The Oregon Liquor and Cannabis Commission (OLCC) is set to adopt a new temporary emergency tax compliance rule for cannabis retailers that will be problematic for many in the industry. The rule, which is in response to Governor Kotek’s directive to make state tax compliance a requirement for the issuance or renewal of OLCC retail licenses, is expected to be enacted at the OLCC’s June 15 meeting and take effect immediately on the following day.
According to OLCC sources, the rule will mandate all new retailer license applicants and existing retailer license renewals to obtain a Tax Compliance Certification, demonstrating compliance with all state tax requirements, before the OLCC can approve the application. The requirement would apply to all “applicants” under OLCC rules, which generally includes individuals and entities with direct or indirect ownership stakes of 20% or more, as well as those with direct operational control over the licensed entity. Failure of any single applicant to demonstrate tax compliance will result in “inactivation” of the application. However, sources have confirmed that there will be a mechanism for licensees to remove certain applicants from the license who are unable to meet the tax compliance requirements.
Per the rule, “tax compliance” is not merely limited to taxes incurred in the course of business for a cannabis retailer – it includes all Oregon State cannabis sales, business, payroll, and personal taxes for every “applicant,” irrespective of the individual’s or entity’s role or involvement with the retailer license. As a result, a tax-compliant licensee could have an application inactivated based on the personal income tax delinquency of its business partners, even if unrelated to the cannabis industry or retail tax. For change of ownership applications, an inactivation effectively means denial, while renewal applications essentially face license cancellation. Notably, inactivation, unlike an application denial, does not grant applicants the right to a hearing to appeal the decision before an administrative law judge. Though we have yet to see the final language of the rule, we anticipate that many in the industry will be eager to challenge the rule based on a violation of licensees’ due process rights.
If the rule takes effect as expected on June 16, it would immediately impact all pending and future change of ownership applications. For license renewal applications, the rule would apply to licenses set to expire on or after September 15, 2023. However, specific details of the rule have not yet been made available to the public and might only be disclosed after the June 15 OLCC meeting. Following its adoption, the OLCC will initiate permanent rulemaking procedures to establish the rule on a long-term basis.
The proposed rule has raised concerns within the cannabis industry, particularly regarding the potential implications for businesses already facing numerous difficulties. Alongside challenges like depressed prices and new testing requirements, the introduction of the tax compliance rule adds another obstacle for businesses to navigate, and licensed retailers will need to consider how to structure (or restructure) their business ownership if there are significant equity holders with tax compliance issues. Our team is continuing to monitor these issues and is available to provide legal advice and support.
Questions? Please contact Ferdinand Ruplin or any of the other attorneys in Tonkon Torp’s Cannabis Industry Group. This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice.