California cannabis businesses ask Gov. Newsom for tax relief

In a Boston Tea Party West Coast-style tax revolt, about 30 cannabis leaders from throughout the state signed a letter Friday asking the state to eliminate the tax paid by growers, offer a three-year reprieve on the tax with point-of-sale transactions and open up more retail opportunities.

The petition addressed to California Gov. Gavin Newsom, Sen. President Pro Tempore Toni Atkins and Speaker of the Assembly Anthony Rendon is intended to beat the finalizing of next year’s state budget, which stands at a $31 billion surplus and is due to be released on Jan. 10. Any changes in the taxes on cannabis would require a two-thirds vote by the California Legislature.

A rally is scheduled for Jan. 26 at the steps of the state Capitol in downtown Sacramento to raise industry concerns.

From growers to retailers, the coalition painted a picture of “frustrated” cannabis operators on the brink of a potential market collapse as the price for legal product has plummeted compared to the illicit market. The going rate has plunged from about $1,500 a pound to $300-$500. Some operators have claimed they pay more in taxes than they make in revenue.

Calling it “adding insult to injury,” cannabis operators said they reached a tipping point when the state announced plans a few weeks ago to raise the cultivation tax rate from $9.65 to $10.08 per dry weighted ounce next year. The state said the tax hike was made as an inflationary maneuver.

But the industry argued the product is taxed too much throughout the whole supply chain. Plus, local governments also collect. For the North Bay, Sonoma County taxes a dozen types of licensed growers from $1.12 to $12.65 per square foot depending on the category. Two Sonoma County cannabis groups asked the Board of Supervisors earlier this month for relief from the county taxes.

Meanwhile, in the state’s third, last-reported quarter, the industry generated $42.4 million in cultivation tax out of the $322.3 million in total tax revenue among growers to the state; $168.9 million in excise tax; and $110.9 million from sales, the California Department of Tax and Fee Administration reported.

“Without meaningful change, many if not most licensed cannabis companies will face a desperate choice: Pay exorbitant taxes into a system designed for failure or pay employees so they can feed their families. None of us want to make this choice,” the letter reads, declaring the industry has reached “a breaking point.”

Springing off the passage of Proposition 64, which passed in 2016 allowing for adult, recreational use in the state, cannabis operators contend the initiative was designed to drive out the illicit market and make it safer for users. But the California cannabis system that manages the tax and licensing program has been looked upon as “a nationwide mockery,” according to the letter.

When asked if operators would be willing to give up their licenses if nothing happens and they’re pushed to do so, cannabis leaders on the Friday morning press conference call told the Business Journal they’re stopping short of an all-out declaration they would refuse to pay taxes.

“Losing our licenses through a tax boycott is a measure of last resort. What the industry is saying is it’s approached a point of having nothing left to lose,” said Tiffany Devitt, chief of government and consumer affairs at CannaCraft, a large producer based in Santa Rosa.

This comes days after the California Department of Cannabis Control Director Nicole Elliott reminded disgruntled cannabis operators that paying taxes is a matter of law.

The department has taken recent steps to streamline the regulatory processes, with Elliott warning change may take a while to accomplish.

“It is important to understand that changes made in the July 2021 cannabis trailer bills now require regulatory improvements to be made through the regular rulemaking process, which can take a significant amount of time to complete,” Elliott told the Business Journal.

But time is of the essence for industry operators who have said they have had to borrow money from family members and withdraw money out of 401k retirement plans.

To gain a foothold on public opinion in the interest of hastening the process, a possible ballot initiative to lower the tax rates was broached on the conference call, but California Cannabis Industry Association Executive Director Lindsay Robinson told attendees the effort would cost at least $20 million.

Instead, the industry advocates for the state to completely remove the cultivation tax on the front end of the supply chain. It also seeks to provide dispensaries three years off to collect excise taxes — those point-of-sale transactions that California Sen. Mike McGuire, D-Healdsburg, proposed transferring the cultivation tax to. The industry also wants to see an expansion of legal access across California, which only covers about a third of the state.

"Our members and colleagues across the legal supply chain have made it clear that the current tax system and lack of retail access are making it nearly impossible for many of them to survive the current landscape,” Robinson told the Business Journal.

Susan Wood covers law, cannabis, production, biotech, energy, transportation, agriculture as well as banking and finance. For 25 years, Susan has worked for a variety of publications including the North County Times, now a part of the Union Tribune in San Diego County, along with the Tahoe Daily Tribune and Lake Tahoe News. She graduated from Fullerton College. Reach her at 530-545-8662 or susan.wood@busjrnl.com