Market Overview

As The Coronavirus Thwarts Cannabis Tax Reform In California, Federal Reform Could Be Last Hope

As The Coronavirus Thwarts Cannabis Tax Reform In California, Federal Reform Could Be Last Hope

California's cannabis tax woes have plagued consumers and businesses since the onset of the adult use program on New Year's Day 2018.

The burdensome taxes in the Golden State have left patients, adult use consumers and businesses pleading for a break.

Since the market’s inception, some consumers have had to pay 35 cents in taxes on every dollar spent. For businesses, regulations have been named as “killers” of the industry.

The state has made efforts to address its shortcomings; 2020 was discussed a a year when tax reform could occur. Yet the COVID-19 pandemic has likely upended most regulatory changes for the foreseeable future.

California Regulations 'Like A Game Of Pingpong'

Adam Spiker is co-founder and executive director of the Southern California Coalition, a cannabis trade organization.

California is making efforts to correct a market dogged by taxes and other crippling threats.

He cited California's two-tier system as a source of much of the issues. The system, which sees municipalities and the state independently changing their regulations, often results in a back-and-forth of the two's regulatory alignment.

"It's basically like a game of pingpong," Spiker said. "When one changes, the other, kind of has to change."

Tthe issues were unavoidable after the state merged a two-decade-old medical system with the burgeoning $1-billion adult use market, he said. 

"[California] had to figure out how to transition that monstrous industry into a regulated legal industry."

Don Williams, vice president of government relations at Curaleaf Holdings Inc. (CSE: CURA) (OTC: CURLF), said all budding industries see a period of constant change.

Williams agreed that the tax rate and its collection are primary concerns, along with California's thriving illicit market.

Willaims highlighted another longstanding concern that plagues the supply chain: licensing delays. “In the past, problems of licensure processing have delayed many farmers, distributors, and retailers from operating sooner.”

An increase in licensing and a reduction in taxes are needed to stop the market from receding, said David Hua, CEO of the cannabis point-of-sale brand Meadow.

"Inaction only benefits unlicensed, untaxed retailers, and costs local and state governments revenue,” he said. “The status quo is not viable."

Curaleaf’s Williams said positive reform is underway at the California Bureau of Cannabis Control. 

“In order to clear up these delays, the BCC needed to become a department. There is now a governor’s budget proposal to create a department of its own.”

Tax Revenue Concerns

Not everyone believes the market is improving.

Lorenzo Nourafchan, partner and CEO of Northstar Financial Consulting Group, said the California market is worsening for businesses and license holders.

"Although the municipalities have made huge financial projections for the cannabis industry, which forms the basis for the relevant tax regulation, in reality, those projections are probably going to fall quite short," he said. 

In May 2019, the state took similar action with its tax revenue projections, cutting expectations by $223 million just four months after making the initial forecast.

Latest Legislative Efforts Thwarted By COVID-19 

The governor's proposal was joined by proposed legislation that aimed to ease concerns across the supply chain. Assembly Bill 1948 would have done away with cultivation taxes while reducing the 15% excise tax to 11% for three years.

GW Holdings CFO Giovanti Humphries, whose company’s portfolio includes the marketing agency Cannaverse and Venice, California-based retailer CAC Venice, discussed the importance of the bill.

“As AB1948 shares some similar characteristics of AB286, which was heavily fought for, we have hope that there will be some relief provided if the new bill passes, especially given the uncertainty of the long-term COVID impact on California’s economy," Humphries said.

He also wondered whether the bill would sway the market.

“Even if the bill passed, [with] the 11% excise tax, plus the bevy of other taxes a customer faces at the dispensary check out, the move could prove too little too late leaving customers searching back for products in the illicit market,” he said. 

The bill, considered "key" by some in the industry, saw a setback at the start of May when it was determined that an Assembly vote would not occur due to the impact of the coronavirus on the legislative calendar and possible state budget uncertainties.

While AB1948 likely will not progress any further, some industry hopes remain alive on the federal level. Northstar Financial's Nourafchan discussed the impact of a federal SAFE Banking Act passage and what it could mean for California and the rest of the U.S. cannabis market.

"The banking bill would benefit the government bodies by enabling them to more easily collect taxes, protect business owners from theft and security issues and, most importantly, encourage more operators and consumers to enter the legal market."

On May 12, the SAFE Banking Act was included in House Democrats' latest proposed coronavirus relief package. President Donald Trump responded shortly after, saying the bill is “dead on arrival.”

Related Links:

A Snapshot Of America's Medical Marijuana Markets: California

California Cannabis Legislation In 2019: A Look At What Passed, Stalled In Sacramento


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