Recreational farmers and retailers have been making good money in California, provided they kept a jump ahead of the law. Their customers were their only regulators. As long as they kept them happy with quality cannabis at a good price, they were on to a good thing. That was until California voted to regularize their business, or so it seemed.
Those choosing to cross to the legal side of the fence find themselves playing in a very new ballgame. Costs attached to operating a business to legal commercial standards are not inconsiderable, and they have to pay license fees too. The statutory norms they have to meet for quality and safety purposes have surprised many of us. Moreover, they face a truculent president who is hardly sympathetic to their cause.
A Fitch Ratings report puffed a darker cloud of smoke in August 2017. It detailed the various benefits states stand to gain by regulating nonmedical cannabis. Fitch expects these to include reduced arrests, prosecutions, and jail-time. “Public health costs may also be positively impacted, notably by a decline in opioid abuse,” Steve Walsh, the director says.
In California, Fitch expects the effective tax rate on nonmedical cannabis to range from 35 to 45%, just a tad short of Washington’s 50%. By comparison, Alaska, Oregon, Massachusetts, Nevada, and Colorado are 10 to 20%, 20%, 24%, 36%, and 36% respectively. This is tough on California farmers, and dealers who want to be legal, especially as those that don’t, theoretically do not pay any tax at all.
We turned to CNN Money for a detailed breakdown. The news service reports as follows:
- Consumers will pay excise and sales taxes of 22.25 to 24.25%;
- Businesses will pay 1 to 20% of gross receipts on a sliding scale; OR
- $1 to $50 per square foot of plants again on a sliding scale
- Plus farmers will pay $9.25 / $2.75 per ounce for flowers / leaves
This adds up to a complicated numbers game in which we will take Fitch’s word.
The rating firm notes how prices declined in Colorado after legalization. A similar trend would have a knock-on effect in California in terms of excise and sales tax. We can’t help agreeing with CNN that legal, “could be pricey enough to keep the black market healthy.”
Fitch concludes, “High effective tax rates on California cannabis may complicate the state’s efforts to establish legal markets.” Crazy things like that can happen when regulators remain inside their ivory towers.