SUSAN WOOD THE NORTH BAY BUSINESS JOURNAL
May 25, 2023, 2:33PM
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Signaling ongoing growing pains for the cannabis industry, California collected less in tax receipts from businesses over most categories in the first quarter, the state Department of Tax and Fee Administration reported May 23.
Tax receipts for the period ending March 31 totaled $216.1 million, a 13% drop from the last quarter of 2022. The figure was also almost $100 million less year over year, down 30.6%, with $311.6 million in 2022’s first quarter.
A few factors may come into play here.
For one thing, the state legislature eliminated the cultivation tax as of last July, after a hard appeal from growers who have struggled with a plummeting wholesale price, competitive illicit market and what they label “over-taxation.”
No cultivation taxes were collected by the state for this past quarter as well as the third and fourth three-month periods in 2022. To compare, the first quarter of 2022 brought in $37.6 million, which only accounts for about a third of the difference in the nearly $100 million shortage.
The remainder may be rectified by a slew of other factors. The first-quarter results also showed a slight drop in sales taxes the dispensaries collect — $111.8 million in the first quarter — by over $7 million, but that hardly makes up the difference.
Tiffany Devitt, chief of regulatory affairs at CannaCraft, a producer based in Santa Rosa, speculated that a shortfall in excise taxes may account for some of the difference too.
First-quarter excise taxes came in as $104.2 million, about $16 million less than the fourth quarter and more than $50 million less year over year.
Both sales and excise taxes are paid at point-of-sale, but collections for the latter could be “lagging behind,” Devitt suggested. Excise taxes (15%) are collected from retailers and passed onto the distributor, which in turn, was paying the state until the rules recently changed.
Retailers now pay the state, and sometimes change comes with hiccups in process.
“Distributors had to pay a tax they hadn’t even collected on,” said Devitt, who also serves on the California Cannabis Industry Association board.
Devitt contends the unfair burden fell to the distributor, which was essentially pretaxed before it got paid in the supply chain.
An unfair advantage?
From a retailer’s point of view, CBC Marin Alliance founder and owner Lynnette Shaw, shared her theory that tax collections have dropped because some in the industry are leaving the legal market.
“There’s so much taxation (in California), people are leaving the legal market, and customers are doing the same thing — even though that (illegal) stuff isn’t tested,” said Shaw, who’s a cannabis industry pioneer responsible in part for the passage of Proposition 215 in 1996 (Compassionate Use Act) that legalized medicinal pot in the state. She operates California’s first dispensary in Fairfax and manages a thick Rolodex of cannabis contacts.
Shaw points the finger at government in her assessment of a troubled industry experiencing a $2 billion shortfall in profit since the state approved adult recreational pot use 20 years after the medicinal OK. Within two years, the state launched a multipronged system that taxed the substance and formed a licensing program to monitor who is operating legally.
Despite fee waivers and rule changes made by the state along the way, the heavy taxes on legal operators have resulted in those companies applying higher prices than others doing business “off the street” without licenses, cannabis stakeholders say.
“They invented this thing to get rid of gangsters, thieves and thugs, and it’s killing the industry. Everybody’s going underground,” Shaw said, stressing how the industry should be more profitable.
“This is California. You practically throw seeds in the ground and spit on it, and it will grow.”
The crackdown on the illegal trade
The California Department of Cannabis Control also reported Monday that its delegated task force assigned to stomp out the illicit market seized unlicensed cannabis plants and products with a retail value of $52.6 million for the first quarter of 2023.
The seizure shows a 39% jump in market removal compared to the amount captured in the last quarter of the prior year. An even larger gain was made in the number of plants eradicated. By targeting larger cultivation operations, the Unified Cannabis Enforcement Task Force improved the amount involved with the seizures, despite using 30% fewer search warrants. The size of the operations was reflected in the amount of money seized — $95,646, an 87% jump from the last quarter of 2022.
The multiagency task force, created in Gov. Gavin Newsom’s 2022-23 budget to target illegal operators, thus leveling the playing field, served 21 in 2023’s first three-month period.
“Significantly improving our results speaks to our effectiveness and will help support the legal cannabis market,” the state cannabis regulator’s law enforcement chief Bill Jones said in a statement.
Still, while legal industry operators like Devitt and Shaw applaud any inroads in cracking down on those not playing by the rules, more needs to be done, they insist.
Devitt calculated that eradicating plants numbering 52,529 equates to about 20 acres, representing a “drop in the bucket,” given the magnitude of the issue.
Shaw agreed, adding she “appreciated the eradication numbers going up,” but enforcement seems like a never-ending story.
“Enforcement is always going to be a ‘whack-a-mole’ approach. The better solution is to boost the industry. They taxed and regulated to get rid of the illegal market, but the opposite is happening,” she said.