Part 3 of Green Market Report’s series on California‘s war on cannabis.
If you were to ask what the main problem facing the largest cannabis market in the country is, there would be one resounding answer – TAXES.
Cannabis taxes on the state and local levels are choking the life out of businesses across the state of California and cultivators, manufacturers, and retailers are looking for relief anywhere. Currently, businesses are subject to a $161 a pound state cultivation tax for flower, then a 15% state excise tax (which is really 27%, but we’ll get into that later), a 10% state sales tax in most areas, not to mention the varying local cultivation, processing, manufacturing, distribution, and retail tax, effectively making the tax rate on the average cannabis purchase about 50%.
At first glance, these taxes might seem reasonable, but when examined more closely they are not what they seem. For example, the 15% excise tax is really defined by an arm’s length transaction with a 15% rate being based on 80% of the retail price and not the wholesale price, effectively truly making the rate 27%. These onerous taxes aren’t levied on any other industry except for cannabis and business owners are crying out for mercy. Legislators on the state and local levels are looking to provide band-aids to the situation, but so far only Senate Bill 1281 is offering long-term solutions.
The legislation introduced by Senator Steven Bradford (D-35) amends the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA) would eliminate the cultivation tax altogether and lower the “15%” excise tax to 5%. It would also have the excise tax paid by the retailers instead of the distributers. Currently, retailers are paying the excise tax to distributors for products has yet to sell, this new provision would have retailers pay the tax directly to the state after the product has been sold and they have the money to pay it. SB 1281 just makes sense.
There are other pieces of legislation that have been introduced to help alleviate the tax burden, Assembly Bill 2792 and AB 2506, but all they do is suspend the cultivation tax until 2028. While businesses could benefit from these suspensions right now, what happens in 5 years? They are all back in the same place where they started, struggling to stay afloat under the crushing tax burdens.
California brought in close to $1 billion in tax revenue last year for the first three quarters, but the illicit market is rampant and legal businesses can’t compete. A group of cannabis executives banned together and wrote to Governor Gavin Newsom about the situation, “The opportunity to create a robust legal market has been squandered as a result of excessive taxation,” they added. “75% of cannabis in California is consumed in the illicit market and is untested and unsafe.”
Newsom needs to address this massive problem that is paralyzing the growth and stability of the California market. He has promised tax relief but has been vague in how he would actually accomplish it. Eliminating the cultivation tax and vastly reducing the excise tax would be a good start. SB 1281 is the legislation that needs to cross his desk that is chocked-full of long-term solutions and common sense. No other industry is burdened with these kinds of taxes and cannabis shouldn’t be either. Support SB 1281.