In a May 11 press release, the California Department of Tax and Fee Administration (CDTFA) announced how much sales tax cannabis brought to the state’s coffers in the first quarter of 2018. This year marked an increase in the taxation of marijuana in California and the start of legal adult use.

According to the CDTFA, “California’s excise tax on cannabis generated $32 million in revenue for the first quarter of calendar year 2018. The cultivation tax generated $1.6 million, and the sales tax generated $27.3 million.” That’s a total of $60.9 million in the first three months of 2018. This figure does not include any additional taxes charged by cities and counties.

The year’s two new statewide cannabis taxes are: First, a 15-percent excise tax on retail purchase of cannabis and cannabis products. According to the CDTFA, “Retailers of cannabis and cannabis products are required to collect the 15 percent excise tax from the purchaser based on the average market price of any retail sale and pay it to their cannabis distributor.” Second, a cultivation tax on cultivators on harvested cannabis that enters the commercial market. Cultivators are required to pay the tax to their distributor or their manufacturer. The rate is $9.25 per dry-weight ounce of cannabis flowers, $2.75 per dry-weight ounce of cannabis leaves, and $1.29 per ounce of fresh cannabis plant. These taxes were due at the end of April.

Less Than Expected Revenue

This tax revenue was less than expected. In January the state estimated that 2017-18 cannabis excise tax revenue would total $175 million. However, the state collected $34 million in excise taxes in the first quarter of 2018, a little less than $10 million short of the estimate.

Some have attributed the shortfall to a black market that evades taxation. For example, various articles, including one at Inc.com, cite figures provided by Erick Eschker, who is an economics professor at Humboldt State University. Eschker estimates that of the total of $7.8 billion in cannabis sales in the state, most of it—$5.5 billion—comes from unlicensed growers, wholesalers, and retailers. Most of the rest comes from legal medical sales.

As-yet unlicensed growers, wholesalers, and retailers, however, have claimed that various obstacles stand between them and legality, including regulatory hurdles, local governments that refuse to process their paperwork, and exorbitant licensing fees. A Los Angeles Times article quotes Amy Jenkins of the California Cannabis Industry Association as saying that because only about a third of California’s local governments have allowed legal marijuana businesses to exist, many cannabis businesses in the state have been obliged to operate outside the state’s newly constructed and still-evolving legal framework. Under the state’s 2016 legalization measure, all Californians have the right to access adult-use marijuana, but as many of 85 percent of local governments have banned cannabis delivery, for example, denying safe and legal access for a large number of Californians.

The California Legislature is considering lowering pot tax rates. As long as adult-use retailers face great difficulty in complying with the law, however, tax revenue may continue to fall somewhat short of expectations. As local governments allow for legal businesses to establish themselves, however, tax revenue may be expected to increase.

What do you think? Will tax revenues match expectations as local governments allow for legal businesses? Should California lower its pot tax rates? Leave a comment below.

About the Author: Eric Howard

Eric Howard, who lives in Los Angeles, is a staff writer for Marijuana and the Law. His most recent book, Taliban Beach Party, appeared in 2017.

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