Cannabis Tax Rates and the Proliferation of the Illicit Cannabis Market

It’s no secret that one of the issues plaguing cannabis industry operators across the country is the extremely high tax rates imposed on industry operators. However, operators aren’t the only people being hit by the effects of cannabis taxes – customers ultimately feel the weight of the taxes imposed every time they purchase products from a licensed cannabis retailer.

While taxes are imposed on a state-by-state basis and again by local jurisdictions in an effort generate revenue, they also have the unintended side effect of driving some potential customers away from legal retailers and back to the illicit cannabis market in order to avoid higher cannabis product prices.

In California, recreational cannabis sales have been legal for years, however, the legal cannabis industry still faces serious competition from the illicit cannabis market due, in part, to the fact that illicit cannabis products are significantly cheaper than those sold by licensed retailers. With such a thriving illicit cannabis market still in existence, it is unfortunate that the California Department of Tax and Fee Administration (“CDTFA”) increased cannabis tax rates at the start of 2020.

California Cannabis Tax Rates for 2020

The changes implemented by the CDTFA have increased the mark-up rate for arm’s length transactions from 60% to 80% and therefore increased the prices of various cannabis goods available at licensed retail facilities. Since many consumers simply want to get the most for their money and local and state governments are typically understaffed and unable to proactively shut down unlicensed operators, the illicit market continues to thrive.

However, the changes to the cannabis tax rates don’t only impact consumer prices, they also impact operators since cultivation taxes have been increased as well. From January 1, 2018 to December 31, 2019, the state mandated cannabis cultivation taxes were as follows: 

Cannabis FlowerCannabis LeavesFresh Cannabis Plant
$9.25 per dry-weight ounce$2.75 per dry-weight ounce$1.29 per ounce

As of January 1, 2020, the cultivation tax rates are as follow:

Cannabis FlowerCannabis LeavesFresh Cannabis Plant
$9.65 per dry-weight ounce$2.87 per dry-weight ounce$1.35 per ounce

While the increases shown above may seem small to some, many operators were already struggling to stay above water and the increased tax rates only add to their plight. Additionally, the increased tax rates make it even more difficult for those operating in the illicit market to change course and enter the regulated cannabis market. Taking into consideration the high price of renting land for cannabis business purposes, high local permit application and renewal fees, high state license fees, and ever-increasing cannabis tax rates, it’s no wonder why so many either refuse or are unable to participate in licensed cannabis business activities. The cost of playing by the rules is high and many are simply not willing or able to play ball. 

Some Local Jurisdictions Lowering Tax Rates

That being said, while the state has increased taxes, some local jurisdictions, like the City of Long Beach, are lowering their cannabis tax rates in an effort to spark growth in parts of the industry that have been stunted since cannabis’ legalization. After tireless work by the Long Beach Collective Association (“LBCA”) and various other stake holders, the City of Long Beach recently lowered its tax rate for cannabis testing laboratories, cultivators, manufacturers, and distributors from six percent to one percent. Such changes will, hopefully, lessen the tax burden on struggling operators, enable more people to enter the industry legally, and reduce illegal cannabis sales in the area.

Other Upcoming Changes

As noted in a previous blog post, Governor Gavin Newsom’s office also appears to be paying attention the tax issues plaguing the cannabis industry as evidenced by its attention to cannabis tax matters in its most recent budget proposal. As announced on January 10, 2020, Governor Newsom’s budget proposal seeks to, among other things, simplify the tax collection process for cannabis businesses. Additionally, according to the various California Cannabis Licensing Authorities,  “the Newsom Administration, in consultation with the industry and stakeholders, will consider other changes to the existing cannabis tax structure, including the number of taxes and tax rates to simplify the system and to support a stronger, safer legal cannabis market.”

With so much on the line, it is refreshing to know that California’s leaders are positioning themselves to support the industry. However, we will have to wait to see how things roll out throughout the next year. For more information on how cannabis taxes may impact your business contact the cannabis industry attorneys at Rogoway Law Group or call us at 707-526-0420.

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