Cannabis Tax Hike the Last Nail in the Coffin? 

Everybody was hoping pot taxes would soon fall. Instead, they're going up.

click to enlarge The Cannabis Industry Association sounded an alarm.

The Cannabis Industry Association sounded an alarm.

As recounted in this space last week, California has been dragging its feet on addressing the crisis facing the state's cannabis industry, especially when it comes to taxes, which are extraordinarily high. Everybody in the supply chain from growers to consumers is hoping the state Legislature will act to cut taxes in its upcoming session. What few were expecting was that taxes would actually be raised before the session even began.

But that's exactly what happened last week when the California Department of Tax and Fee Administration announced that, under its formula for setting levies on both sales and cultivation, taxes will increase starting on Jan. 1.

"CDTFA TAX INCREASE LEAVES MEMBERS STUNNED AND OUTRAGED" was the all-caps subject line of a flash email issued by the California Cannabis Industry Association, which is usually pretty calm and deliberate in its public statements.

"As California's regulated market spirals towards collapse from taxes on cannabis consumers, local bans, onerous regulations, slow growth, and a thriving illicit market, we believe that the CDTFA's decision to increase tax burdens on compliant cannabis operators is counter to developing a safe industry," the statement read. "We encourage the administration and the legislature to reconsider this decision and to partner with the industry on comprehensive policies that allow the regulated cannabis market to survive under these dire circumstances."

I asked Josh Drayton, the CCIA's spokesman, whether the announcement came as a surprise. "The industry was completely blindsided by this tax increase," he said. "Consumers' support of the illicit market is due to a variety of issues, but cost disparity in comparison to regulated products is at the top of that list." Drayton estimated that consumers who today make a purchase for $40-$45 will spend $50 or more on the same purchase as of January 1.

Hezekiah Allen said that he and his cohorts were not surprised by the move. As the executive director of the Emerald Grown growers' cooperative, Allen is especially watchful of government actions as they affect pot farmers in particular. "Yes, we saw it coming," he said. "The increase is in the language of Prop. 64," he added, referring to the 2016 voter initiative that led to cannabis being legalized.

And indeed, the CDTFA is simply following its mandate under state law. The increase may have come as a surprise to most people, but the CDTFA is mandated to analyze tax receipts every six months and adjust how the tax is calculated. The excise tax on cannabis sales — that is, the amount added on top of any regular sales taxes — will remain 15 percent. But the state's pot laws, which were engendered by Prop. 64, require that tax amounts be based not on what consumers pay to retailers, but on what retailers pay to distributors, which means the state must determine the average markup rate of those payments and apply it across the state. Thanks to the increased use of track-and-trace software, that determination has been made easier, and — at least according to the CDTFA — more accurate. Six months ago, the agency declared there would be no change to the markup rate. Six months from now? Who knows?

At the same time, the cultivation tax on flower will rise from $9.25 to $9.65. That increase is due to inflation, according to the CDTFA.

But routine or not, the fact is that the tax bills paid by pot sellers and buyers are going in the wrong direction if the aim is to support a thriving industry and discourage illicit sales, which dwarf legal sales in California. Between taxes, regulations that many in the business say are often onerous, and the refusal of so many local governments to allow sales, the state's legal-cannabis business is in dire straits, just two years into its life.

"Every retail cannabis business I know is struggling right now," said Debby Goldsberry, CEO of Magnolia Wellness on Oakland. The taxes and restrictive laws "cost more money than comes in as sales," she added. Of this latest blow, she said: "The two-fold effect will be that only the largest multi-state cannabis companies will be able to afford to stay in business, and the underground economy, which is full of risks, will continue to thrive, as that's where the affordable cannabis will be found. Neither of these outcomes match the voter's expectations, and it certainly does not benefit consumers in any way."

Even more grimly, Allen said: "I've heard it described as the last nail in the coffin."

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