California Cannabis Taxes: What You Need to Know

California’s cannabis industry is one of the largest in the world, with a projected value of $7.7 billion by 2025. However, with this growth comes a complex web of regulations and taxes that businesses must navigate in order to operate legally. One of the biggest challenges facing cannabis businesses in California is the state’s tax system, which is notoriously complicated and ever-changing.

The state imposes a number of taxes on cannabis businesses, including a 15% excise tax on retail sales, a cultivation tax on harvested cannabis, and a sales tax on all other goods sold. These taxes can add up quickly, and many businesses struggle to keep up with the paperwork and reporting requirements. In addition, the tax rates and regulations are subject to change, making it difficult for businesses to plan for the future. Despite these challenges, many entrepreneurs are still drawn to the industry, and are working hard to find ways to succeed while complying with the law.

Historical Context

Pre-Legalization Era

Before the legalization of cannabis in California, the state had a thriving illegal market for cannabis. The illegal market was largely unregulated and untaxed, leading to lost revenue for the state. The lack of regulation also meant that the quality of cannabis products was not guaranteed, and consumers were at risk of purchasing products that were contaminated or unsafe.

Post-Legalization Era

In November 2016, California voters approved Proposition 64, which legalized the nonmedical use of cannabis and created a structure for regulating and taxing it. The legalization of cannabis in California brought about significant changes to the cannabis industry in the state. The state now has a legal cannabis market that is regulated and taxed.

The state of California imposes a number of taxes on cannabis products, including an excise tax, a cultivation tax, and a local tax. The excise tax is a flat rate of 15% on the retail price of cannabis products. The cultivation tax is imposed on cultivators at a rate of $9.25 per ounce of cannabis flowers and $2.75 per ounce of cannabis leaves. The local tax is imposed by local governments and can vary from city to city.

The taxes on cannabis products have been a source of controversy in California. Some argue that the taxes are too high and are driving consumers back to the illegal market. Others argue that the taxes are necessary to fund the regulation and enforcement of the legal cannabis market.

Overall, the legalization of cannabis in California has brought about significant changes to the cannabis industry in the state. While the taxes on cannabis products have been a source of controversy, they are an important source of revenue for the state and are necessary to fund the regulation and enforcement of the legal cannabis market.

Current Tax Structure

The California cannabis tax structure includes several taxes that apply to cannabis businesses, including cultivation tax, excise tax, and sales tax.

Excise Tax

The cannabis excise tax is a tax on the retail sale of cannabis products, including cannabis flowers, concentrates, and edibles. The current excise tax rate is 15% of the average market price of the product. The average market price is determined by the wholesale cost of the product plus a markup.

All cannabis retailers and microbusinesses authorized to sell cannabis or cannabis products at retail are required to register for a Cannabis Retailer Excise Tax (CRE) permit with the California Department of Tax and Fee Administration (CDTFA) and must begin filing their CRE returns for filing periods starting January 1, 2023.

The excise tax is collected by the retailer at the time of sale and then remitted to the CDTFA. The excise tax is a separate tax from the sales tax and is not included in the sales price of the product.

It is important to note that the excise tax is not deductible for income tax purposes. This means that cannabis businesses cannot deduct the excise tax as a business expense on their state income tax returns.

Overall, the excise tax is a significant source of revenue for the state of California, with the CDTFA reporting cannabis revenue of $1.1 billion in the second quarter of 2022 alone.

Impact of Taxes

California’s cannabis industry is subject to a variety of taxes, including sales tax, cultivation tax, and excise tax. These taxes have a significant impact on the industry, both economically and socially.

Economic Impact

Taxes are a significant source of revenue for the state. In the fiscal year 2021-2022, the state collected over $1 billion in cannabis tax revenue. However, high taxes can also have a negative economic impact on the industry.

One of the biggest challenges facing the cannabis industry is the illegal market. High taxes can make legal cannabis more expensive than illegal cannabis, which can drive consumers to the black market. This can result in lost tax revenue for the state and can also create a range of public safety concerns.

In addition, high taxes can make it difficult for legal cannabis businesses to compete with illegal businesses. Legal businesses must pay taxes, licensing fees, and comply with a range of regulations, which can drive up their costs. This can make it difficult for legal businesses to price their products competitively.

Social Impact

Cannabis taxes can also have a social impact. One of the goals of legalizing cannabis was to reduce the harm caused by the war on drugs, which disproportionately impacted communities of color. However, high taxes can make legal cannabis less accessible to these communities.

Low-income communities, which are often communities of color, may not be able to afford the high cost of legal cannabis. This can result in these communities being left behind as the industry grows. In addition, high taxes can make it difficult for legal businesses to provide jobs and economic opportunities in these communities.

Overall, taxes have a significant impact on the cannabis industry in California. While they are an important source of revenue for the state, high taxes can also create a range of economic and social challenges for the industry.

