California cannabis businesses and consumers have faced a rash of challenges as state agencies hike taxes and suspend business licenses. There is no sign of let up. On November 21, the California Department of Tax and Fee Administration (CDTFA) announced hikes on next year’s cannabis mark up and cultivation tax rates. Effective January 1, 2020, the newest mark up rate will increase from 60% to 80%. The mark up rate is used by distributors to calculate the average market price in an arm’s length transaction and thus determines the cannabis excise tax owed. Additionally, the cultivation tax is being increased: the tax on cannabis flower per dry weight per ounce will increase from $9.25 to $9.65; the tax on leaves per dry weight per ounce will increase from $2.75 to $2.97; and the tax on fresh cannabis plants per ounce will increase from $1.29 to $1.35.
The regulatory burden is putting the squeeze on California’s legal cannabis market from both sides. The fees and taxes are debilitating to small businesses. A local cannabis retail owner in Sacramento offered a glimpse into these regulatory and financial burdens he faces: “Our city license now is $20,000 a year. The state license is $96,000. Then we pay 8.75% sales tax to the state.” These figures don’t include a 4% cannabis tax paid to the city as well as the 15% excise tax. They are also oppressive to consumers. Experts estimate that California consumers will face a tax rate of between 45% and 80% on cannabis products in 2020.
And if that was not enough, municipalities are opting out and regulators are closing cannabis facilities. Close to 80% of the state’s municipalities continue to ban the sale of recreational cannabis. Earlier this month, California regulators suspended almost 400 licensed cannabis businesses for not participating in mandatory track-and-trace system training, representing about 5% of the state’s cannabis business permits. This leads to a scarcity of legal cannabis products. Cannabis market research firm BDS Analytics found that California has only one dispensary for every 35,137 consumers compared to Oregon’s rate of one dispensary for every 5,567 consumers and Colorado’s rate of one dispensary for every 4,240 consumers.
High taxes, high regulatory burdens, and scarce supply are a toxic brew. In 2019, California’s legal cannabis market is estimated to reach $3.1 billion, an impressive number. Unfortunately, it’s illegal cannabis market is estimated to more than double that at $8.7 billion. We will continue to follow California’s struggles to create a thriving legal market and defeat a resilient illicit market here on our blog.