California: Cannabis Taxed To Death

The New Californian Cannabis Tax Hike

The Californian government has announced a new tax hike for cannabis products starting January 1, 2020. This constitutes an immeasurable blow to the industry: not only is the state’s cannabis taxation already sky-high, but stiff competition from the illicit market also represents an increasingly worrying trend for producers and retailers.

The California Tax and Fee Administration’s (CTFA) website states, “An analysis of statewide market data was used to determine the average markup rate between the wholesale cost and the retail selling price of cannabis and cannabis products. Based on this analysis, effective January 1, 2020, the newest markup rate will be at 80%.”

California is already the state with the highest cannabis taxation rate. This has been a tremendous burden for small- and medium-sized cannabis farms — as the competition from bigger cannabis-centered corporations and the illegal market puts weight on their shoulders, further taxation doesn’t help things and adds additional stress.

State producers and retailers have faced many so-called “extinction events” in the past. After California was legalized an adult-use regulatory regime for recreational cannabis, the industry fell from $3 billion in 2017 to $2.5 in 2018. This was the first time growth decreased in the legal cannabis industry since the legalization of medical use. City-level bans on cannabis activity and more stringent testing regulations limited the industry’s growth, and product shortages caused many producers to shut down operations. See also: MJBiz reports a decrease in operational legal cannabis businesses.

Despite these grim events, the California legal market is still on track to grow to $3.1 billion in the remainder of 2019. Forecasts predict consumer spending to reach $7.2 billion in 2024 — a 19% yearly increase. California currently remains the world’s leading legal cannabis market. Despite positive macroeconomic projections, suppliers and industry lobbyists are worried. Jacqueline McGowan with Sacramento firm K Street Consulting has said this tax hike constitutes a third “extinction event.” She goes on to say that it will “will ultimately lead to retailers not being able to pay vendors or employees,” owing to the dual strain of local and state taxes.

Retailers fear that the only possible way forward is to pass off these tax increases to consumers. An estimated 12.5% increase in the excise tax for cannabis is to be expected. That will mean higher prices at dispensaries, in what is perceived as a consumer-facing tax. Some consumers may be tempted to purchase on the black market, but caution is advised. Illicit products have not been tested and may cause the user to incur serious conditions, even death. A recent scare saw up to 47 people dying from vape-related lung illness caused by tainted cannabis vape cartridges. Four Californians were among this tragic group.

Some, like Josh Drayton from the Cannabis Industry Association, and Dale Gieringer from NORM are increasingly worried. Gieringer stated:

“Given the epidemic of vaping disease caused by unregulated black market products, this is hardly the time to make legal products more expensive . . . California already has the most expensive legal market in the country. Legal cannabis needs to be made more affordable in order to compete more effectively with the unregulated black market.”

Drayton curtly called it a “punch in the gut” for the industry.

With black-market competition causing health and safety concerns and increased prices, cannabis companies are increasingly worried about the future of legal cannabis in the state. Some wonder if there will be any industry left to tax in 2021.

Consumers, though, must stay on their toes as developments unfold and temptations to go to illegal providers increase. Safety must remain the primary concern, as this situation is the perfect magnet for opportunists. If the vape scare was any real indication, no one knows the extent to which illegal products could be damaging or unsafe. If anything, this is the time to double down and commit to quality products from vetted legal providers.

Meanwhile, everyone’s looking to 2020 to see if a tax relief bill could be approved when the Legislature convenes next, or whether the CTFA will double down on their consumer- and business-unfriendly tactics.