The California Department of Tax and Fee Administration recently announced that it would be increasing the tax rates for cannabis. In an already struggling legal market, many within the industry are saying that it could only work to further the gap between the legal and illicit markets. In 2017, prior to Prop 64, California’s cannabis sales reached about $3 billion and decreased to $2.5 billion by 2018, and is projected to earn around $3.1 billion this year. The illicit market is projected to earn at least $8.7 billion this year alone. Most consumers name taxes as their primary reason for not purchasing cannabis products from licensed retailers. Increasing the tax rates could only further drive the consumers away and put licensed businesses, out of business.
Here are the new tax rates effective January 1, 2020*:
The CA excise tax rate will increase from 15% on a 60% markup to an 80% markup. (The markup rates are based on the average market price of products sold at retail. This includes the retailer’s wholesale cost of cannabis products and the taxes at other levels of cultivation, manufacturing, and distribution.)
The tax on Cannabis flower, dry weight per ounce will increase from $9.25 to $9.65.
The tax on Cannabis leaves,dry weight per ounce will increase from $2.75 to $2.97,
The tax on fresh cannabis plants per ounce will increase from $1.29 to $1.35.
*This does not include local tax rates
For many legal cannabis businesses in California, it is already difficult to cost-effectively maintain their facilities and businesses under the taxes set by the CDTFA and local municipalities. Most companies are passing on the taxes leaving the consumer to pay, though many aren’t willing. Some businesses are moving to operating outside of the state due to high operating costs and fees. Increasing the taxes could facilitate the demise of the legal market altogether.