For most operators in California’s cannabis industry, the licensed and regulated market probably feels like a slow-burning dumpster fire with no end in sight. But for politicians and state regulators who designed the legalized industry under Proposition 64, the massive new influx of cannabis taxes probably feels like a job well done.
Since the adult-use industry was born in 2016, cannabis companies of all shapes and sizes have struggled to survive—much less turn a profit—while the state has raked in billions of dollars. In 2020, California collected $1.1 billion from cannabis companies, and the state was expected to collect $1.3 billion in 2021.
Under the current tax structure, all products sold in California are subject to a 15-percent excise tax, and cultivators also pay a tax based on the weight of their harvest. Beyond that, there’s a state retail tax of 7.25 percent, and local taxes vary from 5 to 15 percent; Los Angeles, Oakland, and San Jose all collect 10 percent of gross receipts from cannabis businesses. Add it all up, and cannabis companies are paying an effective tax rate of up to 45 percent.
In contrast, Oregon mandates a 17-percent cannabis excise tax and an additional 3-percent local municipal tax. How quaint.
As a result of the tax crush and some of the strictest compliance regulations in the U.S., California companies have been going bankrupt and/or folding their tents at an alarming rate. About 16,000 licensed companies existed in 2018, but that number had shrunk to 10,000 by 2020. A large percentage of the licenses still operational in early 2021 were provisional—8,280 of 9,950. The provisional licensing program was created in 2018 to give entrepreneurs additional time to fulfill environmental and other compliance measures necessary to receive a full annual permit, but provisional status may as well be considered permanent in some cases, judging by the numbers.
If state politicians want to create a more viable industry, particularly for small and medium-sized operators, they must determine which segments of the industry are being damaged the most by high cannabis taxes and then reassess rates across the board. As yet, the state hasn’t indicated it will do anything of the sort. Remarkably, it is preparing to raise cultivation taxes by 4.5 percent.
California isn’t hurting for tax revenues: The state’s annual “Fiscal Outlook” predicts a $31-billion surplus for the 2022 budget year. To the industry, that smells like greed.
Industry outcry
In response, operators are demanding immediate relief and threatening to revolt if the state doesn’t comply.
Flow Kana Chief Executive Officer Michael Steinmetz penned an op-ed on Medium.com pushing his board of directors to withhold the company’s cultivation taxes and put them into escrow until the state makes “real, actionable change” to address over-taxation.
In Oakland, industry leaders demanded tax amnesty from the city and state. Amber E. Senter, cofounder and chairman of Supernova Women, hosted a press conference on the steps of city hall to raise awareness about the situation and ask for help from the police after a series of armed robberies at dispensaries. “The cannabis industry needs tax relief,” she said. “Cannabis equity businesses, in particular, need more money and resources. Small businesses and small farmers need help. Piling on and increasing taxes and now the threat of robberies and violence is proving to be unbearable for most cannabis operators.”
The Cannabis Business Association of Sonoma County and the Sonoma Valley Cannabis Enthusiasts called on the Sonoma County Board of Supervisors to implement immediate tax reform at both the county and state levels. Recommended resolutions would eliminate the state cultivation tax and suspend the county’s collection of cultivation taxes for a predetermined period of time. Sonoma County is one of five counties being asked to participate in an effort to seek state suspension of cultivation taxes.
Governments respond
San Francisco was the first city to respond to the industry, recently approving a one-year suspension of the city’s marijuana business tax. The variable tax rate of 1 to 5 percent on gross receipts will not be enforced until January 1, 2023. Of course, that’s just a drop in the bucket when you’re talking about a $1.3-billion tax base.
Another major factor undermining the legal industry in California is the continued success of the illicit market, which has been growing and thriving since the 1970s. By most estimates, the black market is about twice the size of the legal market, giving consumers ready access to weed that is dramatically cheaper than the products in licensed retail shops.
The deck is stacked against the small, legacy farmers who built the industry from the ground up over the past few decades. Before Prop. 64 passed, politicians selling the plan vowed to protect small farmers by waiting until 2023 to issue licenses for cultivators farming more than one acre. In theory, this was a good idea, but in practice it quickly became a bad joke. Large companies merely bought large numbers of “small” (less than one-quarter acre) licenses and stacked them to create major operations. Somehow, the state forgot to impose any limitation on the number of small licenses a single company could acquire. Oops.
If California politicians and regulators have any intention of allowing small farmers to survive and compete against large, well-funded companies, they will need to act fast. As it stands now, the commoditization of weed in the Golden State is on the fast track, and the inevitable consolidation is sure to leave legacy farmers in the dust.
