On June 30, 2022, Gov. Gavin Newsom approved Assembly Bill No. 195, which added new sections to the California Revenue and Taxation Code, including Sec. 34015.2 that imposes personal liability for unpaid cannabis tax.

Any California tax practitioner who reads Sec. 34015.2 may feel déjà vu. The wording of the statute largely mirrors another personal liability law which has been around for decades, namely Revenue and Taxation Code Sec. 6829. Both statutes allow the state of California to collect the unpaid tax a business still owes the state after it terminates.

The question becomes: from whom can the state collect this unpaid tax?

Sec. 6829 imposes personal liability on certain responsible persons for the unpaid sales or use taxes, plus penalties and interest, of a closed business for which they willfully failed to pay or cause to be paid for the business [Cal. Rev. & Tax Code Sec. 6829(a)]. Effective Feb. 8, 1997, the state adopted Regulation Sec. 1702.5, which provided guidance on the proper interpretation of Sec. 6829.

After the legalization of non-medicinal cannabis in 2018, and the subsequent spread of retail cannabis businesses, a personal liability law for cannabis tax became necessary. That is where Sec. 34015.2 came into the picture. Sec. 34015.2 imposes personal liability on certain responsible persons for the unpaid cannabis taxes, interest and penalties, of a closed business which they willfully failed to pay or cause to be paid for the business [Cal. Rev. & Tax Code Sec. 34015.2(a)].

Sec. 6829 is the personal liability statute for sales and use tax, Sec. 34015.2 is the personal liability statute for cannabis tax.

Operative on April 1, 2025, California Department of Tax and Fee Administration (CDTFA) adopted Regulation Sec. 3820 which provides guidance on the proper interpretation of Sec. 34015.2. In other words, Regulation Sec. 3820 will play the same role for Sec. 34015.2 that Regulation Sec. 1702.5 plays for Sec. 6829. The real meat about the elements of these personal liability rules and how they work is outlined in these regulations.

Regulation Sec. 1702.5 and Regulation Sec. 3820 are worded similarly, but the small differences between them will lead to significant differences in how these laws will be implemented.

Standard of Proof

At the end of both Regulations Secs. 1702.5 and 3820, there is a subsection establishing the burden of proof and standard of proof to determine the individuals responsible for unpaid tax. Both state that the CDTFA has the burden to prove the requirements of personal liability “under the preponderance of the evidence standard of proof” [Cal. Code Regs. tit. 18, Sec. 1702.5(d); Sec. 3820(d)]. After this phrase, Regulation Sec. 3820 ends. Regulation Sec. 1702.5, however, has one final subsection following it:

“(e) Presumption. If the person is not an officer or member or a partner or a manager with an ownership interest in the entity, the person is presumed to not be personally liable under subdivision (a), unless the Board rebuts this presumption with clear and convincing evidence.” [Cal. Code Regs. tit. 18, 1702.5(e)]

This presumption is noticeably absent from Regulation Sec. 3820. What does this mean in real life? First, recall that the clear and convincing evidence standard is a greater burden of proof than the preponderance of the evidence standard [Black’s Law Dictionary, Third Pocket Edition 256 (3d ed. 2006)]. For either kind of tax, the standard to establish personal responsibility for a business officer, partner, member or manager with ownership interest, is the preponderance of the evidence. For a normal employee, however, the state will need less evidence to establish personal responsibility for unpaid cannabis excise tax than for unpaid sales and use tax.

Here are a few hypothetical examples to illustrate the difference:

Example 1: The State wants to collect unpaid sales tax from a closed retail store called Rob’s Sporting Goods. The State is investigating Martha as a potentially responsible person because she was the CFO of the corporation operating Rob’s during the liability period. Since Martha was a corporate officer, the State will just need to meet the preponderance of the evidence standard to prove that she fulfills the elements of personal responsibility.

Example 2: Again, the State wants to collect unpaid sales tax from a closed retail store called Rob’s Sporting Goods. The State is also investigating an employee named Bob as a potentially responsible person. Bob was working as a cashier during the liability period. He was not a corporate officer, member, partner or manager with ownership interest in Rob’s Sporting Goods. Thus, pursuant to Regulation Sec. 1702.5(e), there is a presumption that Bob is not personally liable. The State would have to provide clear and convincing evidence to rebut that presumption and establish Bob’s personal responsibility.

Example 3: The State wants to collect unpaid cannabis excise tax from a closed dispensary called Four Twenteez. The State is investigating an employee named Mary Jane as a potentially responsible person. Mary Jane was working as a cashier during the liability period. She was not a corporate officer, member, partner or manager with ownership interest in Four Twenteez. Here, there is no presumption that Mary Jane is not responsible, so there is no need for clear and convincing evidence to rebut such a presumption. Thus, the State will just need to meet the preponderance of the evidence standard to prove that Mary Jane fulfills the elements of personal responsibility. The same would be true if Mary Jane was the CFO.

