More than five years after California legalized recreational cannabis, the state’s illicit cannabis market still makes up a majority of recreational cannabis sales. For example, in 2019, illicit cannabis sales reached around $8.7 billion while the legal market sold $3.1 billion worth of cannabis.
Governor Gavin Newsom has now signed a bill that would restructure California’s recreational cannabis program in an effort to combat illegal sales. Bill AB 195 will get rid of the marijuana cultivation tax and require that the excise tax not increase for the next three years, reducing the financial load on cannabis producers and theoretically allowing them to sell their products at lower price points.
The main reason California has been unable to curtail illegal cannabis sales is the high cost of legal recreational cannabis. The state levies a variety of taxes on cannabis along the entire supply chain, resulting in legal cannabis costing up to two to three more times than illicit cannabis. As a result, most cannabis consumers, especially those on a tight budget, choose to buy from the illicit market.
The cannabis tax provisions in the new bill have the potential to reduce operational costs in the legal recreational market, which could then translate into lower product prices. The new bill will also increase enforcement efforts against unlicensed cannabis operators. It grants county governments the power to take civil action against such operators for issues such as water diversion and pollution. Additionally, it will also levy civil penalties of up to $10,000 daily for property managers who knowingly lease or rent out a property to unlicensed businesses that produce, store or sell marijuana.
Businesses that qualify for social equity will be eligible for a tax credit of $10,000 and will be allowed to use 20% of their excise tax revenue for reinvestment purposes. The legislation also provides tax credits worth $40 million, with one-half going to eligible microbusinesses and retailers and one-half going to equity operators.
The bill also provides an additional $670 million in cannabis tax to programs dedicated to youth substance misuse treatment, education, school retention, law enforcement and illicit marijuana-related clean-ups and remediation.
Bill AB 195 will also provide $20 million for a one-time grant program request by Governor Newsom. The program will be crucial to fixing another issue plaguing the state’s cannabis industry, efforts by local cities and counties to block cannabis sales in their communities.
Nicole Elliot, director of the Department of Cannabis Control (DCC), said that the law will bring some tax relief to the sector and support the development of an equitable, safe and sustainable cannabis industry.
It remains to be seen how big an impact these tax changes will have on the bottom line of licensed entities such as American Cannabis Partners that are operating within the borders of California.
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