On November 21, 2019, the California Department of Tax and Fee Administration (CDFTA) announced increases to both the cannabis excise taxes, which are taxes owed by the consumer upon the purchase of cannabis, and cannabis cultivation tax, which are owed by cultivators and are calculated by weight. While the actual excise tax rate remains at 15% of the retail price, the basis for calculating the tax, called a “mark-up rate”, will rise from 60% to 80%, resulting in significant added cost to the consumer for regulated cannabis. The cultivation tax rates increased an average of 4% from the previous rate, which is also likely to be passed on to the consumer, not only because of the tendency of businesses to maintain their bottom line but also because cannabis businesses across the board have seen their margins shrink or disappear as a result of the financial burden of regulation and extremely high tax obligations.
The tax rate increases come at a strange time given it is widely accepted that the increased tax and regulatory burdens hoisted on California’s regulated commercial cannabis industry have resulted in a surge in black market cannabis sales where consumer prices can be as much as 40% less than those at State licensed retail operations. Prior to the CDTFA’s announcement, black market sales were reported to make up almost 75% of the total cannabis sales in California. Black market products place the public at significant and potentially deadly risk because there is no way to ensure the they are safe for consumption and it is extremely difficult to determine who is placing products known to cause harm, such as black market vapes, into the market. The increase also seems to buck the trend of the State and local jurisdictions considering tax decreases designed to reduce the financial burden on licensed operators and to coax businesses and consumers into the regulated market, which would result not only in an increase in health and consumer safety but also increase long term tax revenue.
This is a confusing and frustrating time for the California cannabis industry. On the one hand, the California Bureau of Cannabis Control openly admits that licensed cannabis industry operators are facing incredible financial pressure from regulation, on the other the CDFTA announces an increase in taxation. This new burden makes the short-term outlook for State licensed operators appear even more grim. However, operators who can weather the storm should be poised to do better as the regulatory environment expands and stabilizes due to the sheer size of the California cannabis marketplace.