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Los Angeles: The Complicated Issue of Business Tax Registration Certificates

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LA-LegalCornerIt’s that time of year again: ‘Tis the season for taxes and things that make you scratch your head.

Back in October 2015, the Los Angeles City Council voted to stop issuing Business Tax Registration Certificates (BTRCs) to cannabis businesses since most of them are illegal according to Proposition D, the voter approved initiative in 2013 which basically banned most Los Angeles MMJ businesses. Despite the passing of Proposition D, however, MMJ businesses kept proliferating, and the city continued to issue BTRCs and collect tax revenue from them—legal or not.

To councilmembers, it’s senseless to issue BTRCs to businesses that are or could be illegal; in fact, they question why BTRCs continue to be issued when, as they see it, any MMJ business filing for a new BTRC in 2015 or after is clearly illegal.

However, unsure of the council’s authority to do this, the Office of Finance (the office that issues BTRCS) sought insight or input from the City Attorney. While it awaited approval, the Office of Finance stopped issuing new BTRCs sometime in December of last year.

Then, in January, Los Angeles City Council approved Ordinance 184135, which amended Subsection 21.50 of the Los Angeles Municipal Code (LAMC) by mandating that cannabis collectives prove compliance with Proposition D. Thereunder, any collective taxed under LAMC Section 21.50 should have completed and signed a cannabis collective annual Business Tax affidavit by March 31 though the yearly Business Tax renewal deadline has already passed (February 29).

“Although this new amendment aims to end the hypocrisy of issuing purportedly ‘illegal’ businesses tax certificates, it also does much in the way of cutting off a significant source of revenue for the city of Los Angeles.”

In the affidavit, the business manager or other responsible party must swear, under penalty of perjury, that the business complies with Proposition D. Namely, that the business has been in continuous operation since 2007 and timely filed with the city clerk before the Medical Marijuana Interim Control Ordinance (ICO) in 2007, timely filed for the Temporary Urgency Ordinance (TUO) in 2010 and, finally, has paid all of its Measure M taxes. To add insult to injury, any business that signs this affidavit falsely could be guilty of a misdemeanor.

A word of warning, though: It won’t be accepted by mail. This means that individual collective owners or their business partner, have to submit the affidavit in person to the Office of Finance. An individual may also submit if they are an officer (with exact title specified) of the corporation or a member or manager of the LLC.

Both the collective and owner or other associate submitting the affidavit, bear responsibility for accurately demonstrating that the cannabis collective complies with Prop D. Those submitting the affidavit must also provide a government-issued ID to be copied and retained by the Office.

Keep one important thing in mind: A BTRC does not prove the legality of your business, just that it has applied to pay taxes to the city.

Although this new amendment aims to end the hypocrisy of issuing purportedly “illegal” businesses tax certificates, it also does much in the way of cutting off a significant source of revenue for the city of Los Angeles. Especially given the recent news that the city’s current budget is short about $170 million. In fact, the city will have to “borrow” from its reserves until about $100 million in state funds comes in later this year and again in 2017.

True, the $10 million in tax revenue from MMJ business wouldn’t completely alleviate this huge shortfall, but it would definitely make a dent. And if the industry continues to grow – if not be outright regulated – more tax revenue will come in, which in turn, would continue to help relieve any budget woes going forward.

With the very real prospect of outright state legalization on the horizon, it makes sense that city, town and community governments throughout California would be happy to collect tax revenue for their coffers, especially in light of budget woes plaguing the state. For example, the city of Los Angeles collected nearly $10 million in 2014 (from 500+ dispensaries) and 2015 (from 450 dispensaries).

But things are never as easy as they should or even could be.

Here’s what really doesn’t make sense: You have a city budget so desperately in the deficit, and a way to help alleviate that deficit exists through business licensing and taxation of an up-and-coming industry valued at untold billions, yet a poorly written Proposition D forces the city to refuse tax revenue from this industry, even as the industry grows and becomes closer to legalization with every passing day.

If that doesn’t make you shake your head in amazement and disappointment, what will?

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