Voters are frequently promised in cannabis ballot measures that the increased tax income from cannabis sales will be reinvested in the neighborhood. Therefore, cannabis taxes are unavoidable. The argument over how high those taxes ought to be is also in dispute. As a result, cannabis tax complications are a problem in all states. But for years, California was left out in the cold since the state’s strict cannabis tax rules could not be changed. But now everything has changed. Let’s examine what transpired.
Cannabis tax proposal from the governor
Here is a good explanation of the previous cannabis tax laws in California. SB 1074 was never passed by the Senate. To give businesses some hope, Governor Gavin Newsom revealed his plan to scrap the current cultivation tax back in May. With some exceptions for a more rapid rise dependent on industry revenue creation, the state would hike the retail excise tax from 15% to 19% after three years under Newsom’s proposal to make up for that lost cultivation tax revenue. The burden of tax collection will also move from wholesalers to retailers starting in 2019 under Newsom’s proposal. Some of the organizations that are currently partially supported by such funds were the biggest opponents of cutting the cannabis taxes in California. For more information, go here.
Budget for Cannabis in California
The fiscal year for California starts in July. The legislature only last week authorized an operational budget of $300 million. It seems that the majority of Newsom’s suggested cannabis tax was dropped. Instead, the Center for Medicinal Cannabis Research in San Diego and programs like track and trace and the Local Jurisdiction Retail Access Grant Program receive money set out in the proposed budget for cannabis-related products.
Bill for Cannabis Trailer
So what is the situation with California’s cannabis tax relief? We receive the true reform in a concurrent trailer budget bill. Following Newsom’s May proposal, a summary of the proposed trailer bill wording (from the proposed budget) is provided.
(1) eliminates the cannabis cultivation tax; (2) maintains the cannabis excise rate at 15% for three years; (3) permits the California Department of Tax and Fee Administration to adjust the cannabis excise tax rate every two years in consultation with the Department of Finance and the Department of Cannabis Control; (4) mandates an economic study that assesses the effects of tax reform on revenues; and (5) Contains tax breaks for equity investors and high-end cannabis employers as well.
Cannabis taxes have changed at last.
On June 30, Newsom officially enacted the trailer bill (AB-195). This indicates that the cultivation tax is eliminated as of July 1, 2022. For the time being, the excise tax will remain at 15%, while the markup rate for arm’s-length transactions will decrease from 80% to 75% until being recalculated on January 1.
The initial response from the industry to Newsom’s tax change was positive. However, it’s possible that business participants may eventually only have to deal with new tax complications. The state won’t actually benefit the majority of operators or customers by abolishing the cultivation tax and gradually raising the excise tax; instead, it will just redistribute the high tax burden among licensees. The tax burden will just shift from cultivators to retailers. Retailers’ chances of competing with illegal, untaxed businesses will be much worse if higher excise taxes result in higher retail prices.
Without a doubt, this is a positive first step toward creating a more hospitable market for cannabis firms. Additionally, the state intends to spend more money on enforcement against the black market because cutting taxes alone will not be sufficient to support California’s struggling licensed business. The success of licensees in the long run would still be seriously questioned if there is no regular enforcement against unlawful operators. Additionally, the Local Jurisdiction Retail Access Grant Program’s financing will surely assist towns and counties in growing the retail sector.
