California marijuana taxes will increase New Year’s Day

After having avoided an increase in state taxes on legal marijuana, California officials changed course Thursday and announced MJ excise and cultivation taxes will go up effective Jan. 1.

High state and local tax rates have been an industry problem that have made legal businesses less competitive with the illicit market: Unlicensed retailers can lure customers with lower prices, since rogue shops don’t pay any taxes.

In announcing the move, the California Department of Tax and Fee Administration (CDTFA) – which must recalculate the wholesale cannabis markup rate every six months – revealed that the markup rate for the marijuana excise tax will increase from 60% to 80% on New Year’s Day.

The markup rate is used to provide the basis for California’s 15% excise tax.

The increase will also raise the state cultivation tax to adjust for inflation, raising those taxes as well:

  • $9.65 from $9.25 for an ounce of flower, or an increase of 4.3%.
  • $2.87 from $2.75 for an ounce of leaves, or an increase of 4.3%.
  • $1.35 from $1.29 for an ounce of fresh marijuana plant material, or an increase of 4.6%.

The CDTFA’s markup rate is based on the wholesale average market price of cannabis, and the agency had previously declined to increase the state marijuana tax rate.

The agency statement said the markup rate change was based on “an analysis of statewide market data,” and a CDTFA spokesman wrote in an email to Marijuana Business Daily that the tax adjustments are a result of existing state law.

“When implementing (Proposition 64), the Legislature moved the incidence of the tax from the retailer to the distributor, requiring CDTFA to determine the average markup rate every six months,” CDTFA spokesman Casey Wells wrote.

“The purpose of the markup is to have the actual tax match the 15% gross receipts rate approved by voters. After analyzing thousands of transactions in the state’s Track and Trace system, CDTFA analysts have determined that the required markup rate for the period beginning January 1, 2020, is 80%.”

When asked if the excise markup rate will change again in another six months, Wells said that will depend on wholesale market data. But the cultivation tax, since it’s based on inflation, would only be adjusted once a year, he said.

To date, legislative efforts to lower state taxes have fallen short, meaning the legal supply chain has continued to struggle to attract customers.

Nicole Elliott, senior advisor on cannabis in Gov. Gavin Newsom’s Office of Business and Economic Development, emphasized that the tax hike “is not a discretionary action” by CDTFA, but rather a natural outcome of laws established in 2017 by the legislature.

“We support policies that lead to less cash flow issues for small businesses, establish more parity across the industry, simplify compliance for everyone involved and support a healthy legal market,” Elliott wrote in an email to MJBizDaily.

“We remain committed to working with stakeholders and the Legislature to further develop a framework that realizes all these things.”

Industry insiders, however, immediately criticized the move, as did Oakland Democrat Rob Bonta, a state assembly member who has twice tried – but failed – to lower MJ taxes through the legislature.

In an emailed statement, Bonta called the tax hike “deeply concerning.”

“This short-sighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive,” Bonta wrote, and reiterated his support for at least temporarily lowering state cannabis taxes.

The California Cannabis Industry Association (CCIA) said the increase left its members “stunned and outraged.”

“As California’s regulated market spirals towards collapse from taxes on cannabis consumers … we believe that the CDTFA’s decision to increase tax burdens on compliant cannabis operators is counter to developing a safe industry,” according to the association’s statement.

“Widening the price disparity gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.”

Other industry insiders agreed.

“At the very least, this is tone deaf, given what the legal industry is going through right now and the lack of control of the illicit market,” said Adam Spiker, the executive director of the Southern California Coalition, a Los Angeles-based cannabis trade group.

A report on cannabis taxes, expected in December from the Legislative Analyst’s Office (LAO), has been highly anticipated by industry insiders who hope it will give them political ammunition to support lowering statewide marijuana tax rates.

Bonta cited that upcoming report in his emailed statement, and said the state would be “wise to consider the findings (of the LAO)… before unilaterally moving to create an even heavier tax burden” for the legal cannabis trade.

John Schroyer can be reached at [email protected]

7 comments on “California marijuana taxes will increase New Year’s Day
  1. Rick on

    This is the reason why the black market will continue to take significant business away from the legal market, I guess Californians just need to be reminded of that. Keep raising taxes, you’ll shut the legal industry down, it’s all about the price and always will be.

    Reply
  2. William Finley on

    Wow I just love arbitrary tax raises that are the same across the board regardless of weather we farmers receive 500 dollars per pound or 1400 per pound !

    Reply
  3. Samuel Quinn on

    Thank you for your expertise and support and caring response. 

    Further the inflation increase calculation by the CDTFA is erroneous at 4.30%, and the actual Federal Inflation rate is 1.76%! CDTFA has miscalculated by 300%!

    Regarding the 80% “Mark Up”:
    We believe that there should be an unprecedented “RICO” statute law suit against the CDTFA.   Based on the following premise that the 80% Mark Up mandate is overreach of their authority and it is akin to a “Price Fixing” scheme on a “commodity marketplace”, disrupts a FREE MARKET system, for their benefit and arbitrarily decided by the CDTFA board that has a temporary charter enabling them to avoid the ballot measure process when imposing tax. 

    Thank you for giving this time and thought… 

    AC

    Reply
  4. john ward on

    Great news, I was wondering when the state run drug cartel, AKA (the BCC) would start raising the taxes. This tax raise and the many to follow are a blessing to those who have been deceived by the cartel and have been forced out of the free and legal market. Most of the vendors of the pre legalization era are gone now and I don’t think they went to work at Kmart or the Home Depot. Oh and bye the way, they took the consumers with them. Try telling a customer that they can have a delivery of cartel cannabis, or get a delivery of the same or better product from the same person they trusted and bought cannabis from for years and years, except the cost has doubled or more from the cartel. The Black Market AKA the Consumers Market and its 10’s of millions of participant’s will ultimately decide the market place.
    Now it appears that the Federal Cartel folks are working at a complete removal of cannabis from the CSA. This of course will come with a fee, tax or value added tariff of some sort. Of course not to be outdone by the California Cartel’s (fee’s) of approx. 150%, the fed’s (fee) may be around 200%.
    There will be so much profit we could pay off the national debt and give the one %ers another trillion dollar tax relief, but I digress!
    While prop 64 was approved by the voters of California in 2016, our Legistrators have betrayed the voters by turning a public initiative vote to legalize cannabis into a way to arrest far more people of color than ever before while turning a profit. It’s time for a Mulligan. Or just make it illegal again.
    GOD BLESS AMERICA-IF YOU CAN AFFORD IT!

    Reply
  5. Jay on

    I wonder why hasn’t the BCC or CDPH start cracking down on these illegal shops and events? Working for a legal compliant dispensary I have seen the high taxes Decrease the foot traffic At my job by nearly 40% since recreational began, most definitely due to the increase in our prices. These high taxes are giving the black market an unfair advantage to us legal shops. These illegal events and shops are getting away with putting untested product for 50 % off the retail prices on there shelves with no regard for california compliancy. I want the community to be able to get clean, tested recreational products for a reasonable price, but unfortunately due excise and state taxes increasing it will only fuel the black market leaving the legal market drowning. How in the world can California compliant shops survive with the all of these cheap illegal products being sold in the shadows of cannabis industry. The new Tax increases we’re clearly created to destroy the legal market and support the black market. There Will be no positive affects from this tax increase.

    Reply

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