry
The cannabis industry in California has been rapidly growing since the legalization of recreational marijuana in 2016. With this growth comes the implementation of various taxes, including excise taxes, on cannabis products. Excise taxes are imposed by state governments and are typically applied to specific goods or services deemed “luxury” or non-essential.
In the case of California’s cannabis industry, excise taxes are applied to all cannabis products sold by retailers. The purpose of these taxes is to generate revenue for the state and fund various programs and initiatives. However, the recent lawsuit filed by Catalyst Cannabis Co. raises concerns about how these excise taxes are being calculated and collected.
According to California’s current cannabis tax laws, excise taxes should only apply to “cannabis or cannabis products sold at retail.” This means that any accessories or components of a cannabis product, such as vape pen cartridges and batteries, should not be subject to excise taxes. However, Catalyst Cannabis Co. argues that the state’s tax agencies have been “overcollecting” these taxes from marijuana businesses.
The California Department of Tax and Fee Administration (CDTFA) is responsible for collecting and enforcing excise taxes on cannabis products. This includes performing audits on marijuana businesses to ensure they are properly remitting the correct amount of taxes. Despite this, Catalyst Cannabis Co. claims that the state has been illegally changing tax policies and unfairly targeting their business.
Catalyst Cannabis Co.’s Allegations Against State Agencies
The lawsuit filed by HNHPC Inc., a subsidiary of Catalyst Cannabis Co., accuses the state of California and its agencies, including the CDTFA and Office of Administrative Law (OAL), of illegal actions regarding cannabis excise taxes. The suit claims that the state agencies changed tax policies without proper authority and over collected taxes from marijuana businesses.
Catalyst is no stranger to going toe-to-toe with the state, like this previous lawsuit.
In the most recent lawsuit with the state, Catalyst Cannabis Co. argues that they were the only retailer to properly remit the correct amount of excise taxes, while other businesses may have been overcharged due to the policy changes. “most cannabis retailers have either failed to realize that “cannabis accessories” are not subject to cannabis excise taxation, and thus have been massively overpaying such taxes to the State’s unjust benefit; or failed to properly exclude nontaxable “cannabis accessories” by segregating and “separately stating” such items on their invoices/receipts. As a result, the CDTFA and the State, have substantially benefited financially from the ignorance of those other dispensaries via the massive overcollection of cannabis excise tax on items that legally are not subject to excise taxation.”
In the suit it uses an example of a vape pen to show how they taxed products. “”Assume a vape pen sold at retail for $40. If a retailer did not separately state and segregate charges for the cannabis oil (a “cannabis product”) from charges for the pen’s non-cannabis constituent parts, it would be required by law to collect and remit a 15% excise tax on the entire $40 price of the pen – or $6 in cannabis excise tax. If, however, the retailer “separately states” the charges for cannabis items and non-cannabis items and sufficiently substantiates that the cannabis oil in the pen cost only $5, it would be required by law to collect and remit only 75 cents in excise tax (15% of $5), not $6.”
The discovery that HNHPC Inc. properly excluded “cannabis accessories” from excise taxes sparked an “emergency regulation” procedure by the CDTFA. This effectively prevented HNHPC and other Catalyst-branded dispensaries from continuing to exclude these accessories from taxes. Which HNHPC claims that the CDTFA abused its emergency regulatory authority to “cram down” retroactive and incoherent regulations on little to no notice, contradicting the intended purpose of Proposition 64.
The lawsuit filed by HNHPC Inc. against state agencies, including the CDTFA and OAL, seeks a writ of mandate to invalidate the newly promulgated Regulation 3802 and amendment to Regulation 3700(i). This would prohibit these agencies from implementing or enforcing these regulations, which HNHPC claims are in violation of the Cannabis Tax Law (CTL).
Additionally, HNHPC is seeking a judicial declaration that, under the CTL, “separately stated” cannabis accessories are not subject to the cannabis excise tax.
If the allegations made by Catalyst Cannabis Co. are proven to be true, it means that the state of California has been overtaxing the cannabis industry for years. In fact, Elliot Lewis Catalyst CEO estimates that up to $400 million per year may have been overtaxed due to the inclusion of “cannabis accessories” in excise taxes.
This is a significant amount of money that could have been used to help save the struggling cannabis industry in California. One major issue facing the industry is overregulation and excessive taxes, which can make it difficult for businesses to thrive and compete with the black market.
If this $400 million per year was not overtaxed, it could have provided much-needed relief to dispensaries and other marijuana businesses. This could have allowed them to reinvest in their businesses, hire more employees, and improve the quality of their products. It would also mean that customers would not be burdened with higher prices due to excessive taxes.
We reached out to our friend Elliot Lewis (Catalyst’s CEO) for his thoughts on the lawsuit.
“We believe strongly in the merit of our claim against the CDTFA. When we prevail , this will bring an estimated relief to the cannabis industry of about 400 million dollars a year. It’s money that has always belonged to us…. but this will settle the question and thus be needed relief that hopefully save cannabis companies on the brink of extinction and bring customers a better price.”
“One more thing that seems to be arising out of this potentially seismic event is the amazing sense of unity. I will be the first to admit , I have been less than perfect at times in my tenure as CEO in creating unneeded conflict amongst the industry , but I will give my word and efforts here-forth to do my best to find common ground among fellow industry peers and operators to work together to fight the real enemy the corrupt institutions of the state of California who have abused power and confiscated property from customers and industry folks that is based on a greedy and evil ideology.”
“I believe we can take this first hill at the judicial branch in superior court on the excise tax issue , and use that as momentum for a 2026 ballot measure to complete the struggle of a functional legal market and finally putting an end to the war on drugs 2.0.”
“‘Im humbled and energized by all the operators who have reached out to cooperate ( some of which haven’t been the biggest fans of Catalyst or me personally in the past ) and out of this potentially unifying moment we can in fact come together and continue to effectuate change for our industry and our customers that we love so much.” #Weedforthemotherfuckingpeople
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