California Cannabis State Tax Scheme

Going green has taken on a new meaning in the United States. Less than two decades ago, marijuana was illegal across all 50 U.S. states. Now, thirty-three states and the District of Columbia currently have passed laws broadly legalizing marijuana in some form.

California activated its recreational adult-use cannabis program on January 1, 2018, and with California being known for being one of the most progressive states as far as legalizing and taxing marijuana, everyone was watching sideline. Unfortunately, the Golden state has not brought in as much revenue from taxes on marijuana as projected. Many believe this is because the state chose to impose too high and too many taxes on the cultivation and sale of marijuana.

Beginning January 1, 2018, California implemented two types of taxes on recreational cannabis: One for commercial growers, who pay the state a cultivation tax on harvested, dried cannabis at $9.25 per ounce of flower, and $2.75 per ounce of leaf. The second was a retail excise tax of 15 percent of the sale price to be collected by the state at the time of purchase. Additionally, the sale to the end user is subject to a sales tax, which typically runs around 7.5%. Then, each city and county can apply its own tax on the sale to the end user, which ranges anywhere from 2 to 20%. This amounts to taxes of 40% depending on the local tax.

These types of high tax rates on regulated substances oftentimes leads to consumers being driven to buy on the black market as opposed to buying from the licensed dispensaries. Further, this causes the cultivators and dispensaries to drive down their prices to stay competitive with the black market, making their sales significantly less profitable.

It will be interesting to watch if California chooses to make any changes to its current tax scheme and whether other states will learn from this or too greedily overtax the drug.

About the Author: Paula Savchenko is an associate attorney at the Law Offices of Moffa, Sutton, & Donnini, P.A, based in Fort Lauderdale, Florida. Ms. Savchenko joined the firm in 2013 and practices primarily in the areas of Taxation and Administrative Law matters, as she counsels and represents businesses and individuals in their dealings with government agencies. More specifically, most of her work involves tax and regulatory matters, with an emphasis on state and local taxation.