California’s low marijuana tax stream complicating MJ business climate

A lower-than-expected first quarter of marijuana excise tax income in California has thrown a wrench into the works for those hoping state lawmakers might drop tax rates to help combat the black market.

Between January and the end of March, California took in only $34 million in excise tax revenue from cannabis sales.

That falls far short of a projection based on an estimate by Gov. Jerry Brown’s office that California would take in $175 million from the MJ excise tax for the 2017-18 budget year, which ends June 30.

The tax shortfall has already put a damper on the likelihood the state legislature will cut the excise tax from 15% to 11%, according to the Los Angeles Times.

The situation is perplexing for state lawmakers:

  • If they retain the existing tax rate, it will likely encourage thousands of existing black-market cannabis companies to keep doing business the way they have, without paying taxes or fees and undercutting their legal competition on price.
  • If they lower the excise rate, it’s not necessarily a guarantee more customers will enter the legal market or that state tax revenue will increase. However, a lower excise rate would make it easier for fully licensed businesses to compete with illegal retailers and could, therefore, actually increase state tax revenue and put it in line with the January projection.

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24 comments on “California’s low marijuana tax stream complicating MJ business climate
  1. Mr. J on

    Franchising pre-icos to rogue dispensaries makes sense. Easier to track. Ease of tax payment. Ease of representation. Ease on enforcement. Accurate tax collection. Message to Los Angeles Office of Finance/City Council: Make franchising a reality; it is the solution to this mess.

    • Ron Lovick on

      This is NOT Rocket Science !!!

      The REAL problem is that the State of California has made it VERY Difficult to get a temporary State License !!

      If you really want to solve the problem… remove the stupid and unnecessary requirements that are not needed, and only make the licensing problem take months rather than day !!

  2. Bill Shane on

    It would appear the idea of going with a lower tax base in the beginning is the right choice. Do what you can to get the business running as close to full as possible. If the tax money isn’t there after the first year and it looks like you’ll remain under budget, then boost the tax by a couple of percentage points. I would do whatever I could to undercut the black market; it’ll be your worst enemy.

  3. Jonathan Kramer on

    As in all business its best to learn from others. Searching tax rates with other cannabis legal states CA shows up as the highest by an order of magnitude. And with a population of 40 million, the windfall to the state COULD be monstrous, though the 45% tax is extreme. So the disappointing tax revenue should come as no surprise. And with only 35% of counties/municipalities allowing business, their taxes inflate the bottom line also. Eliminating the cultivation tax, cutting the excise tax in half is a better move.

  4. Allen on

    Smaller licensed businesses will not be able to hold out against the illegals that have yet to be shut down… or the high taxes. If it is not a conspiracy to set this industry full of heavy hitters and big players, then things must resolve itself quickly! California legal sales did not go through the roof, because folks in Cali have consumed openly and outwardly for ages now, and regularly might I add, so legalization for the average consumer is not the big “to do” it is in other markets. Especially not when so many other illegal storefronts and delivers will sell you what you need in plain sight of law enforcement and officials. Although in the end, California will reign supreme and beat out all other markets of course, but the question is will the existing licensee’s be able to hold on through the process?

  5. FrankH on

    It seems to me the real culprit here is the local municipalities’ failure to have their licensing process in place to allow more legal operations to enter the marketplace quickly, thereby building a tax base.

  6. Crazy Dago on

    What this article does NOT mention, is the fact that the state still doesn’t have their act together in terms of distributing licenses. Taxes are down because not many businesses have licenses to legally sell cannabis yet in CA. Once the state gets licensing in order and there are more businesses selling, then you will see the projected numbers that have been promised. Everyone seems to always gloss over the states mishaps in organizing the Cannabis board…

    • Steve Martin on

      There’s more dispensaries then ever so your argument fails right there. Also there’s no shortage of products in these dispensaries. People have basically left the regulated market and moved on to the black market … it’s as simple as that.

  7. Ziggy on

    The state needs to invest in itself through licensing and enforcement. “It takes money to make money” is just as true in the recreational scheme as everywhere else. “Get those people licensed!” should be it’s mantra!!!

    Do we really expect the average recreational user to choose to pay taxes when the illegal retailer across the street isn’t charging taxes?

  8. James on

    Nothing perplexing about shortfall, municipalities are not issuing required licenses in a timely manner. Los Angeles has not even begun and our license applications in Long Beach are in month 5 of “processing”.

    Lower the excise tax and repeal cultivation tax or the compliant businesses will fail dramatically.

  9. Ron on

    The retailers ARENT remitting 15% of the Point of sale; they are remitting 15% of a wholesale purchase price calculated on a 60% markup.

    Wholesale purchase price: $1500
    60% “mark up”: $2400
    15% excise tax to be remitted: 360$

    Now, let’s assume they sell the flower they purchased at $1500 for $10 a gram or $35 per 1/8th. OFTEN times the retailer passes that excise tax to a consumer like this:

    1/8th flower: $35
    Sales tax 7.25%
    Excise tax 15%

    Retailer collects $5.25 of excise tax for that 1/8th. There are 129 (1/8ths) in a lb so the retailer is actually collecting $677.25 in excise, if, in fact they sold the entire unit in 1/8ths at $35 or 10$ grams. Obviously sales prices vary but it’s easy to see the discrepancy.

    Excise tax MUST be remitted from point of sale. That is the only way to get accurate tax remittal and prevent the retailer from abusing this loophole and pocketing the difference….

