If you can’t beat ’em, join ’em. And if you can’t tax ’em, smoke ’em.
Just weeks after marijuana became legal for retail sale in the state of California, there has already been a tax cut, with the city of Berkeley cutting its tax to 5% from 10% of gross receipts. Credit rating firm Fitch said it’s due in part to high levels of both state and local taxes on cannabis, but also because illegal sales of cannabis are impacting legal sales, forcing legal dispensaries to compete on price.
The move comes after advocates in the Bay Area said taxes on marijuana were too high.
Steve DeAngelo, the co-founder, and CEO of Harborside in Oakland said in January that the tax rate for cannabis was nearly 35%, including state and local taxes, up from 15% prior. Included in that rate is the regular 6% sales tax, 3.25% sales tax for Alameda County, a 15% state tax on marijuana and a 10 percent Oakland tax on recreational marijuana.
“That is a huge hit. And it’s going to mean that a significant number of people, less affluent consumers, are going to turn to the lower prices of the underground market,” DeAngelo said in an interview with CBS SFBayArea.
DeAngelo added that people might turn to the black market because of the high taxes, but that his dispensary had a variety of different products, in addition to being tested.
“All of our medicine is tested in a laboratory,” DeAngelo said. “It’s evaluated both for safety, for things like pesticides and pathogenic molds, and it’s also evaluated for potency.”
Aside from the aforementioned tax rates in Oakland, tax rates throughout the state vary greatly and can add as much as 10% or 20% of the cost, just because of local taxes. There is also a $9.25 per ounce state tax on cultivation, as well as a 15% state excise tax and state and local sales taxes as high as 10.25%.
The added tax revenue was a factor in the state passing a law to allow recreational cannabis sales. A November 2017 Fortune article cited data that the state could generate as much as $1 billion in added tax revenue, but some people in the cannabis industry said the high tax rates could allow for illicit or black market sales to gain an unfair advantage.
Fitch estimates that tax collections have “far exceeded initial estimates” in both Colorado and Washington, which began collecting taxes on legal sales in 2014. The rating firm added that while it is still too early to know if California will generate the same levels of revenue that Colorado and Washington have, high taxes are going to be an issue.
“[C]omparatively high taxes on legal cannabis will likely continue to divert sales to illegal markets, reducing potential tax collections despite actions such as Berkeley’s,” the firm said in an email obtained by Green Market Report.
The way the legal and regulatory framework was set up in California, it allows local jurisdictions to ban sales of non-medical cannabis entirely. Despite that, illegal sales have continued, flooding the market and negatively impacting the sales potential for legal goods.
The city of Berkeley and mayor Jesse Arreguín hope that the tax cut will improve its competitive position; the tax cut may also be a sign of things to come in a state where 67 cities and counties have taxes on legal cannabis sales.