SACRAMENTO – The California Department of Tax and Fee Administration (CDTFA) announced the state will increase the basis for excise tax on legal cannabis sold in the state, starting January 1, 2020.

Approved under Proposition 64, excise tax rates on cannabis are levied in order to ensure that tax paid on gross receipts remains at fifteen percent, as dictated by law. CDTFA calculates any changes in the excise rate by analyzing transactions recorded in the state’s track-and-trace system. The most recent analysis of sales data indicated to officials that the excise rate should be raised, from sixty percent to eighty percent, starting January 1.

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For those interested in what a twenty percent increase looks like, the CDTFA gave an example of how the increase would effect prices:

“A cannabis retailer purchases cannabis from a distributor for $50. The distributor will calculate the 15 percent cannabis excise tax due from the retailer as follows:

“Retailer’s wholesale cost $50.00
Mark-up ($50 x 80 percent) + $40.00
Average Market Price $90.00
15 percent excise tax (Average Market Price x 0.15)
Excise tax due $13.50

“The distributor will collect $13.50 in cannabis excise tax from the cannabis retailer and remit that tax payment to the state.”

Though cannabis product distributors are responsible for collecting the excise tax, it’s safe to assume that because of the increase, any extra costs incurred by distributors and retailers most likely will be passed on to consumers. Industry members argue the increase will push more customers to access illicit cannabis stores.

California cannabis industry members and advocates also warn raising taxes will put additional strain on legal cannabis businesses that already are forced to compete with a well-established network of illegal cannabis businesses, which some estimate to be nearly three times the size of the legal industry in California.

“I’m hoping the state will step in and take some action to correct some of this. If we don’t solve it here in California, I think it’s difficult to make a case for a national rollout,” CBD edibles maker Plus Products’ co-founder and Chief Executive Officer Jake Heimark, told news network CNN this week.

Competition with illicit cannabis businesses is not the legal industry’s only challenge. The quasi-legal status of cannabis means that, though California is the largest market in the United States, cannabis businesses cannot freely participate in open markets across state borders or use merchant banking services available to other legal businesses, which limits their ability to take credit or debit retail transactions. It also limits the ability to get a loan, for companies running low on capital.

But those restrictions are unlikely to be removed without federal legislation that would expand cannabis legalization nationally.

“The hard truth is that until legislative changes are made, our industry will continue to wither away,” Michael Steinmetz, chief executive officer at cannabis distributor Flow Kana, told CNN.

News of the tax increase follows media reports that several leading California cannabis brands have tightened their belts, with a recent round of layoffs hitting leading California-based companies including Flow Kana, multi-state retail chain MedMen, manufacturer CannaCraft, delivery service Eaze, and cannabis online portal Weedmaps, among others.

In October, media reports indicated the once hot pot stock market has also cooled, with investors retreating from cannabis industry investments, in the U.S. and Canada.

Experts blame several factors for slowing interest in investment, including regulatory issues, potential anti-trust violations, cautious investors, and markets reacting to global trade troubles, as well as the vaping epidemic, which has emerged since September and resulted in at least forty-seven deaths, according to the Centers for Disease Control (CDC).

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