Navigating the new legal cannabis market – Taxes? How much? Why?
The Cannabis industry has had the luxury of being a relatively low taxed, hardly regulated product. That changed with the passing of the Adult Use of Marijuana Act (AUMA) in 2016 which came with new taxes and new regulations. The newly created Bureau of Cannabis Control has been tasked with creating a framework for the industry that is legal, yet highly regulated. This framework included new taxation and new rules. We all expected these growing pains and would like to foster an understating of why the prices are rising in this new legal space.
The California Legislature has put in place several agencies to tax and regulate cannabis. This regulation starts at the farm. Let’s look at some numbers:
- $9.25 per dry-weight once of cannabis flower
- $2.75 per dry-weight ounce of cannabis leaves
- A proposed $1.28 per ounce cannabis plant fee
This is an effective 10-15% tax on flower and concentrates before they go through the required testing requirements and new manufacturing regulations. After harvest, 1% of the product must be tested. There have been many new requirements for packaging as well. These new steps are ultimately leading to a rise in the wholesale price.
Once the cannabis is ready to be sold to a retailer, there is an effective 24% tax on the wholesale cost. That means if you’re buying an item that was $20 before regulation the retailer is paying $25 for that same product, this is before considering rising packaging and testing costs. Once everything has made it safely to the retailers’ shelves they must also pay a 5% city and neighborhood tax based on total sales. Lastly, the City of Sacramento takes 8.25% in additional Sales Tax.
Once all these taxes are added together we are looking at nearly an effective 50% increase in taxes at the wholesale level! While we will always do everything we can to keep prices low there are many non-standard expenses that are a burden to only the cannabis industry. The major one would be the IRS Section 280E, which doesn’t allow retailers to write off any expense towards their massive tax burden. While this may be a tough pill to swallow, it’s what needs to happen to lift this industry into a new regulated, professional space that ensures a safe product of exceptional quality.