California North Coast lawmaker joins call to ease cannabis growers tax burden

California Sen. Mike McGuire expressed his intentions Wednesday to introduce legislation in early 2022 to eliminate the state cannabis cultivation tax, a favored target of the industry.

“We need to take a close look at the overall tax rate and whether it is impeding the overall growth of the cannabis market,” he said. “The bottom line is this, cultivation taxes are crushing small farmers throughout the North Coast,” McGuire said, adding: “Basing it off the weight doesn’t account for when the market collapses. It’s simply not sustainable.”

To remove the tax, the Healdsburg Democrat plans to shift the cultivation tax to the excise tax, which is imposed on point-of-sale-transactions . The state lawmaker plans to ask the Legislature’s Legal Counsel to see what’s allowable under state statute.

He cautioned the state’s hands may be tied in completely eliminating the amount of cultivation tax.

And while industry stakeholders shared their appreciation for McGuire’s intent to be proactive, some were skeptical the notion of just moving the tax around would help, equating the maneuver to musical chairs on a sinking ship.

Then, there’s the legality of it all.

“Any permanent reduction of taxes would have to go before the voters,” McGuire said, citing the regulations passed in California’s Proposition 64, which in 2016 legalized adult, recreational cannabis use statewide. The state subsequently set up a licensee and tax program that imposes obligations at every level of the supply chain from cultivation to sales and excise taxes.“

The state cultivation tax sparked renewed ire from the industry when the state announced plans to raise tax rate from $9.65 to $10.08 per dry weighted ounce next year.

In the 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 for the state; $168.9 million in excise tax; and $110.9 million from sales, the California Department of Tax and Fee Administration reported.

McGuire is responding to suggestions of a looming market collapse in the eyes of the cannabis stakeholders as wholesale prices plummet to rates that hover around what some pay in taxes. The situation is prompting some to fear small growers will go out of business in a $3.1 billion legal industry the majority of Californians support. About a third of that goes into state coffers annually.

“We’re looking for more comprehensive tax reform,” California Cannabis Industry Association Executive Director Lindsay Robinson told the Business Journal.

The state advocacy group has warned about the condition of the market flooded with product that drops the price point, with the added problem of not enough retailers to go around.

“We also need more access to retail across the state,” she said, insisting “it’s within the state’s best interest” to maintain its legal licensees. “This is not just one rallying cry. The industry is at its breaking point of a potential collapse.”

Those alarm bells have sounded from the halls of Sacramento to the legal and government confines of the North Bay.

“We appreciate Senator McGuire taking action, but the tax burden is still there. Ultimately, cultivation should not be taxed in California. Until we lower the tax liability, the illicit market will continue to flourish,” said Joe Rogoway, an attorney who drafted resolutions that were delivered to the Sonoma County Board of Supervisors for the local Cannabis Business Association and Sonoma Valley Cannabis Enthusiasts.

The illicit market was valued at $8.7 billion a year, according to a 2019 Statista report.

In the meantime, Rogoway said many legal farms may trickle into default and drop their licenses with the state.

“The fundamental problem is, taxing the farmer creates an unworkable financial model,” he said in partial support of McGuire’s recommendation. “We’re hearing from a lot of people they may not be able to weather the storm,” he said.

Some regional government officials, including Sonoma County’s, have agreed to either explore or revoke tax responsibility to cannabis businesses. San Francisco suspended its cannabis tax on Nov. 17.

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.

Rogoway said the local cannabis firms are pushing for a restructuring of the tax system.

“Any movement is better than no movement. And where we appreciate local officials willing to look at this, just in the context of the industry, it’s not treated well,” Rogoway said. “The methodology is flawed.”

Tiffany Devitt, the chief of government affairs for CannaCraft, a large cannabis producer in Santa Rosa, contends “the bigger issue is the totality of the cannabis tax burden, which results in tested and regulated cannabis being two-to-three times more expensive than illicit weed.”

Devitt referred to McGuire’s shift as tax reform without tax relief.

“It won't work. It's the equivalent of rearranging deck chairs on the Titanic,” she said. “In order for the state of California to protect the emerging industry and fulfill Prop 64 -- which mandated the state to tax the growth and sale of marijuana in a way that drives out the illicit market — it's going to have to lower the taxes.”

Terry Garrett, an economics consultant who’s the former chief operating officer for the Mercy Wellness cannabis dispensary in Cotati, told the Business Journal he predicted the industry would come to a reckoning around 2020.

Garrett ran a report five years ago that gauged the level of the industry that would remain illegal by 2020. He found that about a quarter of cannabis businesses surveyed would remain out of the legal system with an intent to join it later. About 35% said they split their divisions, with one leg legal, the other not. Thirty percent would operate legally, while 10% admitted to never going into the licensed programs. Their reasons for staying out of government reach ranges from the complicated process to the costs.

“It’s still an underground industry,” he told the Business Journal, noting how unfortunate it is for those who play by the rules. “This is the biggest plant in the state of California that has the potential for economic development.”

Can the recommendations as McGuire suggests fix the situation across the state?

“The industry appreciates the gesture, but it’s like putting a turniquet on a hand when the rest of the body is bleeding,” he said.