Late Wednesday evening, the California Department of Tax and Fee Administration (CDTFA) released California’s revenue numbers for cannabis sales in the 2nd quarter of 2018. Tax revenue totaled over $74,200,000 from April 1, 2018, through June 30, 2018.

The breakdown of revenue, and comparison to Q1, is as follows:

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The second quarter numbers bring the year-to-date figure to $135,100,000. An impressive amount, surely, but still well below of the projections presented by Gov. Jerry Brown in his 2018 budget proposal, which forecast $175 million in tax revenue by mid-2018.Q2 cannabis tax revenue represents a 22% increase over the Q1 numbers, a jump the CDTFA attributes to a growing “compliance trend.”

Why Are California’s Cannabis Tax Revenues Still Below Projections?

Despite the Q2 progress, California’s projected cannabis tax revenue is still likely to fall short of 2018 projections. The most likely culprit for the low revenue is the resilience of California’s cannabis black market.

“After six months of legal cannabis sales, there is a staggering … gap between today’s tax revenue numbers and what voters were promised,” said state Assemblyman Evan Low, a Democrat from Campbell who heads the Business and Professions Committee. “Regulators must adapt before California’s lawful cannabis businesses are obliterated by the black market.”

In certain places, the combination of state cannabis taxes and local taxes can exceed 50%. An exorbitant rate that takes a chunk out of profits for regulated businesses, and drives up costs for both adult-use customers and medicinal patients. As a result, black market operations are less likely to endure the paperwork and additional fees that legal operation requires, and citizens are staying loyal to black market operators with lower prices.

Is Cannabis Tax Relief on the Way?

In mid-March, California State legislators introduced bill AB 3157, which would have temporarily cut the cannabis Excise Tax – from 15% to 11% – and suspended the Cultivation Tax, until June 1, 2021. Unfortunately, the bill failed to earn majority support and is now dead for this legislative session.

In an effort to “better serve taxpayers” the CDTFA touted the opening of a satellite location in Humboldt County; the launch a new pilot project: the Statewide Compliance and Outreach Program (SCOP); with the stated purpose of “visiting known cannabis retailers to educate and assist them in complying with their tax obligations;” and has “implemented improved procedures and security measures for financial transactions.”

All of the CDTFA’s updates are focused on helping licensed businesses pay their taxes, but offer no long-term plan to make the tax situation more palatable to cannabis business operators or the public footing the bill.

Support for Cannabis Tax Compliance and Reducing your Tax Footprint

While the tax situation may seem dire for licensed cannabis operations, consultation from experienced tax advisors can help lower your tax burden. The dedicated tax professionals at ELLO can support state and federal tax compliance, help optimize Cost-of-Goods (COGS) deductions, and lessen the impact of 280E.

For a tax or operational consultation, please contact us here.