Tax policy is an interesting animal and odd results occur whenever non-tax people get involved in developing tax policy. Oregon Governor Tina Kotek and the Oregon Liquor and Cannabis Commission (OLCC) are jumping into the tax policy waters. Their involvement started back in March 2023, when Willamette Week posted an interesting investigation into La Mota, which holds licenses to operate marijuana businesses in Oregon. Among the findings, Willamette Week claimed the owners of La Mota had Oregon Department of Revenue (DOR) tax liens of more than $1.6 million and unpaid marijuana taxes of at least $621,000. Understandably, there was backlash and a knee jerk reaction to “fix” the perceived problems.
On May 16, Governor Kotek directed the OLCC to step up regulation of cannabis retailers, which would include La Mota. According to the directive, the OLCC and the DOR will implement a new mandate requiring applicants for marijuana licenses to provide OLCC with proof of tax compliance. The directive claims “OLCC has existing statutory authority to make this change and will engage in administrative rulemaking to add this requirement.”
Subsequently, the OLCC and DOR issued a list of frequently asked questions regarding the proposed requirements. The FAQ document notes that other state agencies require state tax compliance certificates. Those agencies include the Bureau of Labor and Industries for labor contractors, the Oregon Lottery for contractors, and the Department of Human Services for child-care agencies. However, the statutory authority is not universal among the state agencies. Independently, the OLCC has issued a list of frequently asked questions regarding marijuana tax compliance and has promised to update the list as additional questions arise.
On June 9, the DOR adopted temporary rules broadening their ability to issue tax compliance certificates to cover marijuana sales taxes.
On June 12, the OLCC released proposed temporary rules that would require marijuana retailers, and each entity or individual listed as an applicant on the license, to obtain a tax compliance certificate from the DOR to renew the license. The OLCC adopted these temporary rules on June 15.
- The OLCC’s proposed temporary rules would require marijuana retailers and each individual or entity listed as an applicant to obtain a tax compliance certificate from the DOR issued within 90 days of the renewal application.
- A retailer proposing a change of business structure would only require certificates for each new applicant.
- An applicant may request reconsideration if the OLCC deems an application incomplete and the request is received within 10 days of the date the notice was sent by the OLCC. Any reconsideration hearing would not be subject to the contested case proceeding requirements.
- The proposed rules do not apply to other license types.
- The proposed rules do not carve out exceptions for taxpayers who may have entered into installment agreements with the DOR, who have reasonable cause for failure to timely pay or file, or who qualify for innocent spouse relief.
- The DOR issued temporary rules expanding the taxes covered by tax compliance certificates to include all taxes administered by the DOR, which now include marijuana sales taxes.
- In order for a taxpayer to receive a tax compliance certificate from the DOR, the taxpayer must (1) have filed and paid all taxes, assessments, interest, and penalties for the prior three-year period, (2) be in compliance with an approved payment plan, or (3) have a good faith appeal before the Oregon Tax Court.
In Further Detail
Governor Kotek's assertion there is existing statutory authority is not free from doubt. ORS 475B.045 sets forth circumstances under which the OLCC may refuse to issue a marijuana license. One such circumstance is when the applicant “[h]as not demonstrated financial responsibility sufficient to adequately meet the requirements of the premises proposed to be licensed” (ORS 475.045(2)(h)). Governor Kotek's directive is likely relying on this statute when stating the OLCC has existing authority. It is important to note, however, that the statutory language requires some connection between financial responsibility and operation of the licensed premises. Otherwise, the statement “sufficient to adequately meet the requirements of the premises to be licensed” would not be needed. The OLCC will likely need to establish some form of connection between an applicant's personal tax liabilities and the licensee's ability to operate the licensed facility. Additionally, it is unclear why the OLCC has chosen to limit the tax compliance certificate requirement to licensed retailers. Presumably it is because retailers are responsible for collecting and remitting marijuana sales taxes. However, tax compliance certificates are not limited to—and may not even confirm—retailers’ payment of marijuana sales taxes.
The statutory language governing marijuana licenses is distinct from language found for other state licenses. For instance, prior to becoming a lottery game retailer, “the director shall consider factors such as financial responsibility, integrity, reputation, accessibility of the place of business or activity to the public, security of the premises, the sufficiency of existing lottery game retailers for any particular lottery game to serve the public convenience and the projected volume of sales for the lottery game involved” (emphasis supplied, ORS 461.300). The delegation of authority for denying lottery contracts is materially different than the statutory language for marijuana retailers.
The DOR has broad authority to adopt rules and regulations and has issued a temporary rule amending OAR 150-305-0304. The temporary rule broadens the scope of taxes covered by the certificate to include all taxes administered by the DOR—including the administration of marijuana sales taxes. In order for the DOR to issue a tax compliance certificate, a taxpayer must (1) have filed and paid all Oregon taxes administered by DOR for the prior three-year period, (2) be in compliance with an approved payment plan with the DOR, or (3) have a good faith appeal pending before the Oregon Tax Court. Taxpayers who have received a notice of deficiency but not yet appealed or petitioned the Tax Court, who are in an internal DOR appeals process, or are negotiating a payment plan would not be eligible to receive a tax compliance certificate. It is not clear how much discretion the DOR has when determining whether a Tax Court petition is made in good faith. Lastly, there are no exceptions for a taxpayer who has reasonable cause for failure to timely file returns or pay taxes, or a taxpayer who may qualify for innocent spouse or equitable relief.
How should retailers prepare for these changes?
- Communicate with the existing ownership group and determine if any may be unable to obtain a compliance certificate.
- Ensure your governing documents are up to date. You may want to include mandatory buy/sell/redemption language if an owner/applicant prevents you from renewing your license. You may also want to include language stating owners will comply with applicable state rules and provide notice if they fail to pay tax liabilities.
- Provide written or oral testimony in response to the temporary rules.
- Anticipate the OLCC will broaden the rule to apply to all license types and not just retail licenses.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.