Yesterday, the California Department of Tax and Fee Administration announced they will be increasing the cannabis tax rates as of January 1st, 2020. These will be applied to mostly licensed cultivators upon selling or transferring dried cannabis flower, fresh cannabis flower, and leaves to distributors or processors. The state claims they are increasing the cultivation tax rate as part of a routine adjustment for inflation.
The new cannabis tax law takes effect on January 1st, 2020 and cultivators will notice the adjusted rates reflected on the monthly and quarterly cannabis tax returns. The average market rate is determined by a few different factors and the CDTFA is responsible for making changes to the tax rates in a responsible way.
|Category of Cannabis||Current Tax Rate||New Tax Rate 1/1/20|
|1 Ounce Dry Weight Flower||$9.25||$9.65|
|1 Ounce Dry Weight Leaves||$2.75||$2.87|
|Fresh Cannabis Plant||$1.29||$1.35|
There are two types of transactions that are subject to these state imposed taxes and the California Department of Tax and Fee Administration calculates them differently. In an arm’s length transaction, the average market price is the retailer’s wholesale cannabis cost, plus the mark-up rate determined by the CDTFA. In a non-arms length transaction, the average market price is the cannabis dispensary’s gross receipts from retail sales.
In an "arm's length transaction" the sale reflects the fair market price in the open market between two informed and willing parties, neither are required to take part in the transaction.
In a "non-arm's length transaction" the sale does not reflect the fair market price in the open market or is not between two informed and willing parties, and neither are required to participate in the transaction.
The primary difference is that arms length applies to two unaffiliated cannabis businesses that engage in the transaction. A non-arms length transaction is typically when a dispensary is vertically integrated and manages cultivation, distribution, and retail sales under one entity. This business model will be subject to the new cannabis tax rates based on their monthly revenue and sales receipts.
According to the analysis performed by the CDTFA the mark-up rate for 2020 will be 80%. This news comes at a vulnerable time for the California cannabis market. Legal California cannabis businesses are still competing with the black market all while paying high cannabis tax rates from their city and state, dealing with local bans, strict regulations, and slow growth.
The CCIA issued a statement that pointed out that, “Widening the price disparity gap between illicit and regulated products will further drive consumers to the illicit market at a time when illicit products are demonstrably putting people’s lives at risk.”