California regulators announced on Thursday that taxes paid by the state’s licensed cannabis business will increase on New Year’s Day, despite calls to ease the burden on an industry struggling to compete with a thriving illicit market.
In a special notice from the California Department of Tax and Fee Administration, the state announced that cannabis cultivation taxes would be raised by more than 4%, reflecting an adjustment for inflation as required by state law. The tax on an ounce of dried cannabis flower will rise from $9.25 to $9.65, a jump of 4.3%
The tax levied on dry cannabis leaves will go up from $2.75 to $2.87, which is also a 4.3% increase. The tax on an ounce of fresh cannabis plant material will rise to $1.35 from $1.29, a jump of 4.6%.
The notice also revealed an increase in the state’s cannabis markup rate from 60% to 80%. The mark-up rate — the average difference between the wholesale cost and the retail selling price of cannabis and cannabis products — is used to determine the state excise tax on cannabis products. Regulators are required to recalculate the cannabis mark-up through an analysis of statewide market data every six months.
The increase in taxes comes despite the burden already borne by licensed businesses struggling to compete with a continuing unregulated market, which is estimated by BDS Analytics to be worth $8.7 billion per year in California, more than twice as much as the regulated market.
Phil Blurton, the owner of All About Wellness, a cannabis dispensary in Sacramento, said earlier this week that it’s difficult to compete with unlicensed operators.
“Our city license now is $20,000 a year,” Blurton said. “The state license is $96,000. Then we pay 8.75% sales tax to the state.”
Blurton said he also pays an additional 4% cannabis tax to the city, plus the 15% tax to the state, “which is making the cost of our product so expensive the black market is booming now.”
“I would like to see our taxes lowered,” Blurton said. “I would like to see the price of our licenses lowered.
Jay Handal, the co-owner of the Erba Markets dispensary in Los Angeles, said that the current regulatory environment in California is encouraging illicit businesses.
“The reason the black market continues to exist is because taxes are too high,” said Handal, upon learning of the tax increase. “People are looking for the best value and the government, both state and city, are woefully poor at shutting down black market stores. Raising taxes will only exacerbate the situation by continuing to keep black market store prices ridiculously lower than legal dispensaries that carry tested products.”
Cannabis industry consultant Jacqueline McGowan blasted the decision to raise taxes at a time when licensed firms and ancillary businesses are announcing layoffs to deal with fiscal woes.
“California’s taxing authority’s decision to raise taxes during a time when the legal market is contracting is comparable to the Federal Reserve raising interest rates during a recession,” she said in an email to High Times. “It is the opposite of responsible fiscal policy.”
McGowan added that if current legislative attempts to lower the taxes on cannabis businesses fail, the industry may have to resort to a new initiative to correct the drawbacks of Prop 64, the 2016 ballot initiative that legalized the adult use of cannabis in California.
“If legislation is not enacted urgently then the industry may be facing a situation where a new voter initiative is the only path left to pursue in order to enact sufficient tax relief so that the legal cannabis industry has a chance at surviving and competing with a thriving $9 billion dollar unregulated industry,” she said.
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