The California Department of Tax and Fee Administration recently released the numbers for legal cannabis sales for the second fiscal quarter of 2018. While initial reports for the first quarter disappointed many potential investors, current numbers show an increase in sales and estimate that this compliance trend will only continue to increase.
From April 1 through June 30, tax revenue from the cannabis industry totaled $74.2 million in California. The amount includes state cultivation ($43.5 million), excise ($4.5 million), and sales taxes ($26.2 million), but does not include revenue collected by each jurisdiction.
California initially faced disappointing sale summaries on cannabis with a dismal reporting of $34 million in the first quarter. In his 2018 Jan. budget proposal, Gov. Jerry Brown estimated that the 2017-18 cannabis excise tax would reach $175 million. That total estimated revenue amount has since been adjusted to reflect the lower than anticipated quarterly report.
“We’re nearing the longest economic recovery in modern history, and as Isaac Newton observed: What goes up must come down,” said Governor Brown in a statement announcing California’s revised budget for 2018. “This is a time to save for our future, not to make pricey promises we can’t keep. I said it before and I’ll say it again: Let’s not blow it now.”
Two certainties in life: Excise and cultivation taxes
When California voters approved Prop 64, two new cannabis taxes went into effect: a cultivation tax on all harvested cannabis entering the commercial market and a 15 percent excise tax on the purchase of cannabis and other pot products used for recreational purposes.
Additionally, non-medicinal marijuana and pot-products are subject to state and local sales taxes at the time of retail sale. In 2020, the taxes will adjust for inflation.
Concerned consumers of cannabis may wonder: where does this money go? In accordance with Prop 64, the revenue from the two taxes is deposited into the California Cannabis Tax Fund. The revenue is used to cover the costs of administering and enforcing the measure. From there, the revenue is specifically allocated to drug research, treatment, and enforcement.
After the specific allocations are met, the remaining state cannabis revenue is distributed in the following manner: 60 percent to youth programs —including programs on drug treatment and education —20 percent to prevent and alleviate environmental damage from illegal marijuana production, and 20 percent to programs designed to reduce driving under the influence of marijuana.
Why did California have such a slow start?
Slow starts are not unexpected in the business world. Colorado and Washington experienced similar stalls during the early days of legal recreational marijuana sales. Like other states, California faces licensing issues, local pushback, and confusion as to the rules and regulations of retailing cannabis.
Additionally, in a state known for its high taxation rates, the sales tax for the cannabis industry is no exception.
“While California cannabis companies are thrilled with the traffic increase they’ve seen since January 1, they can’t help but worry that regulations and taxes are going to handicap the legal market in the long term,” said Troy Dayton, CEO of The ArcView Group in a statement earlier this year. “It’s clear that every additional penny of price increase on legal cannabis products only serves to boost the attractiveness of purchasing from the illicit market which has flourished in the state for decades.”
An effort by the state legislature to reduce the excise tax on the sale of cannabis and pot products from 15 percent to 11 percent, and to suspend the tax on cannabis cultivation until 2021 ultimately failed.
AB 3157 (Lackey) would have allowed time for licensed cannabis business and consumers to transition away from the unregulated cannabis market to the regulated market. As the unregulated market does not face taxation issues, many businesses may bulk at the imposed 15 percent excise tax on the gross receipts of any cannabis products. The bill was held under submission in the Appropriations Committee in the first house.
In spite of the initial low numbers, the second quarterly report on cannabis sales shows steady improvement. Whether it’s the warmer weather or the increase in licensing retail marijuana stores, the Bureau of Cannabis Control and the tax department continue to remain optimistic that sales will continue to increase.
In anticipation of questions regarding taxation, California’s tax department opened a satellite location in Humboldt County, created an external tax advisory group, and introduced a new outreach program to visit cannabis retailers to assist them with tax compliance and implementing improved procedures for financial transactions.
A lesson from other states
While California may have had a shaky fiscal start, other states that have legalized recreational cannabis and experienced snail-paced starts are not only surviving; they are thriving.
According to a Drug Policy report, the Colorado Department of Education received $230 million from cannabis taxation revenues between 2015-17 —enough funds to support school construction, early childhood literacy programs, bullying prevention, and behavioral health programs.
Oregon allocates approximately 40 percent of cannabis tax revenues to the state school fund and 20 percent of tax revenue to alcohol and drug treatment programs. The Oregon Department of Education has received $34 million since 2014.
Nevada’s 15 percent wholesale tax is estimated to provide $56 million in funds for state schools while Alaska is anticipating an estimated $12 million annually to fund drug treatment and community residential centers.
Finally, Washington distributes over half of its marijuana tax revenues to fund basic health plans and dedicates an additional 25 percent to help support substance use disorder treatment, education, and prevention.
Recreational cannabis-use isn’t a new business in California, so it is going to take some time for consumers and cultivators to grow into the new regulations. If the second quarterly report is any indicator, California is slowly but surely on its way a well-regulated bureaucratic buzz.