California’s second-quarter cannabis tax revenue weighed in at an impressive $333.2 million, but many feel that large number may be misleading as it pertains to the legal market’s actual health.
As the world’s largest legal cannabis market, California reported nearly $1.4 billion in cannabis sales over a 91-day period from April through June, which led to that $333.2 million in tax revenue. But while it seems from the numbers that the market is thriving, industry leaders are growing increasingly concerned over the exorbitant cannabis tax rates in the state. As it currently stands, CA imposes three various taxes on cannabis: an excise tax of 15%, a varying cultivation tax based on the stage/type of plant cultivated, and a sales tax.
“California could be doing a better job helping the legal market compete with the illegal market and increase tax revenue at the same time by lowering the tax rate,” said Graham Farrar, president and co-founder of Glass House Brands, a Santa Barbara-based cannabis manufacturing company. “Doing so would allow [tax collectors] to take a smaller piece of a much bigger pie. They could also drastically simplify the tax collection process and make it harder to cheat, which will raise tax revenue, by moving the tax collection all to the point of sale. The current system is hard to administer and enforce,” he continued. As a cultivation business, Farrar’s cultivation taxes contributed to the $40.4 million in excise tax collected during California’s second quarter this year, which actually amounts to about 12% of the total tax revenue from the three-month period.
The cannabis sales tax revenue for the second quarter weighed in at a record $120.5 million, up 11.8% from quarter one. The state’s cannabis excise tax generated $172.3 million, another record-breaker and a 9.2% increase from quarter one of this year.
California’s cannabis taxing system is administered by the California Department of Tax and Fee Administration (CDTFA), who recently put out a news release explaining more on what they do with their collected tax revenue. “CDTFA-administered programs account for more than $73 billion annually, which in turn supports local essential services such as transportation, public safety and health, libraries, schools, social services and natural resource management programs through the distribution of tax dollars going directly to local communities,” the department stated. But Adam Spiker, co-founder and executive director of Southern California Coalition, a cannabis trade organization, feels that cannabis sales revenue and consumer spending isn’t a great way to gauge the actual well-being of the industry overall.
“I don’t think it’s necessarily a direct correlation to [the] health of the legal industry, I really don’t,” said Spiker, referring to the incredibly high cannabis sales and tax revenues. “I think it’s more a correlation with more licensing being issued and more of the transition of operators into the legal realm. And, when I look at those numbers, it still tells me, since we know that there’s a lot of dry markets, or underserved markets, throughout the state, it just tells me that the demand for [cannabis] is very powerful. If the state could look at things a little differently from the standpoint of trajectory, right now they’re just squeezing a turnip of all the folks that want to do it right and not taking into account that there’s a much broader market out there that still is vastly bigger than the legal [market] that we need to dip into a lot quicker,” he continued.
As California’s illegal cannabis market continues to dramatically outperform the legal one, addressing the concerns surrounding the current tax system is paramount, at least according to what we’ve heard from Spiker, Farrar, and many other industry folks.