California cannabis tax increase could push consumers to black market

California cannabis tax increase could push consumers to black market
iStock-Nikolay Ponomarenko

Cannabis bodies are outraged at California’s cannabis tax rate increase – saying that price disparity will push consumers towards the black market.

The California Department of Tax and Fee Administration (CDTFA) has approved a cannabis tax rate increase on cannabis products, including flower, leaves and fresh plant. The rate hike will be effective January 1, 2020, and the mark-up rate will be set at 80%.

As the industry faces an economic downturn, the move has hit companies already struggling to compete with lower black market prices.

Cannabis industry bodies have expressed outrage, noting that consumers may be further pushed to buy on the black market due to the price disparity.

However, the bill – AB-37 – signed into law by California Governor, Gavin Newsome, last week, overrides Section 280E of the Internal Revenue Code, which blocks cannabis businesses from taking advantage of the tax deductions afforded to other American businesses.

Raising cannabis tax rates

In a bid to bring the cannabis industry into ‘tax equity’, the proposition was approved by the voters and requires a 15% excise tax on the gross receipts of cannabis sales – which remains unchanged.

The hike follows an analysis of statewide market data, which was used to determine the average mark-up rate between the wholesale cost and the retail selling price of cannabis and cannabis products. The 15% cannabis excise tax is based on the average market price of the cannabis or cannabis products sold in a retail sale.

After analysing thousands of transactions in the state’s Track and Trace system, CDTFA analysts have determined that the required mark-up rate is 80%.

The new bill, however, now allows cannabis companies to claim tax deductions available to other companies under Section 280E.

This affects all businesses that engage in the cultivation, sale, or processing of the cannabis plant, including cultivators, medical dispensaries, marijuana retail stores, and infused product manufacturers, as well as concentrates and cannabis oil manufacturers.

The move partially addresses the unfair impact 280E has on states with regulated cannabis markets without necessitating a sweeping shift in US cannabis policy.

However, cannabis industry bodies, such as the National Cannabis Industry Association, believe that the only way to properly address this issue is to remove cannabis from the Controlled Substances Act; an issue which is currently being addressed by the MORE Act.

Struggling cannabis industry

The increase has left the cannabis industry bodies outraged as the industry is already struggling to compete with the illicit market due to already high taxes and high licensing and operating fees.

The California Cannabis Industry Association (CCIA) responded to the tax rate hike saying: “The announcement by the California Department of Tax and Fee Administration to increase tax rates on the cannabis industry has left the membership of the California Cannabis Industry Association stunned and outraged.

“As California’s regulated market spirals towards collapse from taxes on cannabis consumers, local bans, onerous regulations, slow growth, and a thriving illicit market, we believe that the CDTFA’s decision to increase tax burdens on compliant cannabis operators is counter to developing a safe industry.

“Widening the price disparity gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.

“We encourage the Administration and the Legislature to reconsider this decision and to partner with the industry on comprehensive policies that allow the regulated cannabis market to survive under these dire circumstances.”

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