cannabis, ELLO, tax break, excise tax, cultivation tax, california,

In mid-March, California State legislators introduced a bill that could provide an energizing jolt to the state’s emerging adult-use cannabis industry. Bill AB 3157, supported by a bi-partisan leadership, seeks to temporarily cut the cannabis Excise Tax – from 15% to 11% – and suspend the Cultivation Tax, until June 1, 2021.

Helping California’s legal cannabis market compete

The proposed bill was drafted in response to the relatively heavy tax burden noted by many cannabis entrepreneurs, business operators, advocates and consumers. The combination of the cannabis Excise Tax, Cultivation Tax, sales tax, corporate taxes, state and local regulations, and fees related to licensing, have taken a deep cut out of profits and driven up final sale costs. Meanwhile, California’s sophisticated and entrenched black and grey market cannabis operations are free from these financial burdens and have been able to undercut legally operating businesses.

“California cannabis businesses are making significant investments as they embrace the regulated marketplace while, at the same time, being undercut by unregulated competitors,” stated Assemblymember Rob Bonta (D-Oakland), one of the authors of the bill. “AB 3157 reduces the tax burden on the licensed cannabis market during this transition period, keeping customers at licensed stores and helping ensure the regulated market survives and thrives.”

What kind of impact could AB 3157 have?

As reported by Leafly, data analytics company New Frontier Data performed an analysis of AB 3157 and concluded that the proposed changes would reduce consumer prices by up to 9%. In a statement, senior economist Beau Whitney said: “By lowering the excise tax and postponing the cultivation tax, it will lower the overall price for consumers at the register, which will also reduce the differential between illicit and legal prices. Reducing this gap is critical to making the legal market more competitive against the illicit market and more attractive for consumers.”

Seeking an advantage over the cannabis black market

The Adult Use of Marijuana Act (AUMA) explicitly states that one of the purposes of cannabis legalization is to: “tax the growth and sale of marijuana in a way that drives out the illicit market for marijuana and discourages use by minors and abuse.” In other words, a driving motivation for cannabis legalized is an effort to drive the illegal and dangerous cannabis black market out of business.

AB 3157 seems to suggest that the current rate of cannabis taxation goes against one of the core goals of AUMA. If the legal market cannot compete with the black market, the mission of cannabis legalization fails. A further obstacle is the federal 280E law, which greatly limits a cannabis operation’s ability to deduct business expenses – a vital way both new and established businesses minimize their tax burden in other industries.

Benefits of a Lowered Tax Rate for the Cannabis Industry

We at ELLO have been working closely with a wide variety of cannabis entrepreneurs before, and following, the 1/1/2018 legalization. While many operations are growing and thriving, it is easy to see that lowering the tax burden would create many benefits for the industry, including:

  • Increasing profits for legally-operating cannabis businesses;
  • Lowering the final sale cost of cannabis, drawing more consumer to legal sources; and
  • Incentivizing black and grey market operations to operate legally.

The Likelihood AB 3157 Becomes Law

Nothing can be guaranteed at this stage, but bi-partisan support for AB 3157 – announced by Assemblymembers Tom Lackey (R-Palmdale) and Rob Bonta (D-Oakland) – suggests a reasonable likelihood that the bill could become law. The bill has also received widespread support outside the lawmakers’ circle. Cannabis Grower’s Association (CGA) lists AB 3157 as “high priority,” and Jennifer Schwab, Representative of the International Brotherhood of Teamsters, released the following statement of support: “One of the biggest threats to workers in the emerging legal cannabis industry is diversion of cannabis into the illegal market, which undermines our employers and our jobs. Lowering the tax rate on cannabis will encourage cannabis businesses to choose the legal market, which helps the entire industry and protects our members’ jobs.”

To date, AB 3157 has made the usual rounds of committee review and revision since its introduction on 3/22/2018, but no final draft or vote date have been established.

Final Thoughts

ELLO’s advisors are in the field diligently working alongside cannabis business operators as we seek to create and implement best practices for taxes, reporting, and regulatory compliance. We will be keeping close watch of AB 3157 as it moves through California’s legislation, and will provide regular updates of significant changes.

If you would like schedule a consultation, please reach out to us.