California: Which Set of Books?

California: Which Set of Books?

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AUTHOR: JORDAN ZOOT
PUBLISHER:  CANNABIS LAW REPORT

Tax practitioners often are accused of speaking a language that only they to understand…which may be an exaggeration, but in this case the accusation is ABSOLUTELY TRUE. Let’s begin with an old joke…how many sets of books does a business need to keep? The smart assed answer is two…”one set for the tax collector and one set that is accurate”. We all know how that story ends. The new reality is that a California cannabis business needs to maintain FOUR sets of books in order to comply with the requirements of the agencies that regulate California’s cannabis industry.
Now that we have your attention [and we assume that you are reading this material from the perspective of having a financial interest in the success of a “touch the plant” cannabis business in California], we will explain why this old joke is no longer funny. We will start with the IRS requirements for maintaining books and records for any business.
The U.S Dept. of the Treasury – Internal Revenue Service [the “IRS”] provides taxpayers with detailed guidance regarding the types of records a business is required to keep[1]. The IRS also describes how records should be maintained and how long these records must be maintained[2]. The IRS provides guidance about the purposes of records, uses of records, and outlines their expectations about the types of records that they expect taxpayers to maintain. California is still one of the 50 states. As a consequence, the requirements of the IRS trump the laws and regulations of California relating to books and records.
The California Franchise Tax Board has promulgated rules which track the statutes enacted by the California Legislature with respect to the conformity[3] of California’s tax rules to those enacted by the Federal Government and enforced by the IRS. Therefore, a taxpayer that is subject to the California income and franchise tax statutes is required to maintain a separate set of books for California income and franchise tax purposes. All California cannabis businesses are either owned by individuals or entities and are therefore subject to California income tax or franchise tax.
The California Dept. of Tax and Fee Administration [“CDTFA”] is the administrative agency for business entities that are subject both to Sales Tax, and to Cannabis Cultivation TAX [“CCT”] and Cannabis Excise Tax [“CET”]. The predecessor to CDTFA, the Board of Equalization [“BOE”] was the agency that administered Sales Tax before CCT and CET. The BOE has been promulgating regulations and enforcing its Sales Tax administration for decades. The rules and regulations relating to the books and records promulgated by the BOE, which have carried over to the CDTFA which now administers Sales Tax, are far more detailed than the guidelines of the IRS and FTB[4]. The Sales and Use Tax Law requirements with respect to books and records[5] are:
 
“Sellers and consumers must keep complete records of all business transactions, including sales, receipts, purchases and other expenditures and must retain the records for examination by the state.”
 
The Sales Tax laws continues with rules relating to the examination of those records[6]. The Sales Tax laws arms CDTFA with the power to impose personal liability on corporate officers and other “responsible persons” for failures to collect and pay-over Sales Tax[7].
The statute that imposes the Cannabis Cultivation Tax [“CCT”] and the Cannabis Excise Tax [“CET”] uses the same definition as Sales Tax for its definitions of “gross receipts” as well as for its definitions of “retail sale”, “purchase” and “transfer”. However, the Cannabis Tax law provides its own definition of “arm’s length transaction”[8] and a description of any individual as a “responsible person” is wholly absent. Finally, the Cannabis Tax laws create the need for yet another set of books and records as a consequence of the decision to tie CCT and CET into the so called “California Cannabis Track-and-Trace” pursuant to 18 CCR Sec. 3702[9].
The agencies within the State of California with primary responsibility for oversight of the cannabis industry for regulatory compliance are: the Bureau of Cannabis Control [“BCC”] for Retail [Dispensaries, Offsite Event and Distribution licensees; the California Department of Food and Agriculture’s [“CDFA”] CalCannabis Unit for Cultivation licensees; and the California Department of Public Health’s [“CDPH”] Manufactured Cannabis Safety Bureau [“MCSB”] for Manufacturing, Extraction and Testing Laboratories.
BCC has provided guidance with respect to the retention of required accounting records in Sec. 5037[10], track-and-trace records[11], and track-and-trace reporting requirements[12] for Retail Dispensaries. The     recordkeeping requirements are further augmented for Distributors[13].
CDPH-MCSB has added provisions which are substantially similar to the provisions created by BCC and CalCannabis in Subchapter 6, Article 1, Section 40500 – Record Keeping Requirements, Section 40505 – Sales Invoices and Receipts, Section 40510 Track-and-Trace System General Requirements, Section 40512. Track-and-Trace System Reporting Requirements, Section 40513 Track-and-Trace – Loss of Access, Section 40515 Track-and-Trace Temporary Licenses, and Section 40517 Track-and-Trace System – UID Tag Order.
 
We have spent 9,000-words and seventeen pages seeking to answer the question “how many sets of books must be maintained”. Perhaps the better approach, assuming the licensee has maintained all of the required records diligently is this. When an agency auditor shows up and says we are here to examine your books…just ask the auditor “which set of books would you like to review?”.
 
The recordkeeping requirements are mandated by CalCannabis for Cultivators include records[14], sales receipt and invoice requirements[15], track-and-trace requirements[16], track-and-track unique identifier requirements[17]. We are going to treat Section 8404 Track-and-Trace User Requirements, Section 8405 Track-and-Trace System Reporting Requirements, Section 8406 Track-and-Trace System Inventory Requirements, Section 8407 Track-and-Trace Cannabis and Non-Manufactured Cannabis Products in Temporary Licensee Possession at the Time of Annual License Issuance, Section 8408 – Inventory Audits, and Section 8409 Notification of Diversion, Theft, Losss or Criminal Activitiy are outside the scope of this article.
 
