California has been dubbed the largest adult-use cannabis market in the world, but those playing by the rules continue to forge ahead while remaining handcuffed by the state’s tax structure and retail shortage.
Despite being on pace to record its highest yearly sales mark—with adult-use cannabis retail tallying $3.9 billion in taxable sales through the first three quarters of 2021—California’s reality on the ground is that the illicit market still outperforms the legal one because of a price gap caused by oppressive tax burdens and multilayered bureaucracy as barriers to entry.
Last year, the Legislative Analyst’s Office—a nonpartisan fiscal and policy research institute for California’s Legislature—estimated that adult-use cannabis businesses operate in less than one-third of jurisdictions statewide.
But that could all change under Gov. Gavin Newsom’s budget proposal released Jan. 10—pending what’s in the details. Nevertheless, Newsom signaled he’s ready to reform the cannabis program’s tax structure and retail shortage.
“The administration intends to further develop a grant program this spring that will aid local governments in, at a minimum, opening up legal retail access to consumers,” Newsom wrote in his 400-page budget summary. “Further, the administration supports cannabis tax reform and plans to work with the Legislature to make modifications to California’s cannabis tax policy to help stabilize the market; better support California’s small, licensed operators; and strengthen compliance with state law.”
While many California cannabis businesses, especially small farms, have faced an uphill battle since 2016’s voter-approved Proposition 64 was enacted—and the subsequent adult-use sales launch in January 2018—many of their struggles originate from hand-tying policies that predate Newsom’s governorship. His term began in January 2019.Schwass
Newsom’s proposed budget summary addresses areas that have been hindering California’s legal market since its inception, cannabis law expert Jared Schwass told Cannabis Business Times. Born and raised in Mendocino County, Schwass practices law in the cannabis space as the founder of California-based Schwass Law Firm.
“Advocates and industry insiders alike have been calling for tax reform as operators have seen plummeting wholesale prices but continue to be subject to a flat cultivation tax and excessive excise and local taxes,” he said. “However, there are no details on the tax reform supported by Gov. Newsom and, rather, puts the proverbial ball in the Legislature’s court. Whatever the reform ends up being, a tax reform that does not include the repeal of the cultivation tax will not be sufficient as many farmers are seeing the tax eat away at their already disappearing margins.”
When California’s Control, Regulate and Tax Adult Use of Marijuana Act (Prop. 64) went into effect, the state began collecting a 15% excise tax, a sales tax and a cultivation tax on cannabis. California’s current cultivation tax is based on $10.05 per dry-weight ounce for cannabis flower, $3.00 per dry-weight ounce for cannabis leaves and $1.41 per ounce of fresh cannabis plants that are weighed within two hours of harvesting, according to the California Department of Tax and Fee Administration (CDTFA).
Those three weight benchmarks all increased at the beginning of this year to adjust