California Governor Signs New Law Reducing Cannabis Tax Burden

On the 30th of June, 2022, the Governor of California signed a new bill into law reducing the taxes associated with the production and sales of marijuana, thereby making a huge positive impact in the marijuana industry. Prior to the new bill, the California marijuana industry has been burdened with heavy taxes such as the 15% excise tax applicable all over the state, the 10.75% sales and use tax, and the 15% local business licences, which is not essentially applicable throughout the state but in some jurisdictions as well as the cultivation tax imposed on cannabis flowers to the tune of $161.28 per dry weight pound. Essentially, these taxes were not burdensome in the initial phase when the business was still good, however, the change in tide when the wholesale prices crashed in the fall of 2021 affected the ability of entrepreneurs to make some profit.

This makes the introduction of the new law a welcome development. Some of the changes in the law includes the removal of the burdensome cultivation tax on licensed growers; this means that any harvested cannabis which goes into the commercial system by July 1, 2022, or after is not subjected to any cultivation tax by virtue of the new law, this would apply even in a situation where the distributor or manufacturer obtained the cannabis from the licensed cultivator before the said date. The law also moves the burden of collecting the excise tax of 15% from the distributors and places it at the doorstep of the retailers, and this went into effect from the 1st of January, 2023, however where there is the sale or the transfer of cannabis which has been harvested and has been pushed into the market by cultivators to distributors and manufacturers after the 1st of July, 2022, such cannabis would be exempted from the cultivation tax if it is also being subjected to the 15% excise tax imposed on retailers. The law also provides a restriction on the increase of the excise tax for a period of 3 years, which means till July 1, 2025, there would be no increase in excise tax. Thereafter, the Department of Tax Administration is allowed to upwardly adjust the taxes every two years using the rate that would be able to generate the same amount of revenue if the cultivation tax were to have been collected; such rate would, however, not go above 19%.

The new law is set to begin to increase productivity in the ailing sector as it has been shown in an economic analysis that the tax rate which is estimated to be about $92 per ounce of cannabis an amount higher than is obtained in other states has been the major factor hindering the growth of the legalised business in the state. However, experts while applauding the bill also noted that it was just the first step as more is still needed to be done as the unregulated market for the product is still being patronised even after the legalisation of the product for over 6 years now. Several lawmakers also raised concerns about the new law's inability to address concerns on the racial disparities in the industry. However, on the order of priority, removing the cultivation tax was seen as the top priority for lobbyists which has been pursued for over 3 years now.

To handle the issue of unlicensed producers of the commodity, the law has provided penalties to the tune of $10,000 every day for persons who knowingly let their space out to be used for the illegal cultivation, manufacturing, sales and storing of cannabis in the state. Tax credits were also provided for social equity marijuana business up to the tune of $10,000 and they are entitled to retain 20% of their excise tax from the sales of cannabis for the purpose of reinvesting. Another $40 million in tax credits is provided for eligible retailers and small businesses who will be eligible to obtain half, and the other half would be assigned to equity operators. On the part of Labour, the bill has reduced the number of operational employees that an organisation is required to have before being admitted to become a part of the labour peace agreement from 20 persons to 10 persons. One very cardinal provision of the bill is the provision of the sum of $670 million which is to be used for marijuana education, treatment of substance misuse, environmental monitoring and clean up, enforcement of the law, remediation and environmental clean up occasioned by illegally manufacturing cannabis.

A $20 million provision is made to help the local retail licensing efforts thus reducing the policy gap in where some cities and counties have refused to allow the operation of any cannabis licence in their area.

In total, the state of California has raked in over $4 billion in revenue from the adult use of marijuana which began in 2018, they made $294 million in the first quarter of 2022, and $817 million in tax revenue during the previous financial year. In January, the state decided to help local marijuana businesses by providing funding of up to $100 million, which would be utilised in helping local businesses upgrade their provisional licences to full licence.