CalCannabis has provided specific guidelines for inspections and audits of licensees[18].
 
[1] The IRS provides guidance about the purposes of records, uses of records, and outlines their expectations about the
types of records that they expect taxpayers to maintain. We have provided an overview:
 
Monitor the progress of your business – You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.
 
Prepare your financial statements – You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business. An income statement shows the income and expenses of the business for a given period of time. A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Identify source of receipts. You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.
 
Keep track of deductible expenses – You may forget expenses when you prepare your tax return unless you record them when they occur.
 
Prepare your tax returns – You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. These are the same records you use to monitor your business and prepare your financial statements.
 
Support items reported on tax returns – You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
 
Electronic records – All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law.
 
An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. The electronic storage system must index, store, preserve, retrieve, and reproduce the electronically stored books and records in legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS.
 
Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures
are established to ensure continued compliance with all applicable rules and regulations. You still have the responsibility of retaining any other books and records that are required to be retained.
 
The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. This test is not considered an examination and the results must be shared with you. If your electronic storage system meets the requirements mentioned earlier, you will comply. If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. For details on electronic storage system requirements, See Revenue Procedure 97-22.
 
Specific Records to Keep – Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place.
 
Gross Receipts – Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include the following. Cash register tapes. Bank deposit slips. Receipt books. Invoices. Credit card charge slips. Forms 1099-MISC.
 
Inventory – Inventory is any item you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for inventory. Documents reporting the cost of inventory include the following. Canceled checks. Cash register tape receipts. Credit card sales slips. Invoices. These records will help you determine the value of your inventory at the end of the year.
 
Expenses – Expenses are the costs you incur (other than the cost of inventory) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following. Canceled checks. Cash register tapes. Account statements. Credit card sales slips. Invoices. Petty cash slips for small cash payments.
 
[2] Recording Business Transactions – A good recordkeeping system includes a summary of your business transactions. (Your business transactions are shown on the supporting documents just discussed.) Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store. A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently. A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.
Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. For example, a recordkeeping system for a small business might include the following items. Business checkbook. Daily summary of cash receipts. Monthly summary of cash receipts. Check disbursements journal. Depreciation worksheet. Employee compensation record.
 
[3] On September 30, 2015, AB 154, the Conformity Act of 2015 was enacted. The Act changes California’s conformity date to the Internal Revenue Code from January 1, 2009, to January 1, 2015. California’s conformity results in numerous substantive changes to both personal and corporation tax law with respect to those areas of preexisting conformity that are subject to changes under federal laws enacted after January 1, 2009. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. An analysis of the Conformity Act of 2015 can be found here.
 
The detailed history of California’s conformity to Federal law continues with:
 
2012 Conformity
Rollover of Airline Payments to Traditional IRAs
On February 14, 2012, the president signed the FAA Modernization and Reform Act into law. The Act allows qualified airline employees who participated in pension plans that were terminated as a result of airline bankruptcies during 2001-2007 to transfer an airline payment amount received by the employee to a traditional IRA. Under the provisions of the Act, qualified airline employees can roll over up to 90% of such payments to a traditional IRA. The new law also allows a qualified airline employee who previously rolled over an airline payment amount to a Roth IRA to transfer up to 90% of the payment to a traditional IRA. The airline payment amount rolled over to a traditional IRA may be excluded from gross income in the taxable year such payment was initially received by the employee. The IRA contribution must be made within 180 days from the date the payment was received or before August 14, 2012, whichever is later.
The California treatment of pension income is generally the same as federal treatment. The FAA Modernization and Reform Act provides for an extended period of limitations, if needed, to file an amended federal tax return for the year in which an airline payment amount was received. California taxpayers who file an amended federal tax return excluding airline payment amounts from gross income will need to file Form 540X, Amended Individual Income Tax Return, in order to report the changes for California income tax purposes. For more information, see Rollover of Airline Payments to Traditional IRAs.
 
Taxable Year 2011 – California Conformity to Federal Law
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. The Act changes California’s conformity date to the Internal Revenue Code from January 1, 2005, to January 1, 2009, for taxable years beginning on or after January 1, 2010. California’s conformity results in numerous substantive changes to both the Personal Income Tax Law and the Corporation Tax Law with respect to those areas of preexisting conformity that are subject to changes under federal laws enacted after January 1, 2005. The Act would also conform to the February 17, 2009, federal legislation providing an exclusion from gross income in any taxable year for energy grants provided in lieu of federal energy credits.
Yearly Summary of Federal Income Tax Changes
On or before January 10 of each year (unless federal changes are enacted late in the year), we provide an annual report (Summary of Federal Income Tax Changes) to the Legislature concerning changes to federal tax law occurring during the previous calendar year and the effect of those changes on California law.
 
