CannaLaw: Will Taxes Kill the Golden Goose?

Story by Dale Schafer, Esq.

     Currently, medical cannabis in California generates few taxes, especially compared to the amount of money flowing through the industry. Government has been spending large sums of general fund money in the long term and failed to end cannabis as an industry, or even a reality. The desire to reverse the hemorrhage of money is understandable and lots of money is obviously out there to tax. The current industry pays a “prohibition” tax to the black market and society gains nothing from this. How to apply the taxes without giving life into the black market remains open to interpretation.
     The new law that aims at establishing a medical cannabis industry in California has no state level taxes yet.
     The adult use initiative, on the November ballot, has substantial state taxes, including a production tax of $9.25 per ounce of bud and $2.75 per ounce of shake, as well as a 15% excise tax at purchase.
     These state taxes would apply to all cannabis, even medical. A person who holds a state medical ID card can avoid the excise tax but not the production taxes. If the initiative does not pass, the legislature is poised to impose the same taxes on the medical industry.
     The real burden seems to be at the local level. California has a rather burdensome tax-raising legal structure, which requires voters to allow new taxes or tax increases. Many local jurisdictions are putting before the voters the question of whether to allow local permits for the cannabis industry.
     Local permits are a necessary condition for state licensing. Along with those permits is the sweetener of taxes, for much needed local revenue. Many local jurisdictions are reluctant to jump into the cannabis industry, so the “spoon full of sugar” of taxes may make the medicine of permits go down. This dynamic is playing out around the state in many ways.
Cultivation taxes range from a low of $1.00 per square foot to a high of $900.00 per square foot of canopy. The mid range seems to be $25.00 per square foot, for the first 3,000 square feet, and $10.00 for the additional square feet. For nurseries, taxes range from $1.00 to $2.00 per plant to $2.00 and up per square foot of canopy. At the manufacturing level, $1.00 per gram and up for concentrates or edibles is proposed, and for distributors, local sales taxes average 5% for transactions taxed at the facility. For dispensaries—or retailers as the adult use initiative calls them—sales taxes vary, but 5% and up seems likely, in addition to state sales taxes.
     How much in taxes a business will be required to pay cannot presently be known, but it will be substantial.
     Anyone contemplating entering the cannabis industry in California needs to know what taxes are proposed in the area where they want to invest and operate. August 12, 2016, is the last day to put a tax initiative on the November ballot, so by the time this article comes out, it will be clear what proposed taxes will be on the ballot. For taxes based on a percentage of sales, the future may be easier than for fixed taxes, such as production taxes.
     The current spot price for a pound of bud is around $1,700.00 and that price level would support the industry. However, at harvest time in the Emerald Triangle, you can’t get $800.00 per pound for buds and that price would probably bankrupt many businesses burdened with fixed production taxes. It’s not difficult to imagine the price dropping even lower if square feet of cultivation explodes. This economic situation is probably giving the number crunchers gastric upset.
     California holds out the possibility of substantial profits in its cannabis industry. The state anticipates a billion dollars from taxes and local governments seem to want to grab taxes that compete with this number. A volatile market is not difficult to envision so be aware of the possible downside. The lust for taxes could kill the golden goose and breathe oxygen into the well-established black market.