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Should CA Cut Taxes on Legal Cannabis to Discourage the Black Market?

Apr 25 2018, by Jessica McElfresh in Legal Blog, Marijuana Business

Consumers, growers, and retailers are complaining that cannabis taxes in California are too high. As a result of these taxes, the legal marketplace for cannabis is having trouble displacing the already established black market for buds. Unless the state reduces the tax burden, the black market will continue to stand in the way of the legal cannabis industry.

If you have questions about the cannabis business in California, call a marijuana business lawyer from McElfresh Law at (858) 756-7107 to schedule a consultation.

Cannabis Taxes Are Pushing Growers and Consumers Towards the Black Market

California now imposes a 15 percent excise tax on cannabis in addition to sales tax, which varies from eight to 10 percent. Cultivators must also pay $9.25 for each ounce of buds, and $2.75 for each ounce of leaves that they sell to distributors. These additional costs get passed down to the consumer at the retail level.

The sale of cannabis is also subject to local taxes. In San Diego, for example, the city collects five percent of retailers’ monthly gross receipts. Next year, the local tax rate will increase to eight percent, and the City Council is authorized to raise the rate to 15 percent thereafter.

Taken together, the cumulative tax on legal marijuana ranges from 20 to 50 percent depending on the municipality. Legal cannabis isn’t necessarily 20 to 50 percent more expensive than the vast amounts of black market cannabis available. The black market isn’t made up of shady drug dealers operating in a criminal underground. With anyone over the age of 21 able to legally grow up to six cannabis plants, most Californians are in a position to make ends meet by selling some buds to their friends.

Sacramento Is Considering Lowering the California Cannabis Excise Tax

In response to this budding crisis, California lawmakers from both ends of the political spectrum are scrambling for a solution. Assembly members Tom Lackey and Rob Bonta have proposed a bill that would suspend all cultivation taxes until 2021 and reduce the state marijuana sales tax rate to 11 percent effective immediately.

Assembly Bill 3157 may provide the legal cannabis market with the boost it needs to gain traction, since estimates show that the measure could cut the sale price of weed by around nine percent. As a former law enforcement officer, Lackey believes that “without tax relief to make taxes more affordable, we will continue to empower California’s mature black market.”

The State of Washington, which legalized cannabis in 2012, had to simplify and reduce its cannabis taxes in 2015. Instead of collecting three 25 percent taxes at various stages of the market, Washington now collects a 37 percent tax at the point of sale. Altogether, the tax rate on cannabis in Seattle including local taxes reaches 47 percent–just as high as in some parts of California.

Oregon, on the other hand, has a much lower tax rate than its neighbors: a 17 percent state tax rate plus an optional three percent local tax.

The number of people choosing to buy their cannabis on the black market in each state is difficult to assess, as is the effect of tax policy on the participation rates in the legal cannabis market. Common sense would tell us that people will keep choosing black market buds as long as they’re significantly cheaper than legal products.

Do You Have Questions About Cannabis Taxes in California? Call McElfresh Law Today

With a dwindling supply of legal cannabis, California’s marijuana entrepreneurs are facing a host of issues besides taxes. Fortunately, state legislators and industry leaders are working together to find sustainable solutions for the challenges facing California’s cannabis marketplace. At McElfresh Law, we are closely following these developments to better help our clients navigate a complex legal and regulatory landscape.

If you are in need of a cannabis lawyer, contact us today at (858) 756-7107 to schedule a consultation.