Taxable Year 2010 – California Conformity to Federal Law
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. The Act changes California’s conformity date to the Internal Revenue Code from January 1, 2005, to January 1, 2009, for taxable years beginning on or after January 1, 2010. California’s conformity results in numerous substantive changes to both the Personal Income Tax Law and the Corporation Tax Law with respect to those areas of preexisting conformity that are subject to changes under federal laws enacted after January 1, 2005. The Act would also conform to the February 17, 2009, federal legislation providing an exclusion from gross income in any taxable year for energy grants provided in lieu of federal energy credits.
Summary of Federal Health Care Acts — 2010
The following are provisions of the new law affecting taxable years beginning prior to January 1, 2010. In addition, we will also provide updates about changes to the law for taxable years beginning on or after January 1, 2010.
Mortgage Forgiveness Debt Relief Extended
The Act allows taxpayers that had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013. Go to Mortgage Forgiveness Debt Relief for additional information.
Income Exclusion of Federal Energy Grants
The Act provides that federal energy grants provided in lieu of federal energy credits are excluded from California gross income and alternative minimum taxable income of individuals and business. The income exclusion is applicable for any taxable year and is thus retroactive in its application.
Hokie Spirit Memorial Fund Exclusion
The Act allows a California taxpayer to exclude from gross income any amount received from the Virginia Polytechnic Institute and State University, out of amounts transferred from the Hokie Spirit Memorial Fund established by the Virginia Tech Foundation. The income is excluded from gross income for any taxable year and is thus retroactive in its application.
 
Taxable Year 2009 – California Conformity to Federal Law
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. The Act changes California’s conformity date to the Internal Revenue Code from January 1, 2005, to January 1, 2009, for taxable years beginning on or after January 1, 2010. California’s conformity results in numerous substantive changes to both the Personal Income Tax Law and the Corporation Tax Law with respect to those areas of preexisting conformity that are subject to changes under federal laws enacted after January 1, 2005. The Act would also conform to the February 17, 2009, federal legislation providing an exclusion from gross income in any taxable year for energy grants provided in lieu of federal energy credits.
Federal Law Changes
American Recovery and Reinvestment Act of 2009 (PL 111-5, H.R. 1) enacted January 6, 2009. This provides supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009 and for other purposes.
 
Taxable Year 2008 – California Conformity to Federal Law
In general, California income tax law is based on federal income tax law. Usually, this is accomplished by conforming to specific provisions of the Internal Revenue Code (IRC) by reference as of a “specified date”, which is currently January 1, 2005. However, not all provisions of the IRC are applicable for California purposes. In addition, not all federal changes to a particular provision are applicable for California purposes for the same period and to the same extent the change is applicable for federal purposes.
Economic Stimulus Act of 2008 (PL 110-185, H.R. 5140) enacted February 13, 2008. This provides economic stimulus through recovery rebates to individuals, incentives for business investment, and an increase in the maximum amounts of mortgage loans issued by Fannie Mae and Freddie Mac.
Food, Conservation, and Energy Act of 2008 (PL 110-234, H.R. 2419 and reenacted by PL 110-246, HR 6124) enacted May 22, 2008. This act runs from 2008 through 2012 and reauthorizes most programs of the 2002 farm bill.
Heroes Earnings Assistance and Relief Tax Act of 2008 (PL 110-245, H.R. 6081) enacted June 17, 2008. This amends the IRC to provide tax benefits and incentives for military personnel.
Housing and Economic Recovery Act of 2008 (PL 110-289, H.R. 3221) enacted July 30, 2008. This provides four important tax law changes that impact individuals and small businesses. The changes are (1) tax credit of up to $7,500 for first-time homebuyers, to be repaid over 15 years; (2) property tax deduction for people who don’t itemize; (3) reporting of credit card and merchant payments to the IRS; and (4) prorated capital gains exclusion for real estate for periods of nonprimary use.
Emergency Economic Stabilization Act of 2008 (PL 110-343 H.R. 1424) enacted October 3, 2008. This act is intended to restore liquidity and stability to the financial system of the United States.
The Worker, Retiree, and Employer Recovery Act of 2008 ( H.R. 7327) enacted December 23, 2008. The act suspends the requirement to make annual minimum distributions from retirement plan accounts in 2009. The act provides pension funding relief for both single employer and multiple employer plans.
We provide an annual report (Summary of Federal Income Tax Changes) to the legislature on or before January 10th of each year (unless federal changes are enacted late in the year) concerning changes to federal tax law. See below for the Summary of Federal Income Tax Changes.
 
Taxable Year 2007 – California Conformity to Federal Law
In general, California income tax law is based on federal income tax law. Usually, this is accomplished by conforming to specific provisions of the Internal Revenue Code (IRC) by reference as of a “specified date”, which is currently January 1, 2005. However, not all provisions of the IRC are applicable for California purposes. In addition, not all federal changes to a particular provision are applicable for California purposes for the same period and to the same extent the change is applicable for federal purposes.
Small Business and Work Opportunity Tax Act of 2007 – (Subtitle B of TITLE VIII of Federal P.L. 110-28) – Enacted into law on May 25, 2007 and is generally effective for taxable years after the date of enactment. This act affects provisions from the Gulf Opportunity Zone Tax Incentives, Subchapter S provisions, other general and revenue provisions.
FTB Analysis of Small Business and Work Opportunity Tax Act of 2007 – (Subtitle B of TITLE VIII of Federal P.L. 110-28)
We provide an annual report (Summary of Federal Income Tax Changes) to the legislature on or before January 10th of each year (unless federal changes are enacted late in the year) concerning changes to federal tax law. See below for the Summary of Federal Income Tax Changes.
 
Taxable Year 2006 – California Conformity to Federal Law
In general, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2005. However, there are differences between California and federal law. Also, please note that California does not always conform to all of the provisions of a federal public law. For example, California does not conform to certain provisions of the American Jobs Creation Act (AJCA) of 2004 (P.L. 108-357). Also, California in general does not conform to the provisions of the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73).
The Heroes Earned Retirement Opportunities Act (P.L. 109-227) is applicable for California purposes. Some provisions of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) and the Pension Protection Act of 2006 (P.L. 109-280) are also applicable for California purposes. California conforms to the federal Pension Protection Act change, applicable for taxable year 2006, that allows tax-free distribution from traditional and Roth IRAs from taxpayers who are age 70 ½ or older of up to $100,000 for charitable contribution purposes. (This change is for tax years 2006 and 2007 only.)
We provide an annual report (Summary of Federal Income Tax Changes) to the legislature on or before January 10th of each year (unless federal changes are enacted late in the year) concerning changes to federal tax law. See below for the Summary of Federal Income Tax Changes.
 
