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California Gov. Gavin Newsom’s approval of Assembly Bill 2555 extends the California use tax provisions originally included in the Dennis Peron and Brownie Mary Act, presenting a charitable tax planning opportunity for eligible entities interested in donating medicinal cannabis.
The original bill aimed to reduce the tax burden of charitable cannabis donations to increase patient access to medicinal cannabis. AB 2555, approved in late September, extends the use tax exemption for medicinal cannabis donations by a licensed cannabis retailer to a patient, or by a licensed person to a licensed cannabis retailer for subsequent donation to a patient. Given the base use tax rate in California is 7.25% and can be increased by local district taxes by another 0.10% to 1.50%, this exemption can be a valuable incentive to donate medicinal cannabis.
Organizations that are interested in taking advantage of the exemption should first verify the entity or individual they want to donate to is covered under the exemption. The only eligible recipients of donated medicinal cannabis are licensed cannabis retailers and medicinal cannabis patients.
After identifying an eligible recipient of the intended cannabis product donation, donating entities must comply with two provisions when making the donation.
First, the cannabis retailer that ultimately donates the medicinal cannabis must certify in writing to the donating licensee that the donated product will be used as prescribed in the bill. If the receiving licensee uses the medicinal cannabis for any other purpose, the exemption won’t apply, and they will be liable for any related use tax plus applicable penalties and interest.
Acceptable forms of writing include a written letter, note, or purchase order. Donating entities should keep this letter for at least seven years, as required by the bill, because they can use it to protect themselves from potential tax if the cannabis product isn’t used appropriately.
Second, any transfer of cannabis product from one licensee to another must be entered into the California Cannabis Track-and-Trace System. To properly qualify a transfer of cannabis as a donation, the donating licensee must designate the cannabis product for donation when entering the transfer into the system.
When tax planning for direct donations to medicinal cannabis patients, donating entities must still comply with California Code of Regulations Sections 15409 and 15411 concerning the daily limit of cannabis product sales to a medicinal cannabis patient and requirements for providing free cannabis goods to medicinal cannabis patients, respectively.
Donating entities considering long-term tax planning for cannabis products should note that the use tax exemption is only extended an additional five years with a sunset on Jan. 1, 2030. California will continually evaluate the amount of tax revenue lost versus the number of patients assisted when considering any further renewal.
The California Legislative Analyst’s Office issued annual reports for 2020, 2021, 2022, and 2023 detailing the number of medicinal cannabis patients served, the amount of medicinal cannabis products donated, and the amount of tax revenue lost. The agency reported that the tax revenue loss associated with the cultivation tax exemption and use tax exemption from 2020 to 2023 was $1.6 million and that 145,998 medicinal transactions were identified as medicinal donations.
Looking ahead, the tax loss associated with AB 2555 will likely decrease considerably because the cannabis cultivation tax—which made up over half of the 2020–2023 period’s total tax loss—ended on July 1, 2022.
Considering the overwhelming support AB 2555 received in the California Assembly and Senate and the expected reduction in tax revenue loss compared with the prior four years, it seems likely the use tax exemption will be renewed again.
AB 2555 provides continued relief for use tax facilitating the donation of medicinal cannabis to those in need. Entities engaging in this charitable endeavor must plan their steps and maintain compliance to achieve this result.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Sam Imandoust is a tax attorney at RJS Law who focuses on tax litigation, planning, audits, collections, and appeals.
Kaveh Imandoust is a CPA at RJS Law who has been practicing tax for 20 years, advising clients across myriad specialties and industries.
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California's Cannabis Donation Law Offers Powerful Tax Incentive – Bloomberg Tax
