The hopes of increased consumer participation in California’s regulated cannabis market did not provide a boost to licensed retail sales or state tax revenue during the first quarter of 2023.
California’s adult-use dispensaries reported $1.25 billion in taxable sales for the quarter, representing a 6% decrease compared to the first quarter of 2022, according to figures released May 23 by the state’s Department of Tax and Fee Administration (CDTFA).
The taxable sales figure includes sales of cannabis, cannabis products and other retail sales of tangible personal property (such as a T-shirt) reported on tax returns.
Providing a more accurate depiction of the actual cannabis sold, California’s adult-use dispensaries reported $859 million in sales subject to the state’s 15% cannabis excise tax in the first quarter of 2023, or roughly $286 million per month on average.
That “cannabis sales” total was not reported to CDTFA in previous quarters because California recently made major changes to the way cannabis excise taxes are applied and collected. Beginning Jan. 1, 2023, the responsibility for collecting and paying the 15% excise tax shifted from licensed distributors to retailers.
In other words, distributors stopped collecting the excise tax from retailers, and retailers started collecting the excise tax from their customers based on gross receipts, which do not include the state’s sales tax or the gross receipts from the retail sale of any non-cannabis items, according to a special notice from CDTFA.
With the shift in reporting the excise tax to the retailer, retailers may claim a credit for excise tax paid to a distributor prior to Jan. 1, 2023, and certain retailers are also eligible to retain vendor compensation equal to 20% of cannabis tax due, according to CDTFA.
The total tax revenue from first-quarter returns—which includes excise and sales taxes—was $216 million, representing a 13-quarter low going back to Q4 2019. This trend is partially due to California eliminating its weight-based cultivation tax in July 2022, but also to falling sales figures in general amidst prices compression and other market headwinds. From 2021 to 2022, taxable sales decreased 7% statewide.
While revisions to quarterly data are expected from amended and late returns, the $216 million in tax revenue from Q1 2023 represents a 40% decrease from a $362 million peak in Q2 2021 for the state market. This drop comes despite optimism that eliminating the cultivation tax would allow operators to better compete with the illicit market, and in turn driving greater sales and comparable tax revenues.
Notably, a May 2022 study by Los Angeles-based Reason Foundation found that eliminating the cultivation tax would bolster enough market growth to yield similar revenue results. Specifically, the study’s author, Geoffrey Lawrence, concluded that eliminating the cultivation tax would only result in a 5.15% reduction in revenue by December 2024.
But part of California’s equation for combating the illicit market extends beyond the state’s tax structure. Importantly, greater participation by consumers in the licensed cannabis market is often a factor of access to retail.
While the California Department of Cannabis Control has licensed more than 350 new adult-use dispensaries since July 2021, the state still has fewer than three storefronts per 100,000 people, the lowest rate among legacy markets in the nation.
Still, California’s population equates to the largest cannabis market in the country by sales volume. Since January 2018, licensed cannabis businesses have provided roughly $4.9 billion in tax revenue to the state, including more than $2.4 billion in cannabis excise tax, according to CDTFA.
California’s adult-use dispensaries have reported nearly $22 billion in taxable sales since they commenced operations.