Taxable Year 2005 – California Conformity to Federal Law
In general, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2005. However, there are continuing differences between California and federal law. It should be noted that California does not always conform to the entire provisions of a public law. For example, California does not conform to certain provisions of the American Jobs Creation Act (AJCA) of 2004 (P.L. 108-357). Also, California in general does not conform to the provisions of the Katrina Emergency Tax Relief Act of 2005 (P. L. 109-73). Also see: Conformity-related impacts of Assembly Bill 115 (Stats. 2005, Ch. 691).
 
Taxable Year 2004 – California Conformity to Federal Law
In general, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2001. However, there are continuing differences between California and federal law. It should be noted that California does not always conform to the entire provisions of a public law. California has conformed to some of the changes made to the IRC after January 1, 2001, including some provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16), the Victims of Terrorism Tax Relief Act of 2001 (Public Law 107-134), and the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147). In addition, California has now conformed to the Military Family Tax Relief Act of 2003 (Public Law 108-121). California has not conformed to any of the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (Public Law 108-27), the Working Families Tax Relief Act of 2004 (Public Law 108-311) and the American Jobs Creation Act (Public Law 108-357). However, pursuant to Revenue and Taxation Code Section 23801 any federal S corporation is a California S corporation and any shareholder of a federal S corporation is a shareholder of a California S corporation. Thus the expansion of eligibility for S corporation status contained in the American Jobs Creation Act (Public Law 108-357), is applicable under California law. California has not conformed to the new federal Health Savings Accounts contained in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173).
The original changes to the conformity between Federal and California law date back to 1981 and for the period 1981 – 2000 are beyond the scope of this memorandum.
[4] See several important examples of that authority –
 
Determination based on estimate.—The board does not exceed its authority in establishing taxable receipts on the basis of cost of goods sold plus appropriate markups, since the Sales and Use Tax Law clearly contemplates an examination of the documents of original entry to ascertain whether the books and the sales tax returns reflect accurately the taxable transactions made by the taxpayer. Maganini v. Quinn (1950) 99 Cal.App.2d
 
Consistency of Taxpayer’s Books and Records Not Conclusive.—Even though a taxpayer’s books and records are comprehensive and in agreement with each other, the Board is not required to accept such evidence as conclusive and may use recognized and standard accounting procedures to establish tax liability. Where the Board establishes a deficiency, the burden of proof is upon the taxpayer to explain any disparity between his books and records and the results of the Board’s audit. Riley B’s, Inc. v. State Board of Equalization (1976) 61 Cal.App.3d 610.
 
[5] Chapter 8, Section 7053 provides
Records. Every seller, every retailer as defined in subdivision (b) of Section 6015, and every person storing, using, or otherwise consuming in this State tangible personal property purchased from a retailer shall keep such records, receipts, invoices, and other pertinent papers in such form as the board may require.
Evidence.—The state is not bound to accept the statements of the taxpayer, unsupported by any record, which are contrary to entries in his books of transactions pointing to a larger sum as the true total. People v. Schwartz (1947) 31 Cal.2d 59.
Adequate records must support all claimed exemptions.—Taxpayer did not maintain records adequate to support claimed exempt sales of animal feed, because sales invoices were not correlated to exemption certificates. Paine v. State Board of Equalization (1982) 137 Cal.App.3d 438.
 
[6] Chapter 8, Section 7054 provides:
“Examination of records. The board or any person authorized in writing by it may examine the books, papers, records, and equipment of any person selling tangible personal property and any person liable for the use tax and may investigate the character of the business of the person in order to verify the accuracy of any return made, or, if no return is made by the person, to ascertain and determine the amount required to be paid.
Post-audit test as admissible evidence.—Board’s test period results were properly admitted as evidence where sales during test period were representative of sales during audit period and where taxpayer’s business remained similar in both periods. Paine v. State Board of Equalization (1982) 137 Cal.App.3d 438.”
 
[7] Personal liability of corporate officer.
“Sec. 6829
Upon the termination, dissolution, or abandonment of the business of a corporation, partnership, limited partnership, limited liability partnership or limited liability company, any officer, member, manager, partner, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company in complying with any requirement of this part, shall, notwithstanding any provision in the Corporations Code to the contrary, be personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer, member, manager, partner, or other person willfully fails to pay or to cause to be paid any taxes due from the corporation, partnership, limited partnership, limited liability partnership, or limited liability company pursuant to this part.
 
The officer, member, manager, partner, or other person shall be liable only for taxes that became due during the period he or she had the control, supervision, responsibility, or duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company described in subdivision (a), plus interest and penalties on those taxes.
 
Personal liability may be imposed pursuant to this section, only if the board can establish that the corporation, partnership, limited partnership, limited liability partnership, or limited liability company had included tax reimbursement in the selling price of, or added tax reimbursement to the selling price of, tangible personal property sold in the conduct of its business, or when it can be established that the corporation, partnership, limited partnership, limited liability partnership, or limited liability company consumed tangible personal property and failed to pay the tax to the seller or has included use tax on the billing and collected the use tax or has issued a receipt for the use tax and failed to report and pay use tax.
 
