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 consumers aren’t willing to absorb that cost just to be legal weed.
The recent increase was not voter approved. Written into Prop 64, the CDTFA gets the unilateral control of state cannabis taxation rates and are obligated to reexamine the rates annually, with or without feedback from stakeholders in the industry.
They said they used data from Metrc™, the California sanctioned track-and-trace system used to log all commercial cannabis product movements, including retail sales.
Instead of creating one tax rate across the board, the agency has decided that the distribution tax be a tax that the retailer then ends up getting taxed on as well. The distribution tax was effectively 24% and is now being raised to 27%. But the law isn’t stated clearly, the distributor has to do the math on what 15% of an 80% markup is. Then the city that the license is located in is responsible for collecting tax on the state tax.
It’s unconstitutional to place a tax on tax, but that’s what California has done. Eighty cents of every retail sale dollar is going to taxes.
Some businesses are moving to operate outside of the state due to high operating costs and fees. Increasing the taxes could facilitate the demise of the legal market altogether.
B Le Grand and Lynn You