The higher the taxes, the more California's black market sells
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The California Department of Tax and Fee Administration (CDTFA) is planning on raising taxes on the legal cannabis industry once more.
As of 1 January 2018, it became legal for adults over 21 to purchase and possess up to an ounce of cannabis, in the state of California. The initial estimate for the amount that taxing legal cannabis will bring in for the government was $1 billion (USD).
However, this has now been estimated to increase to as much as $5.8 billion by 2021. Unfortunately, if cannabis prices go up, some consumers may find themselves shopping for a cheaper option on the black market.
In fact, a study conducted by an industry expert showed that for every $3 (USD) spent in the illegal cannabis market, $1 is spent within the legal one.
Increasing the cannabis tax rates has often been considered detrimental to the masses of organizations within the nascent cannabis industry, as it battles against the familiarity and often lower prices found on the black market.
By raising taxes, the CDTFA will only be hindering organizations within the legal markets, risking further divergence between their prices and illegal operators.
The CDTFA has a duty to recalculate the wholesale cannabis markup rate every six months. After declaring the rise in taxation, it was highlighted that the markup rate for marijuana excise tax will increase by 20% on New Year's Day.
The Mark Up
California has a 15% excise tax, which has been allocated by using the markup rate. This markup rate is based on the wholesale average market price of cannabis. The increase in tax will also cause an increase in the state cultivation tax, to create a balance for inflation.
For example, an ounce of the flower that currently costs $9.25 will increase to $9.65, and an ounce of leaves will rise from $2.75 to $2.87. And the current cost of $1.29 for an ounce of fresh marijuana plant material will jump to $1.35.
CDTFA spokesman, Casey Wells spoke to, Marijuana Business Daily about the recent tax adjustments:
"The Legislature moved the incidence of the tax from the retailer to the distributor, requiring CDTFA to determine the average markup rate every six months," Wells said.
"The purpose of the markup is to have the actual tax match the 15% gross receipts rate approved by voters. After analyzing thousands of transactions in the state's Track and Trace system, CDTFA analysts have determined that the required markup rate for the period beginning January 1, 2020, is 80%."
Wells was also asked if the excise markup rate will be adjusted again after another six months. He responded by suggesting it is depended on wholesale market data that the CDTFA gathers. However, the cultivation tax would only be adjusted once a year, due to the fact that it is based on inflation rates.
Strengthening The Illicit Market
California has always been predestined to be the world's cannabis headquarters. And based on predictions, sources from Wall Street expect California to foster up to $10-11 billion in annual sales by 2030.
Despite this, California's first full year of recreational marijuana sales actually showed a regression in revenue. Beginning in 2017, which kicked off with California only selling medicinal marijuana, total sales were estimated at around $3 billion.
However, after being able to sell medicinal as well as recreational marijuana in 2018, sales in California plummeted by $500 million.
The main cause of this decline is the gradual increase in tax for consumers. With this being a cause for concern, legal suppliers attempted to request for lower taxing, although this has still not been achieved. This has obviously affected legal suppliers' ability in attracting consumers.
As consumers generally do, cannabis enthusiasts are looking for the best price for value, meaning that resorting to the black market is still an option for them. This is a setback for legal suppliers of cannabis, as the state and city are both notably ineffective when attempting to shut down black market sellers.
Therefore, raising taxes will only cause more hassle for legal suppliers. As a result of this new legislation, some businesses have already relocated, with many others conjuring this as a suitable option.
"The latest tax hike is disappointing news as both a consumer and an operator," says CEO of CBD skincare company 'Treat Yourself' Leone Posod. "I fear that this increase will do nothing more than strengthen the illicit market since the regulated market is already expensive as it currently stands" Posod noted.
Treat Yourself is one of the many businesses that is in the process of moving their services out of California, and according to Posod "It simply does not make financial sense for us to operate here, no matter how much we want to…too many incredible Californian cannabis businesses have been priced out in the last two years, we can't afford to lose any more." she adds, regrettably.
Back in Black
The impact of the new tax legislation that the CDTFA is implementing on cannabis-related businesses will be closely observed by other states.
The effect of this added tax on California's total marijuana sales may also have a domino effect in regard to whether other states choose to legalize the drug completely. Eventually, California's cannabis legalization could be deemed a failed experiment if profits continue to slide.
The legalization of cannabis in California was supposed to encourage a healthy legal market and slowly drive out illegal black market sales, making the market a safer place for cannabis cultivators and consumers. However, as the legal market fights to lure in customers from the black market, enforcing a higher tax may have precisely the opposite effect, sending consumers to cheaper options, whether they're legal or not.
Black market vendors are the only ones that seem to benefit from the increase in tax, leaving California's cannabis market almost back where it started in 2018.
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