It is increasingly clear that a top priority for California’s cannabis industry in 2022 is tax reform – and Gov. Gavin Newsom and several lawmakers agree – but the question now is: in what form?
The push began with industry stakeholders. Since December, as Cannabis Wire has reported, a group called Save California Cannabis Coalition has sent a letter, held a rally, and hosted a news conference with lawmakers to make its case to the governor that the industry “is collapsing” under the weight of taxes and competition from unlicensed operators. In January, Newsom’s budget noted that “the Administration supports cannabis tax reform and plans to work with the Legislature to make modifications to California’s cannabis tax policy to help stabilize the market; better support California’s small licensed operators; and strengthen compliance with state law.”
Of the taxes, the cultivation tax is in sharp focus. The tax is determined by weight, which, as growers have noted, means that the tax burden doesn’t decline as the value of their crop declines amid competition with these unlicensed growers. That tax is also adjusted for inflation.
By February, California Senate Majority Leader Mike McGuire announced a tax reform bill, as Cannabis Wire reported at the time.
“Cultivation taxes are crushing small farmers throughout the North Coast and California. This legislation will provide much-needed tax relief for struggling small cannabis farmers before the market collapses,” McGuire tweeted last month. “We can’t continue to tax family farmers based on the product’s weight — because when prices fall, the taxes remain disproportionately high. It’s simply not sustainable.”
By the end of the month, three other bills tackling cannabis taxes followed. And, so far, each of them takes a different approach.
Assembly member Blanca Rubio, who spoke at the Save California Cannabis Coalition news conference in February, and who has pushed legislation to impose civil penalties against unlicensed operators, told Cannabis Wire that she put forth a tax reform bill because she believes “that tax relief is a crucial component to building up the legal market.”
As for getting her specific bill over the finish line this year, Rubio put it to Cannabis Wire this way: “The biggest hurdle will be bringing everybody to the table to agree on a single plan. However, I believe there is enough support for something to happen this year, either through the legislative process or through a budget trailer bill.”
Here’s where things stand today:
SB 1074 (Sponsor: Senator Mike McGuire; Co-author: Assembly member Jim Wood): McGuire’s bill would eliminate the cultivation tax as early as this July and would simultaneously increase the cannabis excise tax, which is currently 15% at retail. From July 2025 to July 2026, the increase would “generate half the amount of revenue that would have been collected pursuant to the cultivation tax.” Then, starting in July 2026, the increase would be such that it would “generate the full amount of revenue that would have been collected pursuant to the cultivation tax.”
SB 1281 (Sponsor: Senator Steven Bradford): Bradford’s bill would also “discontinue the imposition of the cultivation tax,” but it would also “reduce the excise tax to 5%” from 15% at retail. The bill would also make it so that this tax does not include a mark-up (typically, this is set by the California Department of Tax and Fee Administration every six months and factored into the tax). Finally, the bill would make it so that distributors no longer have to “collect the excise tax from the cannabis retailer” and “remit the excise tax to the department,” but that the remit would be the responsibility of the retailer. All of this would take effect at the start of 2023.
AB 2506 (Sponsors: Assembly members Bill Quirk and Tom Lackey): This bill would “suspend the imposition of the cultivation tax from July 1, 2023, to July 1, 2028, and would discontinue the requirement that the department adjust the cultivation tax rate for inflation for the 2023 calendar year and during the suspension.” Then, like McGuire’s bill, it would increase “the excise tax by an additional percentage that the Department of Finance estimates will generate the amount of revenue that would have been collected pursuant to the cultivation tax,” but it would do so “from July 1, 2023, until July 1, 2028.”
AB 2792 (Sponsors: Assembly members Blanca Rubio and Cristina Garcia): This bill contains the highest number of changes. It would, like Bradford’s, remove the mark-up amount from consideration in the excise tax, but only from July 1, 2022 to July 1, 2025. It would also, during that time, suspend the excise tax for “purchasers of cannabis or cannabis products sold in this state by licensees eligible for a fee waiver or deferral pursuant to the program established by the Department of Cannabis Control under the California Cannabis Equity Act.” It would also, during that time, suspend the cultivation tax and “discontinue the requirement that the department adjust the cultivation tax rate for inflation during the suspension.”
The bill, like Bradford’s, also makes remit-related changes. Currently, distributors must collect the excise tax from retailers “on or before 90 days after the sale or transfer of cannabis or cannabis product to the cannabis retailer,” but the bill would change this to “on or before 90 days after the cannabis or cannabis product was sold or transferred by the cannabis retailer to the purchaser.” And, currently distributors must “remit the cannabis excise tax and the cultivation tax to the department quarterly on or before the last day of the month following each quarterly period of 3 months,” and the bill would change this remit to the department to “quarterly on or before the last day of the month following the quarterly period in which the distributor collected the tax.”