For purposes of this section “willfully fails to pay or to cause to be paid” means that the failure was the result of an intentional, conscious, and voluntary course of action.
 
Except as provided in subdivision (f), the sum due for the liability under this section may be collected by determination and collection in the manner provided in Chapter 5 (commencing with Section 6451) and Chapter 6 (commencing with Section 6701).
 
(f) A notice of deficiency determination under this section shall be mailed within three years after the last day of the calendar month following the quarterly period in which the board obtains actual knowledge, through its audit or compliance activities, or by written communication by the business or its representative, of the termination, dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company, or, within eight years after the last day of the calendar month following the quarterly period in which the corporation, partnership, limited partnership, limited liability partnership, or limited liability company business was terminated, dissolved, or abandoned, whichever period expires earlier. If a business or its representative files a notice of termination, dissolution, or abandonment of its business with a state or local agency other than the board, this filing shall not constitute actual knowledge by the board under this section.”
 
[8] Section 34010(a) which provides
“Arm’s length transaction” shall mean a sale entered into in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction.”
 
[9] 18 CCR Sec. 3702 provides
“A distributor or cannabis retailer that is required to record commercial cannabis activity in the California Cannabis Track-and-Trace system pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (commencing with Section 26000 of the Business and Professions Code), shall enter into the California Cannabis Track-and-Trace system specified information as follows:
 
Wholesale Cost. When cannabis or cannabis products are sold or transferred to a cannabis retailer in an arm’s length transaction, the distributor and cannabis retailer shall enter the cannabis retailer’s wholesale cost of the cannabis or cannabis products.
 
(2) Retail Selling Price. When cannabis or cannabis products are sold in a retail sale, the cannabis retailer shall enter the retail selling price of the cannabis or cannabis products.”
 
[10] 5037. Record Retention.
(a)Each licensee shall keep and maintain the following records related to commercial cannabis activity for at least seven years:
(1)Financial records including, but not limited to, bank statements, sales invoices, receipts, tax records, and all records required by the California Department of Tax and Fee Administration (formerly Board of Equalization)under title 18, California Code of Regulations, Sections 1698 and 4901.
(2)Personnel records, including each employee’s full name, social security or individual tax payer identification number, date employment begins, and date of termination of employment if applicable.
(3)Training records including, but not limited to, the content of the training provided and the names of the employees that received the training.
(4)Contracts with other licensees regarding commercial cannabis activity.
(5)Permits, licenses, and other local authorizations to conduct the licensee’s commercial cannabis activity.
(6)Security records, except for surveillance recordings required pursuant to section 5044 of this division.
 (7)Records relating to the composting or destruction of cannabis goods.
(8)Documentation for data or information entered into the track and trace system.
(9)All other documents prepared or executed by an owner or their employees or assignees in connection with the licensed commercial cannabis business.
(b) All required records shall be prepared and retained in accordance with the following conditions:
Records shall be legible; and
 
(2) Records shall be stored in a secured area where the records are protected from debris, moisture, contamination, hazardous waste, fire, and theft.
(c) The Bureau may make any examination of the books and records of any licensee as it deems necessary to perform its duties under the Act.
(d) All records are subject to review by the Bureau any time the licensee is exercising the privileges of the license or at any other time as mutually agreed to by the Bureau and the licensee. Prior notice by the Bureau to review records is not necessary. The Bureau may review records outside of the licensee’s standard daily business hours.
(e) Records shall be kept in a manner that allows records to be produced for the Bureau immediately upon request at the licensed premises in either hard copy or electronic form, whichever the Bureau requests.”
 
[11] 5048. Track and Trace System.
“(a) A licensee shall create and maintain an active and functional account within the track and trace system prior to engaging in any commercial cannabis activity, including the purchase, sale, test, packaging, transfer, transport, return, destruction, or disposal, of any cannabis goods.
(b)A licensee shall designate one individual owner as the track and trace system account manager. The account manager may authorize additional owners or employees as track and trace system users and shall ensure that each user is trained on the track and trace system prior to its access or use.
(1)The account manager shall attend and successfully complete all required track and trace system training, including any orientation and continuing education.
(2)If the account manager did not complete the required track and trace system training prior to receiving their annual license, the account manager shall sign up for and complete state mandated training, as prescribed by the Bureau, within five calendar days of license issuance.
(c) The account manager and each user shall be assigned a unique log-on, consisting of a username and password. The account manager or each user accessing the track and trace system shall only do so under his or her assigned log-on, and shall not use or access a log-on of any other individual. No account manager or user shall share or transfer his orher log-on, username, or password, to be used by any other individual for any reason.
(d) The account manager shall maintain a complete, accurate, and up-to-date list of all track and trace system users, consisting of their full names and usernames.
 
A licensee shall monitor all compliance notifications from the track and trace system, and timely resolve the issues detailed in the compliance notification.
A licensee shall keep a record, independent of the track and trace system, of all compliance notifications received from the track and trace system, and how and when compliance was achieved.
If a licensee is unable to resolve a compliance notification within three business days of receiving the notification, the licensee shall notify the Bureau immediately, by submitting the Notification and Request Form, BCC-LIC-027 (New 10/18), which is incorporated herein by reference.
 
(f)A licensee is accountable for all actions its owners or employees take while logged into or using the track and trace system, or otherwise while conducting track and trace activities.”
 
