Efforts to suspend cannabis taxes are increasing in California. Photo credit: SeDmi.
California, the birthplace of the modern cannabis industry, is in danger of losing its spot as America’s number one in cannabis sales.
The state announced a raise in cultivation and sales tax rates come January. The raise is due to reflect nationwide inflation rates that currently stand at 6.2%. These high taxes and illegal cannabis sales are threatening to cause a deep recession in the state’s legal cannabis industry.
San Francisco Suspends Cannabis Tax
On Tuesday, November 30th, San Francisco announced it would suspend its sales tax on all cannabis products to help fight black market sales, NPR reported.
Officials suspended the tax, which imposed a 1%-5% tax on all of the city’s cannabis sales. This is due to a rise in illegal sales and increased theft. They also did so in an effort to help cannabis retailers who’ve struggled to compete with illegal cannabis dealers.
Just last month a group of armed robbers broke into BASA, a cannabis merchandise retail store. Consequently, they stole thousands of dollars worth of merchandise, SI Live reported. The incident was BASA’s fifth robbery of the year.
“Cannabis businesses create good jobs for San Franciscans and provide safe, regulated products to their customers,” Supervisor Rafael Mandelman, and the ordinance’s author, tweeted on Dec. 2nd. “Sadly, the illegal market is flourishing by undercutting the prices of legal businesses, which is bad for our economy as illegal businesses pay no taxes while subjecting workers to dangerous conditions and consumers to dangerous products. Now is not the time to impose a new tax on small businesses that are just getting established and trying to compete with illicit operators.”
Mandelman’s office based their appeal on a report from the California Legislative Analyst’s Office. That report found a direct link between increased state cannabis taxes and illegal cannabis sales. It also proposed various tax cuts to allow the legal cannabis market to compete with the illicit drug trade.
“A change in tax rates would affect the difference between legal and illicit prices,” the report says, “with a tax cut making legal cannabis more competitive with illegal cannabis compared to what would be the case in the absence of a cut.”
There is Something Rotten in California
San Francisco is, however, not the only Californian cannabis market to experience a turbulent year. For example, the Sonoma Valley Sun reported this month that the county’s cannabis industry is seeking the complete removal of the state’s cultivation tax.
As of Nov. 16th, California collected $42.41 million in cultivation taxes for the third quarter of the 2021 federal fiscal year, according to the North Bay Business Journal.
“Retail marijuana is taxed four times in California: a state and local excise tax paid by buyers, a sales tax paid by customers and the cultivation tax that growers pay. Growers want changes to the cultivation tax because they pay it before they make a sale,” reports the Sacramento Bee. The current Californian cultivation tax stands at $9.65 an ounce for dry cannabis flower.
“Every licensed cultivator is in dire survival mode,” Joe Rogoway, cannabis attorney, told the Business Journal. Rogoway helped draft resolutions presented to the county’s governing officials on Wednesday, December 7th.
Sonoma County taxes licensed growers anywhere from $1.12 to $12.65 per square foot depending on the category.
The tax is based on the market’s potential and not its reality, Rogoway says.
Rogoway and the petitioners requested the county lobby the state to repeal or suspend the cultivation tax for three years.
As of today, Sonoma County’s officials have made no official statement. County Supervisor, James Gore, has however, made it clear that he would “like to review some sort of suspension.” He also hopes that the county would add the issue to the upcoming agenda.
The San Francisco Effect
Whether the danger to California’s cannabis industry is self-imposed taxes or black market sales; there is no doubt change must occur. Otherwise, California may experience a total industry collapse.
“Our industry is in deep trouble. We’re impacted on several important fronts. Our industry is taxed like no other, we have few retail outlets available to us, the illicit market continues to boom, and we face unparalleled regulatory hurdles,” CEO of SPARC, Erich Pearson, said in a statement to the Business Journal. “Frankly, what we’re experiencing is a market collapse.”
“Could we experience a collapse? Yes. And I think it will be more widespread than you think. The small guys are not going to make it,” California Cannabis Industry Association lobbyist Amy Jenkins also told the publication.
Mandelman’s plan for the city of San Francisco seems sound. For example, he will personally work closely with the City Comptroller’s Office, the Treasurer, Tax Collector ‘s Office and the Office of Cannabis in hopes of restructuring cannabis’ sale tax.
With new states legalizing the sale of adult-use recreational cannabis, California may serve as a road map for other states.