California Department of Tax and Fee Administration Rate Increases
The California Department of Tax and Fee Administration (the CDTFA) announced two egregious rate increases yesterday.
The first is an adjustment of the mark-up rate for the excise tax calculation from a 60% to 80% a 20% increase, which given the state of the California Cannabis Market is not only unfair, but unconscionable.
Wretched market conditions, much of it created by the exorbitant excise taxation calculations which were always artificially high, and for which no deductions are allowed, argue for the excise tax to be reduced, not increased by 20%.
The second increase is an attack on the most vulnerable of licensees, cultivators. All categories of tax were raised, dried flower increased to $9.75 per pound, leaves to $2.87 per pound and fresh plants to $1.35.
Rates will be effective for everything sold on or after January 1, 2020.
Both sets of increases are probably due to the fact tax revenue has been lower than expected, causing the State to revise downward its revenue expectations earlier this year. Much of this reduced revenue stream is related to sky-high cumulative taxation, which had a domino effect on the entire industry as consumers flocked to the illicit market to avoid rampant taxation. BDS Analytics is estimating that the illicit market will generate 9 billion this year in sales, with the legal market generating barely 1/3rd of what the unlicensed market generates.
This action to increase cultivation taxes and raise the excise tax is premature and inappropriate. A major Legislative Analyst Report containing a comprehensive analysis of the cannabis tax structure is due out next month. Any decisions on tax increases should have waited for this report to be issued. Our organization is not alone in this opinion. Yesterday, Assemblyman Rob Bonta, one of the California legislators most involved in shaping cannabis policy, also stated that the CDTFA should have waited for the report and went on to say:
“Today’s decision by CDTFA to raise taxes on California’s emerging marketplace is deeply concerning. This shortsighted move ignores the realities that licensed businesses are at the breaking point, with many struggling to survive. They are being heavily undercut by the illicit market.”
Unworkable tax policies punish only the law-abiding while simultaneously rewarding the illicit market by setting taxes so high, that the consumer has no choice but to purchase from unlicensed sources.
The market factors that caused reduced taxation revenue streams are still present and raising taxes, rather than lowering them in response to those market factors, is not only tone deaf, but may destroy the regulated market.
If cultivators are placed in an untenable position by the increased CDTFA taxes, licensed retailers will, quite likely, not survive, because of the 20% increase in the excise tax formulation. The reason for this is that they are the end-stage sellers, cultivators might be able to pass on increased taxation in the form of higher wholesale prices, but retailers have no one to pass the tax on to, save consumers and consumers have already largely abandoned licensed retailers fueling the 3:1 ratio of unlicensed to licensed shops.
Yesterday’s actions by the CDTFA reveal a taxing agency more interested in bleeding licensed businesses dry than formulating responsible tax policies which would stimulate commerce and aid industry growth. It has seized on fractured incomplete sales information, gathered from the METRC system which only recently went live. The information gathered does not reflect lost profits due to mark-downs, recalls or acts of God like fires. Nor does it adjust for the effect the huge illegal market has on licensed businesses.
As part of the CDTFA’s working group, the Southern California has strenuously opposed the initial excise tax calculation, pointing out that the old rate of 60% was unsupportable, that it was imposed before items were actually sold, and did not provide for subsequent deductions if products were recalled or otherwise unsellable.
Our organization also strenuously opposed initial cultivation taxes pointing out that the tenuous finances of most small growers would not support the high taxes imposed by the CDTFA.
Today’s actions by the CDTFA are egregious and unnecessary. The state collected combined excise and sales taxes in excess of 300 million last year, more than enough to pay the financial obligations imposed by Proposition 64.
The Southern California Coalition is calling on Governor Newsom to direct the appropriate oversight entity to investigate the CDTFA. The CDTFA has imposed two new unnecessary and devastating taxes on an industry already fatally injured by CDTFA policies. It has used incomplete and isolated data to support these tax hikes. It has taken these actions ahead of a comprehensive report on the matter. The time for governmental oversight of this agency has arrived. The CDTFA and its process for tax adjustments needs to be thoroughly investigated.