[12] 5049. Track and Trace Reporting.
“(a)A licensee shall record in the track and trace system all commercial cannabis activity, including:
(1)Packaging of cannabis goods.
(2)Sale and transfer of cannabis goods.
(3)Transportation of cannabis goods to a licensee.
(4)Receipt of cannabis goods.
(5)Return of cannabis goods. 
(6)Destruction and disposal of cannabis goods. 
(7)Laboratory testing and results.
(8)Any other activity as required pursuant to this division, or by any other licensing authority.
(b) The following information shall be recorded for each activity entered in the track and trace system:
(1)Name and type of the cannabis goods.
(2)Unique identifier of the cannabis goods.
(3)Amount of the cannabis goods, by weight or count, and total wholesale cost of the cannabis goods, as applicable.
(4)Date and time of the activity or transaction.
(5)Name and license number of other licensees involved in the activity or transaction.
(6)If the cannabis goods are being transported:
(A)The licensee shall transport pursuant to a shipping manifest generated through the track and trace system, that includes items (1) through (5) of this subsection, as well as: 
(i)The name, license number, and licensed premises address of the originating licensee.
(ii)The name, license number, and licensed premises address of the licensee transporting the cannabis goods.
(iii)The name, license number, and licensed premises address of the destination licensee receiving the cannabis goods into inventory or storage
(iv)The date and time of departure from the licensed premises and approximate date and time of departure from each subsequent licensed premises, if any. 
(v)Arrival date and estimated time of arrival at each licensed premises.
(vi)Driver license number of the personnel transporting the cannabis goods, and the make, model, and license plate number of the vehicle used for transport.
(B)Upon pick-up or receipt of cannabis goods for transport, storage, or inventory, a licensee shall ensure that the cannabis goods received are as described in the shipping manifest, and shall record acceptance or receipt, and acknowledgment of the cannabis goods in the track and trace system.
(C)If there are any discrepancies between the type or quantity of cannabis goods specified in the shipping manifest and the type or quantity received by the licensee, the licensee shall record and document the discrepancy in the track and trace system and in any relevant business record.
(7) If cannabis goods are being destroyed or disposed of, the licensee shall record in the track and trace system the following additional information:
(A) The name of the employee performing the destruction or disposa 
(B)The reason for destruction and disposal.
(C)The entity disposing of the cannabis waste.  
(8) Description for any adjustments made in the track and trace system, including, but not limited to:
Spoilage or fouling of the cannabis goods.
Any event resulting in damage, exposure, or compromise of the cannabis goods.
(9) Any other information as required pursuant to this division, or by any other applicable licensing authorities.
(c) Unless otherwise specified, all transactions must be entered into the track and trace system within 24 hours of occurrence.
(d) Licensees shall only enter and record complete and accurate information into the track and trace system, and shall correct any known errors entered into the track and trace system immediately upon discovery.”
[13] 5310. Records.
“In addition to the records required by section 5037 of this division, a licensed Distributor shall maintain the following records:
Records relating to branding, packaging and labeling;
Inventory logs and records;
Transportation bills of lading and shipping manifests for completed transports and for cannabis goods in transit;
Vehicle and trailer ownership records;
Quality-assurance records;
Records relating to destruction and disposal of cannabis goods;
Laboratory-testing records;
Warehouse receipts; and
Records relating to tax payments collected and paid under Revenue and Taxation Code sections 34011 and 34012.”
 
[14]  8400. Record Retention. For the purposes of this chapter,“record” includes all records, applications, reports, or other supporting documents required by the department. 
“(a)Each licensee shall keep andmaintain the records listed in subsection 8400(d) of this chapter for at least seven (7) years from the date the document was created.
(b)Licensees shall keep records, either electronically or otherwise, identified in section 8400(d) of this chapter on the premises of the location licensed. All required records shall be kept in a manner that allows the records to be examined provided at the licensed premises or delivered to te department, upon request. 
(c)All records are subject toreview by the department during standard business hours or at any other reasonable time as mutually agreed to by the department and the licensee. For the purposes of this section, standad business hours are deemed to be 8:00am ‐ 5:00pm (Pacific Standard Time). Prior notice by the department to review records is not required. 
(d)  Each licensee shall maintain all the following records on the licensed premises, including but not limited to: 
Department issued cultivation license(s); 
Cultivation plan; 
All records evidencing compliance with the environmental protection measures pursuant to sections 8304, 830 8306, and 8307 of this chapter; 
All supporting documentation for data or information entered into the track‐and‐trace system; 
All UIDs assigned to product in inventory and all unassigned UIDs. UIDs associated with product that has been retired from the track‐and‐trace system must be retained for six (6) months after the date the tags were retired; 
Financial records related to the licensed commercial cannabis activity, including but not limited to, bank statements, tax records, contracts, purchase orders, sales invoices, and sales receipts; 
Personnel records, including each employee’s full name, social security number or individual taxpayer identifition number, date of beginning employment, and, if applicable, date of termination of employment; 
Records related to employee training for the track and trace system or other requirements of this chapter. Records shall include, but are not limited to, the date(s) training occurred, description of the training provided, and the names of the employees that received the training; 
Contracts with other state licensed cannabis businesses; 
All permits, licenses, and other authorizations to conduct the licensee’s commercial cannabis activity; 
Records associated with composting or disposal of cannabis waste; 
Documentation associated with loss of access to the track nad trace system prepared pursuant to section 8402(d) of this chapter. 
 
(e)   All required records shall be prepared and retained in accordance with the following conditions: 
Records shall be legible; and 
Records shall be stored in a secured area where the records are protected from debris, moisture, contamination, hazardous waste, fire, and theft”. 
 
