Landlords: you know that dream tenant who always pays their rent on time and never calls you complaining about repairs that need to be done? Better make sure they’re really a dream tenant or things could turn into a nightmare.
In 2022, Governor Newsom established a cannabis task force to crack down on illegal cannabis growers. In April of this year, his office announced that state officials confiscated more than $316 million worth of illegal cannabis in the first quarter of 2025. You’re probably wondering why tax attorneys (and you) should care about this. Trust me, we do, and you should. When the government seizes illegal cannabis, it notifies the California Department of Tax and Fee Administration (the CDTFA for short). Why? Because, if that cannabis was sold legally, it would have generated tax revenue for the state government. So, illegal grows cost the state money. The CDTFA calculates how much the cannabis would be worth if it were sold legally, slaps on a 15% excise tax, and goes after anyone it can tie to the grow, including, you guessed it, landlords. And the 15% tax is just the beginning – we can’t forget about penalties. There’s a 10% failure to file a sales tax return, a 25% “unlicensed person” penalty, and a whopping 50% failure to pay penalty. Let’s do a little math: $316 million of cannabis seized translates to $47.4 million of tax, plus $40.3 million in penalties. Plus interest. That’s a lot of green.
So, what does all this have to do with landlords? Think about it. Chances are the person renting the property doesn’t have the pockets the landlord does, including ownership of the property itself. The CDTFA opens an audit, and it is up to the landlord to essentially prove a negative – that they had no idea their tenant was operating an illegal cannabis grow on the premises and therefore shouldn’t be held liable.
What can landlords do to protect themselves? Glad you asked. A few of the things CDTFA auditors ask for: applicant credit checks, rental applications, lease agreements, utility bills, copies of income tax returns listing the rental property on Schedule E. Make sure the lease agreement states that cannabis is not allowed on the property. Perform periodic physical inspections of the property and document them. If the landlord is the one paying the utility bills or if the utilities are in the landlord’s name and you notice an unusual increase in utility costs, investigate it immediately! And, most importantly, let our experienced attorneys go to bat for you if you get an audit notice.