The cannabis industry has been flourishing since the US federal government legalized hemp for recreational purposes in December 2018. The Farm Bill legalized hemp with a maximum concentration of 0.3% THC per unit limiting the amount of psychoactive substance in a product.
Recently, the California Department of Tax and Fee Administration (CDTFA) announced that it might raise taxes on the legal cannabis industry once again. For an industry that is currently facing an economic downturn, the increased tax rates might be considered to be another blow.
On one hand, the illicit cannabis market is thriving, with non-compliant guidelines, offering significantly lower prices to consumers with high medicinal claims. This is giving a stiff competition to the legal cannabis industry which follows stringent guidelines issued by government bodies to ensure consumer safety and quality standards.
The CDTFA’s latest plan of increasing taxes will further expand the price point discrepancies between the non-compliant and compliant markets. The tax increment could drive away potential cannabis consumers from the heavily-taxed legal market if the renewed taxes are passed on to the consumers rather than taken in by the operators.
While the CDTFA describes its aim to enhance the quality of life for Californians by fairly and efficiently taking the revenue that supports essential public services, it is ultimately hampering the legal cannabis industry to function in a cost-effective manner. This latest plan of tax increment is prompting some of the cannabis executives in California to believe that CDTFA is intentionally trying to pester the cannabis industry and crushing the livelihood of legal operators.
An exasperated cannabis executive said, “ It makes you question if the state really wants the legal cannabis industry to fail”.
Cannabis Markup Rate
According to Forbes CDFTA is responsible for evaluating the tax mark up rate for the cannabis industry every six months. As per their website, they used a statewide market data analysis to determine the average mark up rate between the retail selling price and wholesale cost of cannabis and cannabis products. Based on this data, the latest mark up rate will be at 80%, effective from January 1, 2020.
In addition to this, the 15% cannabis excise tax rate is based on the average market price of cannabis or its products in a retail transaction.
Cultivation Tax Rates:
As per the new tax rates effective from January 1, 2020, the tax on cannabis flowers per dry weight per ounce will become $9.65 from $9.25. Additionally, marijuana leaves per dry weight per ounce will become $2.97 from $2.75, and fresh cannabis plants per ounce will become $1.35 from $1.29.
The rates will be applicable to cannabis that a cultivator transfers or sells to a distributor or manufacturer.
California is envisioned to be the Shangri-La state of the legal cannabis industry, due to its sheer size, the scope of growth, dispensaries and the abundance of products that they carry. However, this vision might be drastically impacted by the change in tax rates, if the cannabis supply chain operators and consumers alike are thrown off the market with heavy prices.
Co-owner of Erba Markets, Jay Handal, says the primary reason for the existence of the black market is because the taxes are too high. Consumers are looking for affordably priced products, but both state and city governments, are terrible at shutting down illicit black market stores. Raising the tax slab for the legal cannabis industry will only pave the way for more people to turn to black markets for accessing cannabis products, said Jay.
Some stores are even shutting down and moving out of California because of the high operating costs.
Leone Posod, CEO of a CBD skincare company, Treat Yourself, said the latest tax hike is disappointing news for both operators as well as consumers. He further added that the recent hike will only strengthen the illicit cannabis market since the regulated market is already expensive for both operators and consumers.
Posod said he’s moving his company out of California as it simply does not generate sufficient revenue for them to operate seamlessly. He hopes that other cannabis industry executives will keep a close watch on how their businesses are functioning and make necessary changes to stay in the industry.
On the flip side of the story, some illicit farms are owned by family generations and are barely breaking even. Many illicit farmers are complaining that they cannot afford to pay the required state-entrance fees to become compliant, let alone the taxes on cannabis and its products.