[15] 8401. Sales Invoice or Receipt Requirements.
“The licensee shall prepare a sales invoice or receipt for every sale, transport, or transfer of cannabis or nonmanufactured cannabis product to another licensee. Salesinvoices and receipts may be retained electronically but must be readily 
accessible for examination by the department, other state licensing authorities, any state or local law enforcement authority, and the California Department of Tax and Fee Administration. Each sales invoice or receipt shall include all of the following: 
 
Name, business address, and department or other licensing authority issued license number of the seller; 
Name, business address, and department or other licensing authority issued license number of the purchaser
Date of sale or transfer (month, day, and year). The date of any sale or transfer of cannabis and nonmanufacturedcannabis products shall be the date of transfer to the licenseereceiving it; 
Invoice or receipt number; 
Weight or quantity of cannabis and nonmanufactured cannabis products sold or transferred; 
 
(1)  Weight. For the purposes ofthis section a licensee must use wet weight or net weight. Wet weight and net weight shall be determined following weighing device requirements pursuant to section 8213 of this chapter and measured, recorded, and reported in U.S. customary units (e.g., ounce or pound); or International System of Units (e.g., kilograms, grams, or milligrams). 
 
(2)  Weighing Devices. A licensee shall follow weighing device requirements pursuant to section 8213 of this chapter. 
Cost to the purchaser, including any discount applied to the total price, shall be recorded on the invoice; 
Description for each item, including strain or cultivar, and all of the applicable information below: 
 
(1)  Plant; 
(2)  Flower; 
(3)  Leaf;  
(4)  Shake; 
(5)  Kief; and 
(6)  Pre‐rolls. 
         (h)Signature of the seller, or designated representative of the seller, acknowledging accuracy of the cannabis and nonmanufactured cannabis products being shipped; 
(i)Signature of the purchaser, or designated representative of the purchaser, acknowledging receipt or rejection of thecannabis or nonmanufactured cannabis products.”
[16] 8402. Track‐and‐Trace System.
“Except as provided in section 8405(e) of this chapter, each licensee shall report in the department’s track‐and trace system the disposition of immature and mature plants, nonmanufactured cannabis products on the licensed premises, any transfers associated with commercial cannabis activity between licensees,and any cannabis waste pursuant to this chapter. 
The licensee is responsiblefor the accuracy and completeness of all data and information entered into the track-and-trace system. Data entered into the track and trace system is assumed to be accurate and can be used to take enforcement action against the licensee if not corrected. 
Each licensee shall use the track‐and‐trace system for recording all applicable commercial cannabis activities. Each licensee shall: 
 
(1)   Designate an owner or other natural person(s) in the licensee’s organization that can legally represent the license 
to be the licensee’s track‐and‐trace account manager(s); 
(2)   Require the track‐and‐trace account manager to complete track‐and‐trace system training. If the designated 
account manager did not complete the track‐and‐trace system training prior to the licensee receiving their annual 
license, the account manager will be required to register for the track‐andtrace system training provided by the  department within five (5) business days of license issuance; 
 (3)   Designate track‐and‐trace system users, as needed, and require the users to be trained
 by the licensee’s track‐and‐trace account manager in the proper and lawful use of the track‐and trace system before the users are permitted to access the track‐and‐trace system; 
(4)   Require the track‐and‐trace account manager to maintain an accurate and complete list of all track‐and‐trace 
system account managers and users and update the list immediately when changes occur; 
 (5)   Cancel any track‐and‐trace users from the licensee’s track‐andtrace system account if that individual is no longer 
authorized to represent the licensee; and 
(6)   Correct any data that is entered into the track‐and‐trace system in error within three (3) business days of discovery of the error. 
(c) Pursuant to section 8109 of this chapter, each licensee shall identify an owner in the licensee’s organizatn     on to be the licensee’s track‐and‐trace system account manager. The licensee’s designated track‐and trace system account manager shall be responsible for all the following: 
 
(1)  Complete track‐and‐trace system training provided by the department. If the designated account manager did not 
complete the track‐and‐trace system training prior to the licensee receiving his or her annual license, the 
designated account manager will be required to register for them track‐and‐trace system training provided by the 
department within five (5) calendar days of license issuance; 
 
(2)  Designate track‐and trace system users, as needed, and require the users to be trained in the proper and lawful use of the track‐and‐trace system before the users are permitted to access the track‐and‐trace system; 
 
(3)  Maintain an accurate and complete list of all track‐and‐trace system users and update the list immediately when 
changes occur; 
 
(4)  Within three (3) calendar days, cancel the access rights of any track‐and‐trace user from the licensee’s track‐and‐
trace system account if that individual is no longer authorized to use the licensee’s track‐and‐trace system account; 
 
(5)  Correct any data that is entered into the track‐and trace system in error within three (3) calendar days of discovery of the error; and 
 
(6)   Notify the department immediately for any loss of access that exceeds three (3) calendar days.
 
The licensee is responsible for all actions any licensee representatives take while logged into the track‐and‐trace system or otherwise conducting commercial cannabis activities access and use of the licensee’s track‐and trace system account. 
 
If a licensee loses access to the track‐and‐trace system for any reason, the licensee shall prepare and maintain comprehensive records detailing all required inventory trackingactivities conducted during the loss of access. 
 
(1)  Once access to the track‐and‐trace system is restored, all inventory tracking activities that occurred during the loss of access shall be entered into the track‐and trace system within three (3) calendar business days. 
 
