The tax increase supposedly reflects inflation, however the industry is hurting
Despite falling short of expected tax revenue since legalization, California is set to increase its markup tax rates in a bid to adjust for inflation. This increase in taxes however is coming on the heels of several cities in California that are cutting their local cannabis taxes in an effort to combat with the unlicensed legacy market which has been thriving in the state.
The new rates, set to go live January 1st of 2020, will raise the cost of flower per dry-weight ounce by $0.40, leaves per dry-weight ounce by $0.12, and fresh plant per ounce by $0.06. This hike will take effect just as industry insiders have been decrying the current tax rates stating they are already too high to be sustainable against the legacy market.
Chief complaint among licensed operators thus far has been the difference in end-consumer pricing for someone buying from them versus buying from an unlicensed shop. In July of this year California’s Bureau of Cannabis Control released WeedWise, a marketing campaign aimed at helping consumers understand the difference between legal cannabis and unlicensed cannabis in an effort to curb illicit sales.
Some operators are questioning whether the industry is even utilizing the current taxes effectively. Nishant Reddy, CEO & Co-Founder of northern California based cannabis company ‘A Golden State‘ had this to say when asked about the increase. “We want to support the initiatives of the state, but where are the taxes going? Implementing tax increases without putting that money back into the industry is not going to elicit positive change or help the growth of the cannabis industry.”
He went on to talk about how the money needs to be spent. “This tax should support industry growth such as shutting down the black market, speeding up the license process, and helping with legal issues and advancements. Our industry is making a huge positive impact on the state. We at A Golden State and Satya Capital have created more than 100 jobs in less than 18 months. It’s time the cannabis industry starts being recognized and respected.”
California rejected a bill earlier this year to suspend the cultivation tax after the state suspected it would cost more than $220 million in lost revenue. But as companies in California such as Eaze and Flow Kana cut their work force in order to stay afloat, is increasing their operating costs the right answer?
Mikey Steinmetz, CEO of Flow Kana, told SacBee when asked about the layoffs “It almost feels like an epidemic of companies of similar size going through similar processes.” In a tug of war with California’s massive cannabis industry between the voters who want legal access to cannabis and legislators over taxing a struggling industry, the clear losers will the small growers and social grant or small scale retailers who have already been hit the hardest.
Longtime cannabis advocate Etienne Fontan, Director at Berkley Patients Group, voiced his concern “By any objective measure, this young, legal industry is struggling to get off the ground. As long as California maintains high barriers to entry, limited licensing availability, some of the highest compounded cannabis tax rates in the country, with 70% of its municipalities continuing pre-64 prohibitionist policies, I am hard-pressed to see an effective path forward to building a healthy, sustainable legal market.”
Etienne also questioned the reasoning behind the increase in the first place. He continued, “Given the fact that there is almost no long-term historical data to compare current prices, nor is there a requirement to increase the cultivation mark-up rate, one must question how the CDTFA analyzed its market data to determine the new tax adjustments and its intent to do so at this time. We encourage the state, the legislature and regulatory bodies to set policies that reflect the reality of the current situation and help stop the proliferation of the unregulated market that will continue to flourish.”
We here at Marijuana Retail Report will continue to bring you updates on the California cannabis market as it happens.