    • Allen on

      “abuse”? I think the licensees are being abused! Do you have any idea the money spent and lost and endless run arounds that retailers are having to go through to get licensed? And the fog of worry to stay profitable in a market full of illegals with the heavy taxation ?… If folks had nowhere else to purchase they would pay the taxes! So we retailers are putting it all on the line with no promise things will rectify in time. So I say that to say… If there is a little left over from excise taxes, so be it. It should be! That will help pay for the additional city taxes most cities impose that you did not mention*

      • Ron on

        I absolutely understand how much money goes into the licensing. I’m in the process of distribution permitting, and I’ve been in the industry for 13 years, I understand the grind, and difficulties, but that doesn’t give anyone the right to fraud customers and pocket tax. Stop complaining about the black market and create an industry that’s more appealing than the BM. Get creative, and provide services that they can’t. The BM will always be a force in CA.

  10. Big Marvin on

    A message to the Governor and the head of the Bureau of Cannabis Control.

    1) You will first need to get all cannabis companies that want to be compliant up and running. HELP THEM, MAKE IT EASY. SUPPORT THEM. KEEP TAXES VERY LOW AT FIRST. COMPLIANCE IS YOUR NUMBER ONE OBJECTIVE AT THE BEGINNING!!
    2) Once they are up and running make sure all rules are easily understood and logical for small businesses to comply with. Cities and Counties need to help with this because they vary significantly from city to city and county to county.
    3) Begin raising taxes on an incremental basis such that the consumer and the small businesses are not dramatically effected. HIGH TAXES ARE SHUNNED IN EVERY INDUSTRY ACROSS THE PLANET. EVERYONE WILL FIGURE OUT A WAY TO AVOID THEM IN SOME CAPACITY.
    4) Enforcement: This is when you will need to begin significant and diligent enforcement. As small business people most of us are trying to even understand the logic of some the laws and statutes. We will need time to get up to speed. BUT MOST OF US REALLY WANT TO DO THE RIGHT THING IN CANNABIS THE RIGHT WAY!!

    If you use this simple logic 24 months from now. You will have the best system in the world!!

    • George Bianchini on

      ”If you use this simple logic 24 months from now. You will have the best system in the world”

      Big Marvin,
      Since logic does not exist in the cannabis rules making, we will be stuck with the CHOAS we are dealing with now for quite some time. The BCC board is made up of a group of professional good willed folks, and attorneys that are all experts in their fields. With that said, They don’t have a clue about Cannabis. They have turned the rule making process of a now legal plant that has never killed anyone into 217 pages of doomsday protectionism with no possible way of complying. The black market will thrive with these rules, and the public will embrace them as a needed service to get around the new State Drug Cartel.
      When I fought for tax and regulation during the last ten years, I/we were referring to allowing us to have a real business license and let us pay sales tax. Lettuce, spinach and melons (e-coli) and peanut butter kill people every year, these are products that need rules yet we willy nilly put them on grocery store shelves right next to the other deadly products like sugar and salt. We are trusted to make the right decision on many things that are deadly to humans. Cannabis should not be any different, as it’s far safer than most/all items on the grocery and drugs store shelves.
      The BCC needs cannabis professionals to comprise at least half of the Boards position. The rules should be made by folks that can at least tell the difference between a pot plant and a tomato plant. It should also reflect the will of the voters who approved the new law, as it does not now.
      I thought that with the temporary licenses we were moving forward. We are not. These new rules are solutions for problems that don’t exist. I have been contacted by an investor that wants to organize the illicit market and dominate market share. I was told they were going to call it the Green Market ‘’The better green choice’’. His pitch was that the BCC was a fraud, charged with creating a system designed to fail so that corporate America can in effect formulate a hostile takeover of the industry.

      Other than that, I completely agree with you.

  11. Mike on

    you can’t always attribute to conspiracy what is just plain stupidity. OTOH, you can use stupidity to implement your conspiracy. if the true goal is a big money takeover and crowding out all the sincere small producers and sellers, to allow in the huge corporations access too this cash cow, then what better way to do it than let stupidity reign on the gov set up so they can throw up their hands and say what else can we do but let seasoned experienced big business have the licenses. we tried to let the small guy in but that didn’t work. its so complicated to get licensed and expensive, little guys are already dead in the water with no chance of compliance, even if they can get a local to approve them as a start.

  12. Stef on

    I believe the problem is the state gave to much power to the local counties. When your county chooses to ban legal activity the black market thrives. I know there are tons of illegal grows in my county and you don’t even have the option to make them legal or pay the taxes. The state need to make state wide laws and keep it out of corrupt local law makers hands.

    • Steve Martin on

      Stef ………Prop. 64 would have NEVER passed without giving the locals the opportunity to ban it .. simple as that.

  13. Steve Martin on

    The dispensaries are a huge part of this problem as they are still marking up anything that comes into the store by 100% ….. they need to get their head out of their a** and realize that is simply not sustainable going forward.

  14. John C. Krieg on

    Everybody jumping in thinks they’ll get rich in a year, and a few will be bankrupt by then. Avoid the tax altogether by getting a doctor’s recommendation and a state medical marijuana card. It’s a good program that has dropped their fees 50% (now under $90). The card serves as a secondary form of ID and is good backup in case Sessions and the DEA come storming in. They may yet get recreational repealed but not compassionate use. Rise up Cali!

    Old Leather Lungs

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