(2)  A licensee shall document the date and time when access to the track‐and‐trace system was lost, when it was restored, and the cause for each loss of access. 
 
(3)  A licensee shall not transfer cannabis or nonmanufactured cannabis products to a distributor until such time as access to the system is restored and all information is recorded into the track‐and‐trace system.”
 
[17] 8403. Track‐and‐Trace System Unique Identifiers (UID).
 
(a)  Within five (5) calendar business days of the date the licensee’s designated account manager(s) was credentialed by the department to use the track‐and‐trace system, the designated account manager licensee shall request UIDs using the track‐and‐trace system as prescribed by the department in Artic le 5 of this chapter. 
 
(1)  The licensee shall only use UIDs provisioned and distributed by the department, or the department’s designee. 
 
(2)  The licensee shall maintain a sufficient supply of UIDs in inventory to support tagging in accordance with this 
section. 
 
(3)  The licensee shall use the track‐and‐trace system to document receipt of provisioned and distributed UIDs within 
three (3) calendar business days of physical receipt of the UIDs by the licensee. 
 
(4)  Except as provided in section 8407 of this chapter, all cannabis shall be entered into the track‐and‐trace system by the licensee starting with seed, cannabis which has been propagated onsite or purchased from a licened nursery, or seedling purchased from a licensed nursery pursuant to this chapter. 
 
(b)  The UID shall accompany the cannabis products through all phases of the growing cycle, as follows: 
 
(1)  Licensees with immature plants shall assign a UID to each established lot respectively. The lot UID shall be placed in a position so it is visible and within clear view of an individual standing next to the immature lot to which the UID was assigned, and all UIDs shall be kept free from dirt and debris. For the purposes of this subsection, each lot of imaure plants shall be uniform in strain or cultivar and shall not have more than one hundred (100) immature plants at any one time. All immature plants in a lot shall be labeled with the corresponding UID number assigned to the lot and shall be contiguous to one another to facilitate identification by the department. 
 
(2)  Immature plants transferred from a licensed nursery, via a distributor, to a licensed cultivator shall meet 
requirements of subsection (b)(1) above. Each immature plant intended for retail sale shall have a UID affixed, or be  labeled with the corresponding UID number of the lot, and be recorded in the track‐and‐trace system prior to  transfer from the licensed nursery. 
 
(3)  The licensee shall apply a UID to all individual plants at the time any plant is moved to the designated canopy area or when an individual plant begins flowering, as defined in section 8000(l) of this chapter. The licensee may tag individual immature plants prior to movement to the designated canopy area or prior to flowering. 
 
(4)  UIDs are required for each mature plant. UIDs shall be attached to the main stem, at the base of each plant. The UID shall be attached to the plant using a tamper evident strap or zip tie and placed in a position so it is visible and  itwithin clear view of an individual standing next to the mature plant to which the UID was assigned and UIDs shall be kept free from dirt and debris. Licensees are prohibited from removing the UID frm the mature plant to which it was attached and assigned until the plant is harvested, destroyed, or disposed. 
 
(c)   Each harvest batch shall be assigned a unique harvest batch name which will be associated with all UIDs for each individual plant, or portion thereof, contained in the harvest batch. 
 
(d)  UIDs are required for all cannabis and nonmanufactured cannabis products and shall be associated with the  corresponding harvest batch name from which the cannabis and non-manufactured cannabis products were derived. 
 
(e)   Upon destruction or disposal of any cannabis or nonmanufactured cannabis products, te applicable UIDs shall be retired in the track‐and‐trace system by the licensee within three (3) calendar business days of the destruction or disposal and be performed in accordance with the licensee’s approved cannabis waste management plan.
 
[18] § 8500. Inspections, Investigations, and Audits Applicability.
 
(a)  All licensees and applicants shall be subject to inspection, investigation, or audit of their licensed premises and records by the department to determine compliance with applicable laws and regulations. 
 
(b)  Inspections, investigations, and audits may be conducted by the department in coordination with the California Department of Fish and Wildlife and the State Water Resources Control Board consistent with section 12029, subdivision (c) of the Fish and Game Code. 
 
8501. Inspections, Investigations, Examinations, and Audits.
 
The department shall conduct inspections, investigations, examinations, and audits of licensees including, but not limited to,a review of any books, records, accounts, inventory, or onsite  operations specific to the license.
The department may conduct an inspection, investigation, examination, or audit for any of the following purposes:
To determine accuracy and completeness of the application prior to issuing a license;
To determine compliance with license requirements including, but not limited to, the cultivation plan;
To audit or inspect any records outlined in section 8400 of this chapter;
To respond to a complaint(s) received by the department regarding the licensee;
To inspect incoming or outgoing shipments of cannabis and nonmanufactured cannabis products; and
 
(6)  As deemed necessary by the department.
(b)Inspections, investigations, examinations, and audits of a licensed premises shall be conducted at any time, or as otherwise agreed to by the department and the licensee or its agents, employees, or representatives. Prior notice of inspection, or investigation, or examination is not required.
 
(c)   No applicant, licensee, its or any agent or employees shall interfere with, obstruct, or impede the department’s inspection, investigation, or audit. This includes, but is not limited to, the following actions:
Denying the department access to the licensed premises;
Providing false or misleading statements;
Providing false, falsified, fraudulent, or misleading documents and records; and
Failing to provide records, reports, and other supporting documents.
 
(d)  Upon completion of an inspection, investigation, examination, or audit, the department shall notify the licensee of any violation(s) and/or action(s) the department is taking.
 

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