Lester Black, SFGATE
June 16, 2023
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The legal cannabis industry is accustomed to facing a long list of threats to its business, from increasingly brash robberies to strict government regulations. But pot shops in California’s largest city are dealing with a profoundly bizarre problem: No one in Los Angeles knows the real tax rate for cannabis.
The city and the state government are currently fighting over who gets to levy the final tax on pot shops. Neither side is relenting, leaving store owners stuck with no idea how to calculate pot taxes.
Not only does this pose a question of fairness — How is it just for the government to force companies into a situation where there isn’t a clearly stated tax rate? — it could also put cannabis stores out of business. Not paying taxes can be a death sentence for pot companies in California. If the city of LA decides a company didn’t pay the correct rate, the shop owner can lose their license. Such uncertainty has forced stores — already on the verge of going out of business thanks to California’s depressed cannabis market — to preemptively pay extra taxes to avoid any penalties.
Carlos de la Torre, the founder of Cornerstone Wellness in Los Angeles, told SFGATE he expects to pay an extra $140,000 this year in taxes because of the city and state’s compounding tax rules.
“We don’t recoup that money, it comes out of our pockets,” de la Torre said. “For most of us in retail, that’s all of our profit, that’s all of our money.” ‘An infinitely recursive tax’
LA’s tax problem is caused by the fact that both the city and the state want to be the final tax on any cannabis product. The city of LA claims that its local tax needs to include the cost of all other taxes and fees, including all state taxes. However, the state also claims that both its excise tax and sales tax need to include the cost of any local taxes. In other words, pot shops need to keep applying each agency’s tax to the cost of the other agency’s tax in a never-ending loop of taxes taxing taxes.
David Hua, the CEO and cofounder of Meadow, a cannabis software platform, said LA is the only municipality he knows that has tried to claim final taxation powers. He said in an email that LA’s taxes are “logically impossible to apply.
“As defined this is an infinitely recursive tax, each taxing the other into infinity,” Hua said in an email. “There is factually no way to follow the law as LA interprets it.
FILE: Kristina Schultz and Ramen Wallace make purchases at The Woods Dispensary in Los Angeles on Sunday, April 16, 2023.The Washington Post/The Washington Post via Getty Im This circular tax problem has existed since LA instituted its local cannabis tax in 2018, but the situation became even more complicated earlier this year when state law changed to require the state’s excise tax to also include the cost of local taxes, creating what Hua described as a “tax pretzel.
Hua said he’s told retailers to consult with tax and legal professionals to come up with their own solution to the problem, but he’s often seen retailers proactively compounding the multiple taxes against each other, essentially inflating the tax rate at their own expense in order to make sure each agency is happy. He said he’s seen LA retailers expand the local tax from 10% to 12.5%, the sales tax from 10% to 12.5% and the state excise tax from 15% to 16.5%. Using this formula has real costs for pot shop owners. This increase in taxes is hitting the industry as it already struggles to stay profitable and entice customers away from the illicit market, where illegal dealers sell pot without paying any of these taxes. “Now with this triple compounding tax scenario, it’s over $140 for that same product that you bought four years ago for $109,” de la Torre said. “By having this confusion and charging consumers more, people are just going to buy their products in other places like the black market.”
Hua agreed, saying it’s “mind boggling” for the government to create these compounding taxes when customers are already seeking out cheaper cannabis on the black market.
“Unsurprisingly, this massive, confusing tax burden has led to the majority of commercial cannabis transactions taking place outside of the legal market,” Hua said. “Yes, the majority of sales are unlicensed, as the state is aware — they killed the golden goose with taxes in the 30-40% range, and cannabis tax revenues are decreasing quarter after quarter.” A legislative fix for LA’s cannabis retailers?
Neither the city of LA nor the state’s Department of Tax and Fee Administration appear to be able to fix the problem themselves. The Los Angeles Office of Finance did not return a request for comment, and the California Department of Tax and Fee Administration said that their excise tax needs to include the cost of any local taxes but did not have any guidance for how to apply the tax given Los Angeles also has a compounding tax rate.
The solution might come in the form of a state law proposed in this legislative session. Senate Bill 512 would solve the problem by removing the compounding nature of both local and state cannabis taxes. The taxes would only apply to the pre-tax cost of the goods and not apply to costs of paying any other taxes.
FILE: A customer browses products for sale at the Green Goddess Collective legal cannabis dispensary on Feb. 15, 2023, in the Venice neighborhood of Los Angeles.PATRICK T. FALLON/AFP via Getty ImagesA legislative analysis said this would reduce the effective tax rate for cannabis in the state. “These changes should lower final sales prices to consumers in the regulated market to help compete against the illicit market,” the analysis said.
The proposed law passed the state Senate on May 30 in a 33-1 vote. It has yet to be scheduled for a vote in the Assembly.