Breath of Fresh Air – Potential Tax Relief for California Cannabis Businesses
There may be a significant tax break on the horizon for California’s growing legal cannabis market. A bi-partisan group of Assemblymembers introduced a bill (AB 3157) that will temporarily cut the state excise tax from 15% to 11% and eliminate the cultivation tax, which is currently $9.25 per ounce ($2.75 per ounce of cannabis leaf and $1.29 per ounce of fresh cannabis plant) until June 1, 2021. The bill is intended give the legal cannabis industry a chance for a strong start, encourage black and gray market cannabis operators to make the transition to the legal marketplace and prevent the black market from successfully competing with legally compliant tax-paying businesses.
AB 3157 will be welcome news to California’s cannabis entrepreneurs, many of whom are concerned about the ability of their businesses to survive under the heavy tax burden imposed by state and local governments, while simultaneously having to compete with a sophisticated and experienced black market. Assemblymember Rob Bonta (D-Oakland), a supporter of the bill, noted “California cannabis businesses are making significant investments as they embrace the regulated marketplace while, at the same time, being undercut by unregulated competitors.” Currently, California imposes an excise tax, cultivation tax, and sales tax, not to mention the license application fees, the general cost of complying with various state and local rules and regulations, and the usual corporate taxes. Local governments are also joining in and imposing significant cannabis taxes on local cannabis businesses, including sales taxes, cultivation taxes and other operation-specific taxes. On top of these state and local taxes, cannabis businesses are unable to deduct business expenses other than cost of goods sold (COGS) from their federal taxes due to 280E.
The Adult Use of Marijuana Act (AUMA) called for the regulation of cannabis to “reduce barriers to entry into the legal, regulated market,” and “tax the growth and sale of marijuana in a way that drives out the illicit market for marijuana and discourages use by minors and abuse.” The disproportionately high tax rate imposed on cannabis companies presents an incredibly high barrier to entry for a new or transitioning cannabis business. Additionally, the high prices that compliant cannabis businesses need to charge consumers in order to afford California rents and California taxes only encourage diversion, abuse and the growth of the black market. By temporarily relieving a portion of the heavy tax burden on cannabis companies while the industry gets its bearings, AB 3157’s supporters hope to reduce the disparity in price between the black market and the legal market for consumers and other operators along the supply chain.