California legalized medical marijuana in 1996 but never established a statewide regulatory system. The vacuum that it created allowed a sophisticated illegal distribution and sale system to develop. This well-established black market now hampers the growth of legal cannabis sales. In 2016, the California Department of Food and Agriculture estimated that California produced over five times as much cannabis as it consumed.
Assemblymember Lackey, who spent 28 years as part of the California Highway Patrol, said this about their proposed bill: “Voters have approved Proposition 64 and now it’s time for the state to carry out their will… I know how sophisticated California’s black market for cannabis has become. Criminals do not pay business taxes, ensure consumers are 21 and over, obtain licenses or follow product safety regulations.”
The current tax structure for legal sales of cannabis in California includes the following:
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15 percent State Excise tax
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$9.25/oz cultivation tax for cannabis flower
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Local sales tax (7.25 to 9.25 percent)
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Various local taxes
Some estimates project that assorted fees can combine to a 45 percent cumulative tax rate. Such a steep tax rate makes less legitimate cannabis sources appealing to some buyers. Other states that have recently created a legalized market, such as Washington and Oregon, have seen positive responses to simplifying the overall tax structure for cannabis. Washington’s revenue from legal sales more than doubled when it reduced its overall tax burden for legal businesses.
“California cannabis businesses are making significant investments as they embrace the regulated marketplace while, at the same time, being undercut by unregulated competitors,” said Assemblymember Rob Bonta. “AB 3157 reduces the tax burden on the licensed cannabis market during this transition period, keeping customers at licensed stores and helping ensure the regulated market survives and thrives.”
The proposed bill will reduce both the excise and cultivation tax, and should result in a 9 percent price reduction for California consumers, per New Frontier Data. “Reducing this gap is critical to making the legal market more competitive against the illicit market and more attractive for consumers,” said Beau Whitney, Senior Economist at New Frontier Data.
We will continue to watch this important issue as it develops and moves through the gears of California’s state government. If you have additional questions about how this may affect your insurance coverage, please feel free to reach out to me at 626.703.1556 or just email me at ctobin@boltonco.com.
If you have any questions on coverage, check out our Cannabis Industry page. I can help you avoid a lot of headaches and make sure you have the right coverage.
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