Volunteers

Another difference between the regulations is the definition of who is a responsible person. Regulation Sec. 1702.5(b)(1) and Regulation Sec. 3820(b)(1) define responsible person with mostly identical language. Regulation Sec. 1702.5(b)(1), however, contains the following sentence, which is absent in Regulation Sec. 3820(b)(1):

“The term ‘responsible person’ does not include any person who would otherwise qualify but is serving in that capacity as an unpaid volunteer for a non-profit organization.” [Cal. Code Regs. tit. 18, Sec. 1702.5(b)(1)]

Here is another instance where the collection of unpaid cannabis tax will have less restriction than the collection of unpaid sales and use tax. The drafters likely left out this sentence from Regulation Sec. 3820 knowing that many cannabis retailers are structured as nonprofit organizations. Medicinal cannabis businesses formed before 2018 were organized as nonprofit cooperatives or collectives, based on California Department of Justice guidelines. Today, many cannabis businesses are structured as nonprofit mutual benefit corporations, so much so that the California Secretary of State’s cannabis forms and fees webpage provides quick links to forms for such entities to convert to stock corporations or LLCs. Even an unpaid volunteer at a nonprofit cannabis business may possibly be a responsible person for unpaid cannabis tax, if he or she meets the elements of personal liability. This is not the case for an unpaid volunteer at a nonprofit with unpaid sales or use tax.

Tax Collection

Revenue and Taxation Code Sec. 6829 imposes personal liability for sales taxes actually collected by the business entity. Revenue and Taxation Code Sec. 34015.2 imposes personal liability for cannabis taxes owed by the business entity, regardless of whether the taxes were actually collected by the business entity.

The new Regulation Sec. 3820 imposes personal liability if CDTFA establishes that while the person was a responsible person, the business “was required to collect the cannabis excise tax imposed pursuant to Revenue and Taxation Code section 34011.2 and failed to remit such tax when due” [Cal. Code Regs. tit. 18, Sec. 3820(a)].

On the other hand, the older Regulation Sec. 1702.5 imposes personal liability if CDTFA establishes that while the person was a responsible person, the business either:

“1. sold tangible personal property in the conduct of its business and collected sales tax reimbursement on the selling price (whether separately itemized or included in the selling price) and failed to remit such tax when due; or

2. consumed tangible personal property and failed to pay the applicable tax to the seller or the Board; or

3. issued a receipt for use tax and failed to report and pay the tax.” [Cal. Code Regs. tit. 18, Sec. 1702.5(a)]

There is a subtle but significant difference between the two regulations. For responsible person liability in a sales tax case, there is a requirement that the business actually collected sales tax reimbursement from customers and failed to remit it. For responsible person liability in a cannabis tax case, the CDTFA does not need to establish that the business collected cannabis excise tax—only that the business was legally required to do so and failed to remit it. This is another instance that arguably gives the State a less stringent standard to establish personal responsibility for unpaid cannabis tax than for unpaid sales tax.

Dischargeability in Bankruptcy

The statutes that create sales tax liability and cannabis tax liability are worded differently. Revenue and Taxation Code Sec. 35(b) imposes sales tax liability on the seller “For the privilege of selling tangible personal property at retail …” Revenue and Taxation Code Sec. 34011(a) imposes the cannabis tax on the purchaser of cannabis, not on the seller. It states, “… a cannabis excise tax shall be imposed upon purchasers of cannabis or cannabis products sold in this state …” This is another subtle but significant difference between the two taxes.

California law requires the seller to collect both the cannabis excise tax and the sales tax; however, when the seller collects sales tax, it is collecting a tax that it (the seller) owes. In contrast, when a seller of cannabis collects the cannabis excise tax, it is collecting and holding the tax (in trust) on behalf of the buyer. This is similar to when an employer collects and holds the employees’ portion of payroll taxes. The taxes collected on behalf of the employees are held in trust. Similarly, cannabis excise taxes collected from buyers are held in trust by the seller. This distinction in the mechanics of how these two taxes are assessed and collected leads to very different results in bankruptcy cases.

Pursuant to 11 U.S.C. Sec. 507(a)(8)(C), trust fund taxes are never dischargeable in bankruptcy. Therefore, California cannabis taxes are never dischargeable in bankruptcy. California sales taxes, on the other hand, may be discharged in bankruptcy since they are not trust fund taxes. See Raiman v. State Bd. of Equalization (In re Raiman), 172 B.R. 933 (9th Cir. BAP 1994), and Ilko v. Cal. St. Bd. of Equalization (In re Ilko), 651 F.3d 1049, 1052 (9th Cir. 2011).

Also, cannabis businesses generally cannot get relief in bankruptcy court because they are engaged in an activity that is illegal under federal law. Bankruptcy courts routinely dismiss cases filed by cannabis businesses “for cause” pursuant to 11 U.S.C. Sec. 707(a) because of their violation of “non-bankruptcy law,” specifically the federal Controlled Substances Act, 21 U.S.C. Sec. 801 et seq. See Arenas v. U.S. Trustee (In re Arenas) 535 B.R. 845 (10th Cir. BAP 2015). While the cannabis business entity is generally precluded from receiving bankruptcy relief, the responsible person may be able get relief in federal bankruptcy court. This issue has not yet been developed in the bankruptcy court case law.

Conclusion

While the new Regulation Sec. 3820 and the existing Regulation Sec. 1702.5 are similar, the subtle differences in wording cause significant difference in their real-life implementation.

It seems obvious that California is serious about collecting unpaid cannabis excise tax. A good way to achieve this objective is by extending the umbrella of potentially responsible persons, by creating a lower barrier to establish personal responsibility. Tax practitioners should take note of the important differences new Regulation Sec. 3820 creates, compared with previously existing sales tax personal responsibility cases.

This article was previously published in the California Tax Lawyer's 2025 issue. The California Tax Lawyer is an annual publication from the California Lawyer's Association Taxation Section.