Tax & AccountingMarch 01, 2021

Cannabis Meets Wayfair – San Francisco Prop D


Where Cannabis and Wayfair Meet: San Francisco Voters Say Yes to Proposition D Cannabis Tax

On election 6-Nov-2018, San Francisco voters approved Proposition D, a measure to impose new taxes on recreational cannabis businesses. The measure will levy a local gross receipts tax on marijuana of between one to 5 percent, depending on whether the business is a retail operator and how much gross revenue it takes in. The first $500,000 of gross receipts from sales of recreational cannabis will be exempt from the tax, as will retail sales of medical cannabis.

However, the language of the proposition also extends the reach of this local nexus provision beyond marijuana businesses to other businesses as well. Given this growing interest in states to legalize and tax marijuana businesses, as well as the growing reach of Wayfair economic nexus to both state and local governments, especially in so-called home rule states like California, Proposition D bears a closer look.

San Francisco Nexus Standard adopted in Proposition D

Although the new local tax is noteworthy in and of itself, what is especially interesting is that the tax on online sales is not limited to cannabis businesses–and this nexus decision adopted even before the state of California itself has at least formally spoken on whether and to what extent it will adopt Wayfair economic nexus. The approved San Francisco law literally reads:


A person is “engaging in business within the City,” within the meaning of this Article 6, if that person meets one or more of the following conditions: (a) The person maintains a fixed place of business within the City; or …(k) The person has more than $500,000 in total gross receipts, as the term “gross receipts” is used in Article 12-A-1 of the Business and Tax Regulations Code, in the City during the tax year, using the rules for assigning gross receipts under Section 956.1 of Article 12-A-1.


To better understand how a local jurisdiction like San Francisco can adopt a nexus standard at all, it is useful to review both California home rule law and current nexus standards in California.

Home Rule in California

Of course, each state has different rules on the creation of taxing powers at the local level and must be separately researched. But taking California as the example, the starting point for any home rule analysis is the constitution of the state, which creates the rules for the formation and powers of local governments, in this case, cities. In California, the powers of the cities are spelled out in Article 11, which lays out the principle that cities created pursuant to a charter can override general state laws with which they conflict as to any subject which can be classified as a municipal affair.

In the event of conflict between the regulations of state and of local governments, or if the state legislation discloses an intent to preempt the field to the exclusion of local regulation, it may be an open question subject to potential litigation as to who wins the tug of war.

Current State of California Nexus Standard after Wayfair

As we all know, in June 2018 the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that a business’ physical presence is no longer the only standard by which states may collect sales and use taxes.

Shortly after that decision, the California Department of Tax and Fee Administration (CDTFA) mistakenly posted on its website a draft notice containing new tax collection rules for retailers, indicating that California may adopt use tax collection thresholds for remote vendors like the thresholds adopted under South Dakota’s law effective August 1, 2018 (sales that exceeds $100,000, or 200 or more separate transactions). That draft notice was immediately removed from its website. Since then, the California legislature proposed a bill to address the issue (a $500,000 nexus threshold for use tax collection) but so far has not passed one. In the interim, the CDTFA is attempting to implement economic nexus without legislative actions, believing that between the California ‘Long-Arm’ provision and the Wayfair decision, CDTFA has the authority to enforce the nexus thresholds like South Dakota without passing any additional legislation or regulation. That “Long-arm” statute reads,

Section 6203(c) defines “retailer engaged in business in this state” to mean “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.”

Key Takeaway

Although Proposition D passed, there was considerable opposition to it. It remains to be seen how the new San Francisco law will hold up in court, especially after California definitively adopts its version of Wayfair (expected in early 2019). But in the meantime, all businesses, not just marijuana businesses, must comply with the economic-type nexus law now in place in San Francisco and must plan for compliance with what looks like “soon-to-be-adopted” Wayfair-type economic nexus in California. It is therefore critical to have the technical and research tax systems in place to track these developments now and in the future.

Stay current with changing nexus regulations across all states by regularly visiting our Sales Tax Nexus reference page.

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