Will California manage to reform its cannabis taxation?

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The Californian cannabis industry is still struggling with the black market. In addition to a lack of points of sale, only 23% of cities accepting cannabis businesses on their territory, Californian cannabis suffers from very high taxation, preventing it from being competitive in the face of an unregulated market.

The price of cannabis products sold in legal dispensaries can thus be two to three times higher than that of nearly identical items sold in unlicensed stores, which are not subject to the growing cultivation or excise taxes. costs for retailers.

Among the taxes, the tax on culture is the subject of particular attention. This tax is determined by weight, which means that the tax burden does not decrease as the value of their crop drops due to competition with these unlicensed growers. This tax is also adjusted for inflation.

Last February, California Senate Majority Leader Mike McGuire announced a tax reform bill.

“Crop taxes are crushing small farmers all over the North Coast and California. This legislation will provide much needed tax relief to struggling small cannabis growers before the market collapses,” McGuire tweeted last month. “We cannot continue to tax family farmers based on the weight of the product – because when prices fall, taxes remain disproportionate. It’s just not viable. »

Its proposal, SB 1074, calls for removing the cultivation tax next July and simultaneously increasing the excise tax on cannabis, which is currently 15% at retail. From July 2025 to July 2026, this increase “would generate half the amount of revenue that would have been collected under the culture tax”. Then, from July 2026, the increase would be such that it “would generate the full amount of revenue that would have been collected under the culture tax”.

Legislative push

To solve the problem, several proposals had already been put on the table, for example taxing products according to their THC level. At the end of February, three other bills tackling cannabis taxes followed. And each of them takes a different approach.

Draft SB 1281 would also “end the imposition of the cultivation tax,” but would also “reduce the excise tax to 5%,” from 15% at retail. The bill also provides that this tax does not include a mark-up, usually set by the California Department of Tax and Fee Administration every six months. Finally, the bill provides that distributors no longer have to “collect the excise tax from the cannabis retailer” and “remit the excise tax to the department,” but that the rebate is the responsibility of the retailer. All this would take effect at the beginning of the year 2023.

Proposal AB 2506 “suspends the imposition of the culture tax from July 1, 2023 to July 1, 2028, and removes the requirement for the department to adjust the culture tax rate for inflation to the calendar year 2023 and during the suspension”. Then, like McGuire’s bill, it would increase “the excise tax by an additional percentage which, according to the Department of Finance, will generate the amount of revenue which would have been collected under the cultivation tax”, but would do so “from July 1, 2023 to July 1, 2028”.

The AB 2792 project contains the largest number of changes. It would eliminate the consideration of the amount of the increase in the excise tax, but only from July 1, 2022 to July 1, 2025. It would also suspend, during this period, the excise tax for “purchasers of cannabis or cannabis products sold in this state by licensees entitled to a fee waiver or deferral pursuant to the program established by the Department of Cannabis Control under the California Cannabis Equity Act“. It also suspends, during this period, the culture tax and “removes the obligation for the ministry to adjust the rate of the culture tax according to inflation during the suspension”.

It will probably be difficult to find a consensus on a tax plan. But the health of California’s legal cannabis industry depends on it.

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