Legalization has been a bumpy road for California cannabis operators, and since January 1, owners are learning that it also comes at a price. The state’s steep taxes on cannabis businesses – with effective tax rates as high as 57% for some cannabis activities – have many operators bracing, and calling for a reduction in these so-called sin taxes. Consumers are also encountering price increases -- prices are up about 15% compared to last year.
Cannabis operators are pushing lawmakers to scale back these taxes and prevent business owners from being tempted to remain in the black market because of the high costs of legalization. In response to advocacy efforts from the cannabis industry, California lawmakers proposed a bill this month that would drastically reduce excise and cultivation taxes on legal cannabis for a period of three years. As one of the bill’s authors, Rob Bonta, is quoted in the LA Times, lowering taxes on legal cannabis operators would be a way of “keeping customers at licensed stores and helping ensure the regulated market survives and thrives.”
In particular, the bill, AB 3157, would temporarily remove the state tax on cannabis cultivation, which is currently set at $9.25/oz for flowers and $2.75/oz for leaves. Additionally, it would lower the excise tax on cannabis purchases from 15 to 11 percent. Both of these changes would be welcome steps for the legal cannabis industry: the excise tax is one of the more confusing and onerous burdens on legal cannabis operators, so having it lessened would be particularly well-received. However, even after these changes, California’s effective tax rate would still be comparable to Colorado’s during its early legalization struggles. Therefore, it may not be enough to ward off the black market entirely.
Colorado took a similar approach when they rolled back cannabis taxes after operators were being pushed into the black market. As the Washington Post reported, in the immediate aftermath of legalization Colorado’s up-to-33% effective tax rate created a large market for illicit goods: “Camouflaged amid the legal medicinal and recreational marijuana market, the ever-adaptable underground market thrives. Some in law enforcement and on the street say it may be as strong as it’s ever been, so great is the unmet local and visitor demand.” California lawmakers are aware of the risks of overtaxation and the resulting effects.
We will continue to track California’s AB 3157 -- check back on our blog for updates in the coming weeks. For more information or to talk to one of our cannabis attorneys, contact us at email@example.com.
Want to read our original Cannabis Taxes blog post? Click below!