I’ve written a couple of times about the ongoing struggle that is the California cannabis tax situation, and I was recently on a great panel about the future of cannabis taxes in the country. California cannabis taxes are some of the highest in the U.S.. The situation seems to be, thankfully, evolving for the better though with the advent of SB 1074.
Current California Cannabis Taxes
Pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), since January 2018, California cannabis taxes came into effect. MAUCRSA mandates that a “cultivation tax” be applied on all “harvested cannabis that enters the commercial market upon all cultivators.” This is in addition to a 15% excise tax that applies to all retail sales.
Specifically, back in 2018:
(1) The tax for cannabis flowers [was] nine dollars and twenty-five cents ($9.25) per dry-weight ounce. (2) The tax for cannabis leaves [was] two dollars and seventy-five cents ($2.75) per dry-weight ounce.
Cultivation taxes on “fresh cannabis plant” by weight also got added along the way. Further, a mandatory mark-up is imposed depending on whether sales of cannabis are at an arm’s length or not. The mark-up rate is determined by the California Department of Tax and Fee Administration (“CDTFA”) on a biannual basis in six-month interval, and the current mark-up is 80%.
California Cannabis Inflation
CDTFA is allowed to adjust cultivation tax rates annually for cannabis leaves to reflect fluctuations in flower prices. However, as of January 1, 2020, on an annual basis, the CDTFA must also adjust the tax rates for inflation. As of 2022, cultivation tax rates increased to $10.08 per dry weight ounce of flower; $3.00 per dry weight ounce of leaves; and $1.41 per ounce of fresh cannabis plant. While the Assembly created some tax relief for licensees during COVID-19 (i.e., to essentially freeze lower tax rates for a certain amount of time), this latest adjustment for 2022 is really what enraged licensees. I wrote about the potential for a California cannabis tax revolt here. In January of this year, Governor Newsom also recognized the industry’s cries for reform and vowed to work with the Assembly to lower cannabis taxes to better stabilize and sustain the industry.
It appears that some meaningful tax relief is on the horizon for at least cultivation and manufacturing licensees in the form of SB 1074, which was proposed in the California Senate last week. If passed, SB 1074 would adjust upwards the applicable retail excise tax based on calculations by the Department of Finance tied to estimates around weight-based cultivation taxes (as in effect on June 30, 2022). The bigger change though is that this bill completely eliminates the current cultivation tax as of July 1, 2022. These moves combined essentially shift the California cannabis tax burden to retailers. Not everyone is happy about the elimination of the cultivation tax. Namely, child care services programs, including those for low-income youth, have spoken out about how these tax cuts will directly negatively impact current services that rely heavily on current cannabis taxes.
We’ll definitely be watching to see how SB 1074 plays out in California. So, stay tuned.