As with any new or evolving industry, the taxation of cannabis in California has undergone rapid change over the last five years. California became the first state to legalize medical marijuana in 1996 and on November 8, 2016, the state’s voters chose to legalize recreational use of marijuana. Since then, the taxation of cannabis within the state has been a hot button issue.
Beyond adjusting tax rates, recent changes in the cannabis industry have simplified the regulatory and licensing oversight of the market and made it more readily accessible to medical marijuana patients who found the plant too expensive to buy after recreational cannabis was legalized.
In California, cannabis sales are subject to sales and use taxes, a 15% excise tax on retail purchases of cannabis and cannabis products and local cannabis business tax, which depends on the jurisdiction. Additional cannabis taxes are levied on harvested marijuana as it enters the commercial market with rates dependent on if the harvest is flowers, leaves or a fresh plant.
For businesses, this means that cannabis sales are very complex tax-wise and ensuring compliance is essential to continuing success, especially in such a highly regulated industry.
Earlier this year, the state created the Department of Cannabis Control to simplify oversight and licensing of cannabis businesses, reducing regulatory-related burdens and providing one resource for business and taxation support for cannabis businesses.
That said, we heavily recommend that businesses that are new to this industry to consult with professionals like Miles Consulting Group to assist with navigating these tax waters.
For consumers, California’s cannabis taxes means that every purchase of cannabis or cannabis-related products of a $100 includes another $15+ of tax, depending on the location. In Los Angeles, for example, a $100 purchase of cannabis totals $138.52 after tax, as calculated and shared by Leafy. The amount of tax added onto each sale has proved to be as harmful and it is beneficial for the state. While the tax revenue has been beneficial for the state’s budget, a thriving marijuana black market continues to exist as recreational users look to dodge the heavy taxation on legal purchases.
This taxation also made it difficult for low-income medical users of the plant to acquire it. Under the legalization legislation, marijuana was taxed at the same rate, regardless of whether it was sold or if it was donated to a non-profit for distribution to those who needed it most. As a result, these programs suffered, but the passage of California Senate Bill 34 amended this tax issue and created a legal pathway for cannabis companies to participate in these programs without needing to apply a portion or all of the taxation levied on sales.
California has certainly blazed a trail in regards to legal recreational cannabis and its taxation, but other states are also walking this path as well.
As of September 2021, 18 states have fully legalized cannabis, with another 13 states having decriminalized its use. More states have legalized medical marijuana, with only five states banning its use in any form for both medical and recreational purposes.
States that have legalized marijuana have either already levied an excise tax or are in the process of doing so. Rates depend on the state, with some utilizing a system that places a certain percentage of tax per ounce, while others tax based on the amount of THC in the products or levy different rates based on the type of product.
As a result, consumers and businesses will have very different experiences with cannabis taxes based on the location of their business or where they are making their purchase. The different systems make direct comparison difficult, but Washington, with an excise tax rate of 37%, is generally considered the most expensive state to buy recreational cannabis in.
As we previously stated, companies doing business in this industry should be especially cautious when it comes to collecting and remitting taxes on their products. If you have questions, Miles Consulting Group can help.
Do you have questions regarding the taxation of cannabis, or any other state tax situations? If so, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