Comparison With Other States

When it comes to cannabis taxes, California is not the only state that has implemented them. In fact, several other states have also legalized recreational cannabis and have their own tax structures in place. Here is a comparison of California’s cannabis taxes with those of some other states:

Colorado

Colorado was one of the first states to legalize recreational cannabis, and it has a well-established tax system in place. The state imposes a 15% excise tax on wholesale transactions, as well as a 15% sales tax on retail sales. In addition, local jurisdictions can impose their own taxes, which can vary widely. Overall, Colorado’s tax rates are slightly lower than California’s.

Washington

Washington is another state that has legalized recreational cannabis and has a tax system in place. The state imposes a 37% excise tax on all retail sales, as well as a 6.5% sales tax. Local jurisdictions can also impose their own taxes, which can range from 1% to 3%. Overall, Washington’s tax rates are higher than California’s.

Oregon

Oregon has a similar tax structure to California, with a 17% tax on retail sales and no excise tax. However, local jurisdictions can impose their own taxes, which can range from 1% to 3%. Overall, Oregon’s tax rates are slightly lower than California’s.

Massachusetts

Massachusetts is another state that has legalized recreational cannabis, and it has a tax system in place. The state imposes a 10.75% excise tax on all retail sales, as well as a 6.25% sales tax. Local jurisdictions can also impose their own taxes, which can range from 0% to 3%. Overall, Massachusetts’ tax rates are lower than California’s.

Overall, California’s cannabis taxes are relatively high compared to some other states, but they are not the highest. It’s worth noting that tax rates can vary widely within each state, depending on local jurisdictions.

Controversies and Challenges

Black Market Issues

Despite the legalization of cannabis in California, the black market for cannabis continues to thrive. One of the main reasons for this is the high tax rates imposed on legal cannabis businesses. As of January 1, 2023, cannabis is taxed at a flat rate of about $161 per pound, on top of a 15% excise tax, as well as local cultivation, manufacturing, processing, distribution, and retail taxes. These taxes make it difficult for legal businesses to compete with the black market, which does not have to pay these taxes. As a result, many consumers are turning to the black market to purchase cannabis products, which undermines the legal market and reduces tax revenue for the state.

Another issue with the black market is the lack of regulation and safety standards. Products sold on the black market may be contaminated with pesticides, heavy metals, or other harmful substances, which can pose a risk to consumers’ health. Legal businesses are subject to strict testing and labeling requirements to ensure the safety and quality of their products, but the black market is not subject to these regulations.

Regulatory Challenges

The cannabis industry in California is also facing regulatory challenges, which are hindering its growth and profitability. The regulatory framework for cannabis businesses is complex and constantly changing, which makes it difficult for businesses to comply with the rules and stay in business. Many businesses are struggling to navigate the regulatory landscape and keep up with the ever-changing rules and requirements.

One of the biggest challenges facing the industry is the high cost of compliance. Legal businesses are subject to a wide range of regulations and requirements, including testing, labeling, packaging, security, and more. These requirements can be costly to implement and maintain, which puts a strain on businesses’ finances. In addition, many businesses are struggling to obtain the necessary licenses and permits to operate legally, which further adds to their compliance costs.

Another challenge facing the industry is the lack of banking services. Because cannabis is still illegal at the federal level, many banks are reluctant to work with cannabis businesses. This makes it difficult for businesses to access loans, credit, and other financial services, which can hinder their growth and profitability.

Future of Cannabis Taxes in California

California’s cannabis industry is still in its infancy, and the state is continuing to refine its regulations and taxation policies. As the industry grows, so too will the state’s tax revenue from cannabis.

One area of potential change is the cultivation tax. Currently, the cultivation tax is based on weight and is applied to all harvested cannabis that enters the commercial market. However, some have argued that this tax structure unfairly targets small cultivators and puts them at a disadvantage compared to larger operations. As a result, there have been proposals to change the cultivation tax to a tiered system based on the size of the operation.

Another area of potential change is the excise tax. While the excise tax has generated significant revenue for the state, some have argued that it is too high and is driving consumers to the black market, where they can purchase cannabis products at a lower cost. As a result, there have been proposals to lower the excise tax to make legal cannabis products more competitive with the black market.

In addition to these potential changes, the state is also exploring other ways to increase revenue from the cannabis industry. One option is to expand the number of licenses available for cannabis businesses, which would increase the number of businesses paying taxes. Another option is to explore new forms of taxation, such as a tax on cannabis advertising or a tax on the energy used to grow cannabis.

Overall, the future of cannabis taxes in California is likely to be shaped by a combination of industry growth, consumer behavior, and political considerations. As the state continues to refine its policies, it will be important to strike a balance between generating revenue and supporting a thriving and equitable cannabis industry.