State hikes taxes on cannabis

Increase puts fees in line with higher profit margins



 

Long hailed as the cannabis capital of the United States—California was the first state in the nation to decriminalize medical marijuana in 1996—the Golden State has stumbled.

Although Washington and Colorado legalized recreational cannabis in 2012, California took steps four years later to allow all uses of weed and create what was hoped to be the largest source of income from the drug of any state in the country. But Prop. 64, the 2016 measure passed by voters approving recreational use, has instead taken what many hoped would be a tax windfall for the state and turned it into a snarl of fees, licensing and red tape that has made the black market even stronger.

Despite promises that the opposite would occur, the black-market cannabis trade has continued to flourish in the wake of Prop. 64, aided by high prices at state-approved dispensaries and licensing loopholes that have allowed businesses to avoid paying their fair share of taxes. Last year, California took in $363.8 million in cannabis-related tax revenue, a far cry from the $630 million initially projected by then-governor Jerry Brown’s administration.

The New Year will bring changes that could make matters worse for the consumer. The retail cost of cannabis, which critics say is already too high, will be increased on Jan. 1.

The California Department of Tax and Fee Administration (CDTFA) is responsible for determining how much the marijuana retailers across the state are allowed to mark up the price of cannabis.

CDTFA research has shown that since the roll-out of legalization, consumers have been paying 80% above wholesale. The agency thought the mark-up had been 60%. The keystone markup in general retailing is typically 50%.

Looking to keep its tax revenue in line with the higher profit margin, the state is demanding a larger cut of the profits from each retail transaction.

Tax effect

The taxes on medical and recreational marijuana run deep. Prop. 64 mandated a 15% excise tax—a fee imposed at the manufacturing stage rather than at the retail stage.

In January, the tax rate will remain the same, but be applied to the higher markup level that has benefited the producer. Sellers believe they will be forced to pass the additional tax they must pay to the state on to the customer.

“The more the dispensaries charge, the more it’s going to create a black market. The bootleggers are going to get rich,” said Lisa Krasnoff, a Westlake Village resident who uses cannabis recreationally. “I definitely feel the pinch, but I feel like if it’s what we have to do to keep it legal and get California out of debt, that’s what we have to do.”

Krasnoff said the high prices are worth it for certain products— she buys vape pens at legally certified dispensaries, but turns to a private dealer for cannabis buds.

In addition to the 15% excise tax, other fees imposed on the product include sales, cultivation, quality control testing and some local taxes.

Black market blues

The United Cannabis Business Association, a trade association that represents licensed cannabis businesses across the state, estimates that the profits from black market cannabis are almost triple those of legalized sales. The association conducted an audit this year that concluded unlicensed vendors will bring in $8.7 billion compared to $3 billion from legal sales.

Beyond the illicit aspect, cannabis products bought off the street carry potential health risks as they haven’t had to undergo the same testing scrutiny by the state as legal weed.

The California Department of Public Health reported there have been more than 60 cases of lung disease linked to vape pen products bought from unlicensed vendors.

Also at issue: the availability of convenient legal dispensaries. An estimated two-thirds of California’s 540 municipalities— including Calabasas, Agoura Hills, Simi Valley, Moorpark and Camarillo (check)— prohibit any kind of cannabis business. As a result, the illegal market has flourished.

Weedmaps, a popular online service that connects users with nearby cannabis retailers and delivery services, muddies the waters because it doesn’t require any proof that a commercial operation has the state’s approval to operate. Customers who use the service have no way of knowing if their money is going to a legal or illegal operation.

Even cities that have approved dispensaries have had challenges. Thousand Oaks, for example, the only city in eastern Ventura County to permit commercial cannabis, approved a dispensary in fall 2018 but that facility has yet to open its doors.

T.O. officials recently approved a second medicinal use dispensary for the Westlake portion of city. That one is expected to open next year.