By John Schroyer| November 21, 2019

After having avoided an increase in state taxes on legal marijuana, California officials changed course Thursday and announced MJ excise and cultivation taxes will go up effective Jan. 1.
High state and local tax rates have been an industry problem that have made legal businesses less competitive with the illicit market: Unlicensed retailers can lure customers with lower prices, since rogue shops don’t pay any taxes.
In announcing the move, the California Department of Tax and Fee Administration (CDTFA) – which must recalculate the wholesale cannabis markup rate every six months – revealed that the markup rate for the marijuana excise tax will increase from 60% to 80% on New Year’s Day.
The markup rate is used to provide the basis for California’s 15% excise tax.
The increase will also raise the state cultivation tax to adjust for inflation, raising those taxes as well:
  • $9.65 from $9.25 for an ounce of flower, or an increase of 4.3%.
  • $2.87 from $2.75 for an ounce of leaves, or an increase of 4.3%.
  • $1.35 from $1.29 for an ounce of fresh marijuana plant material, or an increase of 4.6%.

The CDTFA’s markup rate is based on the wholesale average market price of cannabis, and the agency had previously declined to increase the state marijuana tax rate.

The agency statement said the markup rate change was based on “an analysis of statewide market data,” and a CDTFA spokesman wrote in an email to Marijuana Business Daily that the tax adjustments are a result of existing state law.

“When implementing (Proposition 64), the Legislature moved the incidence of the tax from the retailer to the distributor, requiring CDTFA to determine the average markup rate every six months,” CDTFA spokesman Casey Wells wrote.

“The purpose of the markup is to have the actual tax match the 15% gross receipts rate approved by voters. After analyzing thousands of transactions in the state’s Track and Trace system, CDTFA analysts have determined that the required markup rate for the period beginning January 1, 2020, is 80%.”

When asked if the excise markup rate will change again in another six months, Wells said that will depend on wholesale market data. But the cultivation tax, since it’s based on inflation, would only be adjusted once a year, he said.

To date, legislative efforts to lower state taxes have fallen short, meaning the legal supply chain has continued to struggle to attract customers.

Nicole Elliott, senior advisor on cannabis in Gov. Gavin Newsom’s Office of Business and Economic Development, emphasized that the tax hike “is not a discretionary action” by CDTFA, but rather a natural outcome of laws established in 2017 by the legislature.

“We support policies that lead to less cash flow issues for small businesses, establish more parity across the industry, simplify compliance for everyone involved and support a healthy legal market,” Elliott wrote in an email to MJBizDaily.

“We remain committed to working with stakeholders and the Legislature to further develop a framework that realizes all these things.”

Industry insiders, however, immediately criticized the move, as did Oakland Democrat Rob Bonta, a state assembly member who has twice tried – but failed – to lower MJ taxes through the legislature.

In an emailed statement, Bonta called the tax hike “deeply concerning.”

“This short-sighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive,” Bonta wrote, and reiterated his support for at least temporarily lowering state cannabis taxes.

The California Cannabis Industry Association (CCIA) said the increase left its members “stunned and outraged.”

“As California’s regulated market spirals towards collapse from taxes on cannabis consumers … we believe that the CDTFA’s decision to increase tax burdens on compliant cannabis operators is counter to developing a safe industry,” according to the association’s statement.

“Widening the price disparity gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.”

Other industry insiders agreed.

“At the very least, this is tone deaf, given what the legal industry is going through right now and the lack of control of the illicit market,” said Adam Spiker, the executive director of the Southern California Coalition, a Los Angeles-based cannabis trade group.

A report on cannabis taxes, expected in December from the Legislative Analyst’s Office (LAO), has been highly anticipated by industry insiders who hope it will give them political ammunition to support lowering statewide marijuana tax rates.

Bonta cited that upcoming report in his emailed statement, and said the state would be “wise to consider the findings (of the LAO)… before unilaterally moving to create an even heavier tax burden” for the legal cannabis trade.

John Schroyer can be reached at johns@mjbizdaily.com