It’s High Time to Start Talking Taxes in California

Though many people are still celebrating California’s major victory with the legalization of recreational cannabis, many activists and industry leaders are worrying about one of life’s certainties – taxes.

Starting January 1, 2018, California will be imposing state taxes on the sale and cultivation of cannabis.   A lot of taxes, to be precise.  In addition to the regular sales tax that we pay on everything from groceries to cars, Proposition 64 will be imposing a 15% excise tax on all retail cannabis sales – both medical and recreational – though medical cannabis patients with a county ID card will be exempt from having to pay the state sales tax, which runs anywhere between 7.5 to 10% depending on the city.  Proposition 64 also imposes a cultivation tax on all harvested cannabis that enters the commercial market – both medical and recreational – at a rate of $9.25 per ounce of dried marijuana flowers and $2.75 per ounce of dried marijuana leaves.

On top of all that, Proposition 64 allows cities and counties to take a cut by imposing their own separate local taxes or fees in addition to the state sales and excise taxes already in place, which is something many cities and counties have already planned to do.  In fact, more than 60 cities and counties saw the writing on the wall and placed cannabis tax measures on their local November ballots in anticipation of Proposition 64 passing.[1]  So far, voters in 37 cities and counties – including Long Beach, San Diego, Santa Barbara and San Bernardino – have approved separate local taxes on pot[2], and more cities and counties are likely to follow soon.

For example, although no local cannabis tax measures were put on the November ballot in Los Angeles, a city council-sponsored initiative called Proposition M was approved for the city’s March ballot.   Proposition M, which is widely expected to pass, seeks to impose local taxes of: $50 per each $1,000 of gross receipts from cannabis sales; $100 per each $1,000 of gross receipts from medical cannabis sales; $10 per each $1,000 gross receipts for transportation, testing or research; and $20 per each $1,000 gross receipts for cultivation and manufacturing.[3]

Even though Californians will be paying relatively low excise taxes compared to other states (Washington and Oregon each have initial tax rates of at least 25% for recreational cannabis[4]), economists still warn that such heavy taxation on a nascent industry could backfire.  When you break it down, California will be collecting an excise tax of 15% in addition to a 7.5-10% sales tax, plus various local taxes, ranging on average between 5% to 15%.  Combined, the effective tax rate could easily exceed over 30%.

These tax numbers are worrying industry leaders, including Aaron Herzberg, a partner at CalCann Holdings, a medical cannabis licensing and consulting group.  “Both the state and local governments apparently view marijuana as a way to quickly raise significant tax revenue, and they wall want to get their hands in the cookie jar,” Herzberg stated.  “The taxes that have been passed and are being proposed are exorbitant, and there is a big danger that if such high taxes are imposed, the black market will continue to thrive.”[5]

But we all knew that there would be a price for legalization.  And if Colorado is any indication, the cannabis industry in California should be just fine despite the heavy taxation. Currently, Colorado’s overall effective tax rate is about 29%, which is close to what is projected for California once all the state and local taxes are added up.[6]   In 2014, annual cannabis sales for retail shops in Colorado reached $700 million during the state’s first year of legalization.[7]  Then the following year, in 2015, that number increased to $996 million.[8]   This year, Colorado continues to break monthly sales records and is on track to generate over $1 billion in sales.[9]  Clearly, Colorado appears to have arrived at a workable tax structure that is able to compete with the black market.  With time, California should be able to do so too.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.