California’s Cannabis Tax Problem
We’re all well aware that the one reason government bodies are motivated to do anything at all, is for the tax revenue. That sweet, sweet tax revenue. The newly-legal cannabis industry in California has proved to be no exception to that rule. So much so, that California has THREE different tiers of taxes for cannabis businesses. Some of those taxes are taxes on the other taxes. Did I say taxes? They’ve gone overboard to the point that these policies are hurting the legal industry and actually helping unlicensed businesses thrive. So what are the taxes that these cannabis businesses face? And how can we help legal businesses instead of hurting them? I’ll start by explaining the problem, and end with a proposition (I’m talking to you California). Get ready to brace yourselves as I walk you through the absolute sh*tshow that is California’s cannabis tax.
California’s Cannabis Tax Breakdown
It all starts with the cannabis excise tax. Retailers are responsible for paying this tax every time they purchase new product from the distributors. But get this, they have to pre-pay the tax in full before they’ve even made a penny from reselling the product. That’s totally fair and responsible, right?... right?
If we’re talking numbers, the excise tax is a 15% tax on a 60% markup of the wholesale price. If the retailer is buying product at a wholesale price of $100, the state of California wants them to bump it up another 60% (as an estimate of what the retailer will be reselling it for) and then pay taxes on that number. So for every $100 of product, they’re paying $24...
Check out more detail on how complex excise tax calculations can get here: https://www.cdtfa.ca.gov/industry/cannabis.htm#Retailers
But wait, there’s more!
California’s Sales & Use Tax
These businesses still have to pay California’s regular sales & use tax, which ranges from 7.25% to 10.5% depending on the city/county they’re selling the product in. If you’re a recreational consumer buying a cannabis product, you’re not paying the sales & use tax on the actual price of the item. You’re paying sales & use tax on the price of the item + the excise tax!
So if it’s a $10 item, the recreational consumer has to pay $2.40 of excise tax AND sales & use tax calculated on $12.40, not just $10. Because that’s also completely fair and logical, right?
Not to mention, because the sales & use tax differ from city to city, if you’re a delivery service, you need to somehow know exactly what tax to charge depending on which city you’re in. And then have the ability to properly remit the taxes for each city, and pay it out to them in a timely manner. So if you delivery to dozens of different cities, good luck!
Check out how Sales & Use tax varies from city to city here: https://www.cdtfa.ca.gov/taxes-and-fees/rates.aspx
California’s Additional Cannabis Business Tax
As if that wasn’t enough, specific cities and counties also put on their greedy pants and decided to charge their own additional taxes on cannabis transactions done within their boundaries. Unlike the regular Sales & Use tax, which medical patients don’t have to pay, we’re seeing these additional cannabis taxes being added on for both medical and adult-use customers.
For example, in Los Angeles, there is an additional 5% tax for medical patients, and 10% tax on adult-use customers. And of course, you calculate the tax based on the price of the product AND the excise tax, not just the price of the product.
I would also link you to a place where you can see all the different additional cannabis business taxes, but that doesn’t exist. So here is just how LA does it: https://finance.lacity.org/files/cannabis-tax-rate-tablepng
Cannabis Tax Recap AKA The Problem
So when it’s all said and done, in order to purchase a $10 item, you’ll need to pay $2.40 in excise tax. Then, depending on where you purchase it, you can pay up to 10.5% in sales and use tax. And let’s say another 10% for additional cannabis business tax. So when you calculate those using the price of the item + excise tax ($12.40), you end up with an additional $2.54 in taxes. That brings your total, for a $10 item up to $14.94. Yes, that’s nearly a 50% additional cost, just in taxes alone.
Not to mention the nearly impossible task of knowing exactly what taxes to charge, at what rate, and when. Even if you only make sales in one city, adult-use customers pay different taxes than medical patients. And if you’re selling non-cannabis items with your cannabis items, those two things are taxed completely differently. Not to mention, if you’re making sales in more than one city, now all of your taxes are completely different.
So now let’s put on our thinking caps and ask ourselves some questions. If you’re a consumer, would you rather pay $15 or $10 for the same product? The fact is that the illicit market is still around and thriving, while the licensed legal market is struggling to stay alive. The complex and excessive taxes that California imposes on the legal market, gives a significant advantages to the illegal market. The more consumers pay the unlicensed “$10-guys,” the more they’re able to thrive and continue their unlicensed business. In fact, there’s very little incentive to make your business legal, because the “$15 guys” aren’t making any money!
WebJoint Delivery Software AKA Shameless Plug AKA The Solution
I just happen to be the co-founder of the world’s leading cannabis delivery software. As of right now, we’re the only software company in the world that’s focused on cannabis delivery services. We basically come into work every day to solve the complex problems facing the cannabis industry. We took the headache of cannabis taxes and literally automated the whole process so you don’t even have to think about it. You’ll get the right tax rate every single time, regardless of what you’re selling, who you’re selling to, and what city you’re selling it in. It’s so easy that it’s post-dab proof; trust us, we tried!
So that’s the good news. But the bad news is that although we can help simplify the complexity of the taxes, we can’t do anything about the fact that they’re just too high to support the legal market. That’s the problem at it’s core, and that’s why the unlicensed industry is thriving. Higher taxes for the legal industry is having the opposite effect, and it’s bringing in less tax revenue than estimated for the State of California because no one wants to buy legal cannabis.
The answer is simple: lower taxes and consumer preference will shift towards the legal market. When that happens, we won’t need much enforcement against the illegal industry because they’ll naturally go out of business. Finally, that’s when California will see the tax revenues that they wanted to see from cannabis. To put it into perspective, why do I go buy beer legally from a supermarket? Because it’s actually cheaper and more accessible than buying moonshine made in someone’s garage. The opposite is true for the cannabis industry currently.
The cannabis industry is filled with unique challenges that make you want to pull your hair out. The transition in California from the illegal market to the legal, has been rocky to say the least. Overcomplicated and excessive taxes are just one of the problems that the legal industry faces today. With software solutions like WebJoint, cannabis delivery services can automate the complex taxes to ensure that they’re always collecting the correct amount. However, it still doesn’t solve the root of the problem: taxes are too high. California, please see what the rest of the industry clearly sees. ~50% tax is ridiculous and consumers will never willingly pay that when more convenient, cheaper options exist in the illegal market. Lower the taxes, get rid of the price point advantage the illegal industry has, and the legal market will finally thrive.