California OTA Partially Grants Taxpayer's Appeal

Dismisses Negligence Penalty for San Francisco Cannabis Dispensary

Published on Mar. 10, 2026

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The California Office of Tax Appeals (OTA) has partially granted a taxpayer's appeal regarding a Notice of Determination issued by the California Department of Tax and Fee Administration (CDTFA) for unreported taxable sales and a negligence penalty. The taxpayer operated a cannabis dispensary selling medical cannabis and related products in San Francisco.

Why it matters

This case highlights the complexities and challenges faced by cannabis businesses in California when it comes to tax compliance and audits. The partial grant of the taxpayer's appeal suggests issues with the CDTFA's audit methods and underscores the importance of maintaining accurate records for cannabis companies.

The details

After two reaudits reducing the taxable measure, the CDTFA calculated unreported taxable sales. However, the OTA partially granted the taxpayer's appeal, finding that the CDTFA's use of an indirect audit method was not appropriate and dismissing the negligence penalty.

  • The dispute involved a Notice of Determination issued by the CDTFA for the relevant tax period.

The players

California Office of Tax Appeals (OTA)

A state agency that hears appeals related to tax determinations and assessments.

California Department of Tax and Fee Administration (CDTFA)

The state agency responsible for administering and collecting taxes, including those related to cannabis businesses.

Taxpayer

A cannabis dispensary operating in San Francisco that sells medical cannabis and related products.

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The takeaway

This case highlights the ongoing challenges faced by cannabis businesses in California when it comes to tax compliance and the importance of maintaining accurate records to navigate the complex regulatory environment.