The largest legal cannabis market in the world just had the best quarter on record.
California’s adult-use industry reported nearly $1.4 billion in taxable cannabis sales and $333.2 million in total program tax revenue, according to the California Department of Tax and Fee Administration (CDTFA). Those record figures represent a 91-day period from April, May and June.
Yes, the legal market appears to be picking up steam, said Graham Farrar, the co-founder and president of Glass House Brands. His Santa Barbara-based operation encompasses more than a half a million square feet of sustainably grown, craft-at-scale cannabis.
And, yes, there are more and more legal cannabis consumers participating in California, he said.
Since the state launched its first adult-use sales in January 2018, the cannabis industry has provided a total program revenue of $2.8 billion, which includes $1.4 billion in cannabis excise tax, $347.4 million in cultivation tax and $1 billion in state sales tax during the course of the past 3 1/2 years.
But are the taxes too high? The answer to that is also yes, Farrar said.
“California could be doing a better job helping the legal market compete with the illegal market and increase tax revenue at the same time by lowering the tax rate,” he said. “Doing so would allow [tax collectors] to take a smaller piece of a much bigger pie. They could also drastically simplify the tax collection process and make it harder to cheat, which will raise tax revenue, by moving the tax collection all to the point of sale. The current system is hard to administer and enforce. Lots is getting better and there is still lots that we can improve.”
When California’s Control, Regulate and Tax Adult Use of Marijuana Act went into effect, the state began collecting a 15% excise tax, a sales tax and a cultivation tax on cannabis.
California’s current cultivation tax is based on $9.65 per dry-weight ounce for cannabis flower, $2.87 per dry-weight ounce for cannabis leaves and $1.35 per ounce of fresh cannabis plants that are weighed within two hours of harvesting, according to CDTFA. Bringing in $40.4 million during the second quarter of 2021, California’s cultivation tax represented roughly 12% of the state’s total cannabis tax collected from that period.
The $2.8 billion in total program revenue since adult-use sales launched in 2018 was mostly derived from nearly $11.7 billion in taxable sales.
The CDTFA is responsible for administering California’s sales and use, fuel, tobacco, alcohol and cannabis taxes, as well as a variety of other taxes and fees, that fund specific state programs.
“CDTFA-administered programs account for more than $73 billion annually, which in turn supports local essential services such as transportation, public safety and health, libraries, schools, social services and natural resource management programs through the distribution of tax dollars going directly to local communities,” the department stated in a recent news release.
But consumer spending and sales figures alone are not a tell-all sign about the health of California’s legal cannabis industry, said Adam Spiker, the co-founder and executive director of Southern California Coalition, a cannabis trade organization.
“I don’t think it’s necessarily a direct correlation to health of the legal industry, I really don’t,” he said. “I think it’s more a correlation with more licensing being issued and more of the transition of operators into the legal realm. And, when I look at those numbers, it still tells me, since we know that there’s a lot of dry markets, or underserved markets, throughout the state, it just tells me that the demand for [cannabis] is very powerful.”
Spiker continued and said, “If the state could look at things a little differently from the standpoint of trajectory, right now they’re just squeezing a turnip of all the folks that want to do it right and not taking into account that there’s a much broader market out there that still is vastly bigger than the legal [market] that we need to dip into a lot quicker.”
Regarding cannabis tax revenues for the second quarter of 2021, California’s 15% cannabis excise tax generated a record $172.3 million in revenue during the 91-day period, representing a 9.2% increase from the first quarter.
The second quarter sales tax revenue from cannabis businesses totaled a record $120.5 million, an 11.8% increase from the first quarter. The sales tax applies to sales of cannabis, cannabis products and other tangible personal property.
And the second quarter cultivation tax generated $40.4 million—a 3.1% increase from the first quarter of 2021 but a 6.9% decrease from its all-time high of $43.4 million generated in the third quarter of last year.
Overall, the state’s $333.2 million in total program tax revenue during the second quarter represents a 9.3% increase from the first quarter of 2021 and a 26% year-over-year increase.
On paper, those figures may appear to some as a great boost to help support state and local essential services. But the tax rates are too high to promote a full-reaching legal industry for optimal effect, Farrar said.
“Lowering the tax rate would raise the taxes collected and help the legal market cannibalize the illegal market, and make legal cannabis more accessible,” he said. “Three great public policy wins with one change.”
The reality on the ground is that the illicit market still far overperforms the legal market because the price gap between legal and illegal cannabis remains way too severe, Spiker said.
The Legislative Analyst’s Office—a nonpartisan fiscal and policy research institute for California’s Legislature—estimates that adult-use cannabis businesses operate in less than one-third of jurisdictions statewide.
That price gap severity is largely due to the cannabis tax burdens but also can be attributed to other regulatory and licensing factors, Spiker said.
“You look at the biggest singular cost, it’s without a doubt the state taxes,” he said. “But the rest of it is kind of death by 1,000 cuts. There’s probably a lot of waste in access costs. Not that we shouldn’t have lab testing, but I think that it’s pretty well believed that cannabis probably doesn’t need to be tested to the level of in excess of 10 times more extreme than vegetables and fruits. I think that’s one area.”
Packaging criteria also can become costly, he said.
“There’s not a cumulative discussion or recollection of how each of these levels of regulation impact the cumulative market,” Spiker said. “Everything you do in the regulatory realm is another thing that separates you from the illegal that doesn’t give two [hoots].”
Despite all that, California is on pace to eclipse $5.2 billion in sales this year. If the quarter-over-quarter numbers continue to grow, that figure will be higher.
In 2019 a projection, Arcview Group—a vertically integrated company servicing the cannabis and hemp industry with market research—forecasted California consumer spending on legal cannabis to reach $7.2 billion in 2024 with a 19% compound annual growth rate during the next five years of the forecast.
But if California continues to report record sales quarters, that $7.2-billion projection could be realized much sooner.
“I think that there’s those who will be like, ‘Ah, we’re getting there. We’re getting there,’” Spiker said about rising dollar figures being a sign of an improving legal market.
“[Bull]. We’re not getting there,” he said. “Or we’re getting there so slowly that the adverse is happening; we’re seeing more and more cannabis operators that either don’t want to enter the legal realm or tried being in the legal realm and, because it was too costly, they couldn’t survive and they’re back to doing things the way they used to.”Industry stakeholders have yet to get enough decision-makers at the state level to weigh all sides of the equation, he said.